The Missing Ingredient in State and Local Government Fiscal Sustainability

September 24, 2024

By Daniel L. Smith, Professor, Joseph R. Biden, Jr. School of Public Policy & Administration and Associate Dean for the Social Sciences, College of Arts & Sciences, University of Delaware

There is a robust literature on state and local government fiscal institutions, spending and saving, funds management, fiscal ‘health,’ and other practices and policy choices one might broadly call a literature on fiscal sustainability. For all this literature’s merits, I argue that it is missing a meta framework of managerialism. Without this framework, literature is not as useful for understanding the current context of public administration as it once was.

I am relying on the general concept of managerialism that would be familiar to anyone who has worked in or studied management in organizations—both public and private. My own perspective is shaped by decades of observing, advising, serving with, and working alongside a diversity of managers, board members, and policymakers in the public, not-for-profit, and for-profit sectors.

There are a number of reasons why an understanding of managerialism is important to a better understanding of fiscal sustainability in state and local government.

The top three, I’d argue are:

• The erosion of what I call the norm of balance
• The literature’s narrow focus on outputs rather than outcomes
• The annual time horizon that pervades the literature.

The Norm of Balance is Gone

One of the unobservable forces that drove the adoption of fiscal institutions in state and local governments is a cultural and political norm that governments should have annually balanced budgets. This drove the regular adoption of various fiscal institutions, especially in the second half of the 20^th century.

These include balanced budget requirements, tax and expenditure limitations, rainy day fund rules, state and local governmental accounting standards, and more. In the past I would have argued that at least some fiscal institutions were merely formal codifications of practices or mandated results that governments would have pursued intrinsically. In many cases, however, the norm of balance has weakened, if not evaporated – though it has not disappeared universally.

If the norm of balance is not what it once was, fiscal sustainability must be a strategic imperative. That is, it must be something that policymakers and managers deliberately pursue within a strategic and managerial framework. They must make the case for pursuing fiscal sustainability while acknowledging whatever tradeoffs come with that choice. Ideally, the strategic pursuit of fiscal sustainability entails developing new performance metrics that go beyond mere balance on a cash basis and apply to a timeline that goes beyond the fiscal year.

We Are Stuck on Outputs

Decades after scholars and practitioners of public administration collectively decided the outcomes of governmental decisions are more important than the outputs of activities, the state and local government fiscal sustainability literature remains frustratingly stuck on outputs. Though this isn’t going far enough, there are many good reasons this has been the case as expenditures, revenues, budget surplus/deficit, assets, liabilities, and ratios that incorporate these and other variables make for good dependent variables in quantitative analysis.

Nonetheless, a managerial framework that focuses on outcomes rather than outputs can generate data that can be used as dependent variables. Some local governments, especially those that use balanced scorecards in their budgeting processes, are already leaders in this regard. They annually collect and report dichotomous and ordinal data on compliance, achievement, and satisfaction, among other outcome-oriented performance metrics. They also annually collect and report ratio level data on budget variances. State governments would do well to follow their lead, and scholars would do well to use outcome-oriented metrics as dependent variables.

An Annual Perspective is Not Managerial

In all but a few cases, state and local government budgets are annual results of annual processes. Outside of government, however, no successful manager plans to merely survive the fiscal year. A sufficiently managerial perspective on budgeting would entail a multi-year definition of fiscal success. In the private sector—both for- and not-for-profit—annual budget results directly impact organizations’ equity or net assets, which are crucial metrics for managers, boards, auditors, investors, donors, clients, and watchdog groups. They are not merely interested in the impact the budget has on equity or net assets in a given fiscal year, however. They will base their judgments and budgetary and personnel approvals for the next fiscal year and beyond on the organization’s plan to maintain or increase equity or net assets.

But in the case of government, the relationship between a year-end surplus or deficit and its net assets or net position is not as direct or well understood—especially by the public. Nothing precludes governments or scholars, however, from devising output and outcome measures that define fiscal sustainability in a way that is in line with for- and not-for-profit management. This is not an argument for blurring the lines between government and non-government—it is merely an argument for being more managerial in planning for fiscal sustainability.

Conclusion

I hope my observations will be helpful to those who are taking a fresh look at state and local government fiscal sustainability in practice and in theory. As liabilities continue to grow, including the liabilities that many observers simply do not count, a more managerial perspective may be helpful to measuring and achieving fiscal sustainability.

The contents of this blog post reflect those of the authors, and not necessarily those of the GFRC.