State and local governments will likely continue to face the stress and shortfalls caused by the Great Recession for an extended period. Three years of research on fiscal sustainability in local government in Southern California identifies strategies that can be used to address this stress, including options for the executive, budget, and finance functions of these jurisdictions

Callahan, Richard

Pisano, Mark

English

University of San Francisco

The University of San FranciscoUSF Scholarship: a digital repository @ Gleeson Library |Geschke CenterPublic and Nonprofit Administration School of Management2013Developing Effective Mechanisms that PromoteFiscal SustainabilityMark PisanoRichard CallahanUniversity of San Francisco, rfcallahan@usfca.eduFollow this and additional works at: http://repository.usfca.edu/pnaPart of the Business Commons, and the Public Affairs, Public Policy and Public AdministrationCommonsThis Article is brought to you for free and open access by the School of Management at USF Scholarship: a digital repository @ Gleeson Library |Geschke Center. It has been accepted for inclusion in Public and Nonprofit Administration by an authorized administrator of USF Scholarship: a digitalrepository @ Gleeson Library | Geschke Center. For more information, please contact repository@usfca.edu.Recommended CitationMark Pisano and Richard F. Callahan. Developing Effective Mechanisms that Promote Fiscal Sustainability. Government FinanceReview. October 2013,74-77. 74 Government Finance Review | October 2013Research shows that fiscal stresses are not a temporary feature of the local government landscape, and the lessons learned on leadership for fiscal sustainability will become increasingly valuable.State and local governments will likely continue to face the stress and shortfalls caused by ??? ????? ????????? ??? ?? ????????period. Three years of research on fiscal sustainability in local government in Southern California1 identifies strate-gies that can be used to address this ??????? ????????? ??????? ??? ??? ?????-tive, budget, and finance functions of these jurisdictions. From the beginning of this research, the most obvious feature of the local government landscape in Southern California was the significant stress on each jurisdiction’s budget, particularly ?? ??? ??????? ?? ? ????? ??????????budget deficit reaching tens of billions of dollars. Now, as the third year of ??????? ? ???????? ?? ????? ? ?????to a close, it becomes clear that fiscal stresses are not a temporary feature of the local government landscape, and will undoubtedly continue. As ????? ?? ??????? ?? ??? ???? ???????Accountability Office projects increas-ing operating deficits in state and local government.Additional research performed in conjunction with the GAO suggests that the demographic changes in the country may increase costs of govern-???? ???????????? ?????? ??? ?????? ?? ???????????? ??????? ??? ?????-ditures, and significantly reduce the ?????? ?? ?????????? ??? ?????????This analysis points to continued pressure on all government budgets for decades.As a result, the lessons learned on leadership for fiscal sustainability will become increasingly valuable to career government finance and budget offi-cers, as well as to the appointed public ?????????? ??? ??????? ????????? ??????? ?? ????? ??????????RESEARCHING IN THE CURRENT FISCAL CONTEXT The research looked at how lead-ership practices, including strategy development, correlated with a juris-diction’s fiscal sustainability. The lead-ership challenge was not limited to the impact of the Great Recession on local ?????????? ???????? ??? ????? ??? ???-enues, coupled with state government deficits. An equally challenging com-ponent for staff in the California local jurisdictions studied has been how the political and social systems deal with the fiscal and demographic realities. The unwillingness of the populace and leadership to confront the numbers has been described as “magical thinking.”2 Similarly, a noted authority3 outlined a budget approach where an electorate wanted a “free lunch” and elected lead-ership sought ways to deliver increased ???????? ??????? ??????? ??????The research team developed a pro-cess of searching for jurisdictions that Developing Effective Mechanisms that Promote Fiscal SustainabilityBy Mark Pisano and Richard F. CallahanSOLUTIONSOctober 2013 | Government Finance Review  75had successfully advanced fiscal sus-tainability, as well as those that did not ? ????????? ??? ???? ?? ? ???? ???????filing for bankruptcy. The case study ??????????? ??? ?????? ?? ??????? ????? ???????? ???????? ??? ?????local jurisdictions developed, or failed to develop, processes that not only addressed the “bad news” of the eco-nomic downturn, but also how they might develop strategies that anticipat-ed fiscal bad news. The findings were drawn by studying the politics of gov-?????? ????? ???????????? ???? ?????-tive and finance staff and by research-ing how threatening the fiscal stresses appeared to the decision makers. The successful practices the research team found across a range of cases (or where these practices were absent, in cases of unsustainable budgets) can be summa-rized as follows.1. Fiscal Decisions as Part of Stra-tegy Development. First, fiscal deci-sion making should be approached through the development of strategy. In practice this includes:?  Moving from departmental or func-tional silos that “stove pipe” decision making to treating the budget as a common pool of resources available to all departments.?  