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Do We Really Need another Municipal Fiscal Health Analysis? Assessing the Effectiveness of Fiscal Health Systems

BRUCE D. MCDONALD, III and CRAIG S. MAHER
PFM, Vol. 19 No. 4, (2020)

One of the difficulties faced in the effective and efficient management of public organizations is the understanding of when the organization is showing symptoms of financial distress. Admin-istrators and researchers alike have typically relied upon financial condition systems such as Brown’s (1993) 10-point test and Wang, Dennis, and Tu’s (2007) financial condition index (FCI). The evidence is mounting that these systems are ineffective at predicting fiscally distressed communities; however, previous studies are limited to either case studies or entities in a few states. In an attempt to generalize over a longer period of time and across more states, this analysis utilizes a sample of 150 municipalities for the period of 1977 to 2012. The authors test the efficacy of the measurement approaches with a series of rare event history analyses (EHA) that captures their utility in predicting municipal bankruptcy or state takeover of financial opera-tions. The findings are consistent with previous studies – financial condition systems do not pre-dict fiscally distressed communities. Measures of fiscal reserves and long-term liabilities were more effective at predicting distress, suggesting that scholars should continue to work on the refinement of measures rather than systems of fiscal condition as predictors of fiscal distress.

Keywords: fiscal health, municipal governance, municipal bankruptcy

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