Accounting for the full costs of capi-tal projects and negotiated collec-tive bargaining agreements, includ-ing the immediate salary and benefit costs, as well as the long-term salary, benefits, and pension costs.?  Committing one-time revenues to ?????? ? ??????????????  Moving from assumptions that  positive fiscal trends are inevit-Exhibit 1: State and Local Governments Face Increasing Fiscal ChallengesSource: GAO simulations, updated April 2011. Note: Historical data are from the Bureau of Economic Analysis’s National Income and Product Accounts from 1980 to 2009. Data in 2010 are GAO estimates aligned with published data where available. GAO simulations are from 2011 to 2060, using many Congressional Budget Office projections and assumptions, particularly for the next 10 years. Simulations are based on current policy.Exhibit 2: Case Study Governments2011 Case Studies 2012 Case Studies 2013 Case StudiesCounty of Los Angeles County of San Bernardino  City of Los AngelesCity of Brea City San Bernardino City of PasadenaCity of Long Beach City of Santa Ana City of RiversideWhittier School District City of Southgate  El Rancho School DistrictNote: The first two years of case studies were published in the 2012 Spring and 2013 Spring issues of National Civic Review.Year2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 20606420-2-4-6Percentage of GDP? Operating BalanceSurplus (Positive Balance)Deficit (Negative Balance) 76 Government Finance Review | October 2013able and anticipating future fiscal stresses.?  Connecting environmental and plan-ning processes to look at the long-term demands on budgets.?  Favoring decision-making processes that develop trust among the com-peting interests.2. Fiscal Fluency: Professional Expertise Matters. This is the fiscal flu-ency of leadership. In successful juris-dictions, the language of finance is well known and is used to create shared meaning.4 Fiscal fluency is consistent with research showing that effective leaders use language to develop clarity of purpose, allowing others in the orga-nization to clearly see the challenges ahead and the steps needed to move forward.5 Essentially, fiscal fluency is the development of professional, long-???? ????? ???? ????????? ?? ????????public finance, borrowing, demograph-ics, and negotiations with federal and state funding sources.3. Civic Infrastructure Can Support Strategy Development. The civic ?????????????? ? ???????????? ? ???????of voluntary associations and interest groups concerned with community ??????????? ? ??? ????????????? ???-port the development of strategy need-ed to address fiscal downturns. Where public leadership connects with civic leadership, trust develops. Strategies for building this community capacity go beyond public participation and public education. Not all the cases of fiscal sustainability included the presence of civic engagement, but the absence of an engaged and vibrant civic infrastructure was observed in cases of fiscal instability. 4. The Value of Transparency. Transparency of information from budgets, official statements, audit find-ings, etc., creates an organizational ??????? ???? ?????????? ?????? ?????-tives, budget and finance staff, and auditors to speak truthfully about the fiscal environment. Transparency supports the development of strate-gies to address immediate and long-term fiscal stresses. In the absence of transparency, the politics of short- term, incremental decision making enervate financial management. Poor short-term decisions based on financial unrealities will be made with the hope that, down the road, the future will be brighter. However, the GAO projec-tions and related research suggest that the long-run financial picture will not be punctuated with growth trends suf-ficient to overcome poor fiscal deci-sion making today. Transparency helps connect decision making with long-term consequences.5. Clearly Marked Lines of Authority. ????????? ????????? ?????? ?? ???????structured. When the lines of authority ??????? ?????? ?????????? ??? ???????policymakers are blurred, confusion reigns and accountability becomes dif-fused. In several of the high-perform-??? ????????????? ???????? ??? ?????-tive function had been strengthened. Structural dynamics need to make it ?????? ??? ????????? ????????? ?? ????????address the short- and long-term fiscal sustainability of the jurisdiction.MOVING FISCAL SUSTAINABILITY FORWARDWhen fiscal stress is present and like-ly to endure, better-performing juris-dictions begin to address matters by being rigorous about future revenues. The five decision rules outlined above appear to move fiscal sustainability beyond simply a balanced budget. The ???????????? ??????? ????????? ?? ????of the research repeatedly emphasized that fiscal sustainability goes beyond a singular objective to balance the budget. These managers cautioned that balancing through cost-cutting mea-sures alone would eviscerate a com-munity in the long term. Similarly, they cautioned that simply providing resources to public safety functions does not ensure a safer jurisdiction. Rather, they collectively discussed an operational definition of meeting com-munity needs through short- and long- term fiscal stewardship, partnerships, and strategies.The essence of this definition of fiscal sustainability is that, in the face of long-term fiscal stress, governmental enti-ties will both manage known resources and help get the community involved in solving problems. This engagement will create the community mainte-nance process a jurisdictions needs to sustain it through the long-term stress ahead. Knowing and protecting these resources is the first step in this GAO projections and related research suggest that the long-run financial picture will not be punctuated with growth trends sufficient to overcome poor fiscal decision making today.October 2013 | Government Finance Review  77process. Further, given the uncertain-ties of the intergovernmental financial system, a policy of relying on inter-governmental transfers as long-term resources in a baseline budget should be carefully reviewed.Developing an outcome- and perfor-mance-based decision-making frame-work can be an effective fiscal sustain-ability strategy. The successful leaders in the case studies all used strategies to compliment their stewardship prin-ciples in a manner that helped achieve community needs.  Another successful strategy is to con-nect fiscal sustainability to the com-munity’s environmental and business concerns. The key here is that the major new role of leadership, and par-ticularly of elected officials, is to create the need for partnerships and for politi-cal space that allows organizations to join the discussion, making sure that all interests are considered. In other words, the responsibility for providing ??? ????????? ????? ?? ??? ???????????a function of the government. One of government’s major responsibilities is ???? ?? ????????????? ?????? ? ?????????? ????? ?? ??? ???? ? ?? ???? ???community organizations and individu-als can become part of the problem-solving team.CONCLUSIONSThe research this article is based on looked at leadership practices that develop effective mechanisms for fis-??? ??????????????? ??? ?????????? ???dynamics of special interest groups ??? ?????????? ????????? ??? ????reduce the clarity that is needed for fiscal sustainability. In this respect, ??? ?????????? ?? ??? ????? ?????????may suggest updating charters and laws governing financial under- standing, decision making, and accountability in local government so ???? ????????? ?????????? ??? ??? ????-nizational capacity to be sufficiently independent in a way that allows it to bring information to the policy table without interference from the decision-making process. Many strategies for enhancing sustainability will require modifications to the jurisdiction’s organizational structure, which might include changes in the government charter that make all its divisions part of ??? ???????? ???? ??? ???????? ????????need to create partnerships as a fiscal strategy mindset.For several decades, there have been quick recoveries from negative busi-ness cycles, which have conditioned local and state officials to assume that positive fiscal trends are inevitable. This research demonstrates, however, that our past budgetary decisions have implications that are now outpacing our growth in revenues. ???? ???????? ?? ???????????? ??? revenues is covered in the GAO state and local trend reports. Additional research also suggests that the demographic changes occurring in the United States are significantly ???????? ??? ?????? ????? ?? ????? ?????A current deficiency in state and local budgeting may be due to a lack of understanding and incorporating these long-term trends.For each of the cases studied, the ?????????? ??????? ??????? ???????? ???purpose of this article is not to rec-ommend that one jurisdiction’s suc-cess should be copied or that only ??? ????? ?????? ??? ????????? ?????? sustainability. Rather, the research findings suggest varied factors that account for success, along with the ? ???????? ?? ??????? ????????????????methods for implementing the practic-es and mechanisms needed. This work indicates that substantial change in the role and functioning of government ?? ????????? ?? ?????? ???? ??? ?????-tive and financial staff and functions can meet the challenge of long-term fiscal stress. ?Notes1.  The project was funded by the John and Dora Haynes Foundation, with research partners from the University of Southern California, the University of San Francisco, and the National Civic League.2.  John L. Korey, “California: Failed State or Too ??? ?? ?????? The California Journal of Politics & Policy. (3)2, 2011. 3.  Jeffrey Chapman, a public-sector economic professor and researcher who has studied California public finance since the passage of Proposition 13 in 1978.4.  This is a primary role of leadership, as out-lined by Warren Bennis, Why Leaders Can’t Lead: The Unconscious Conspiracy Continues (San Francisco: Jossey-Bass Publishers), 1989.5.  Marcus Buckingham, The One Thing You Need to Know (New York: Free Press), 2005.MARK PISANO is a senior fellow at the Bedrosian Center for Governance of the University of Southern California. He is former director of the Southern California Association of Governments. Pisano can be reached at Mpisano@usc.edu. RICHARD F. CALLAHAN is associate professor and chair of the Department of Public and Nonprofit Administration at the University of San Francisco’s School of Management. He formerly worked for local governments in California and New Jersey He can be reached at Rfcallahan@usfca.edu.

Developing Effective Mechanisms that Promote Fiscal Sustainability

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Developing Effective Mechanisms that Promote Fiscal Sustainability

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