14.6 Suggestions for Future Practice and Research
14.6.3 State–Local Fiscal Relations
These findings could be particularly useful to state governments, given that of the 15 states known to formally monitor local government financial
condition, 14 use some derivative of fund balance as an indicator of financial position (Kloha, Weissert, and Kleine, 2005).
From the perspective of state government officials, the finding that local governments maintain large fund balances for strategic management and cash flow also suggests a complex dilemma. On the one hand, the need for such balances could be alleviated by modifying the state aid disbursement process so aids to localities are distributed in bi-annual, quarterly, or even monthly installments instead of the current single annual payment method used in many states. While this may increase overall intergovernmental efficiency, the costs of doing so are very notable, both in terms of resources and the potential for administrative error. Moreover, such a strategy may bring about a different problem, given that more frequent, yet smaller disbursements may hamper local governments’ ability to meet demands for large sums of cash at any given time. This same can also be said for any attempt to modify the local property tax collection process in favor of smaller, more frequent collections. Nonetheless, this chapter reveals that local governments maintain a staggering amount of fund balance resources for the purpose of smoothing out cash flow. At the very least, these findings beg a reconsideration of potential changes to alleviate those cash flow problems.
Notes
1. This discussion focuses almost exclusively on local governments, but many of the concepts are applicable to state governments, health care organizations, non-profit institutions, and other public entities.
2. These assumptions are the subject of some debate within the public financial management community. The current government accoun- ting model was developed by the National Committee on Municipal Accounting (NCMA), an organization that was under the auspices of New York Bureau of Municipal Research (NYBMR) for most of the early 20thCentury. Historians clearly identify the NYBMR as a driving force behind the widespread diffusion of scientific management in early public administration, so, not surprisingly, the NCMA’s accounting model and public financial management as a whole emphasizes par- simony, efficiency, separation of organizational functions, and other values central to the rational comprehensive organization theory espoused by the scientific management school (Golembiewski, 1964).
Theorists sensitive to the interpretive, normative, critical, and post- modernist perspectives (Miller, 1992; Orosz, 2001; Gianakis and McCue, 2002) have criticized this approach by arguing that the ambiguity, goal conflict, and uncertainty inherent to local government operations limits
Fund Balance, Working Capital, and Net Assets g 377
financial managers’ ability to arrive at truly comprehensive solutions to organization problems. Instead, their argument suggests, financial managers ought to derive their professional norms and management objectives from an interpretive construction of the conflicting values that act upon their particular environments. Although the traditional, rational perspective continues to serve as the basis for much of the scholarship and practitioner-oriented commentary on fund balance issues, it is nonetheless necessary to recognize this important alternate perspective.
3. Portions of this section are modified from Gauthier (2001, 586–587).
4. Net assets could be determined for enterprise/proprietary funds prior to these changes because these funds use full accrual accounting rather than the modified accrual method used in the governmental funds. Full accrual accounting captures the full, long-term economic implications of assets and liabilities, so the difference between assets and liabilities reported according to a full accrual model can therefore be considered net assets rather than fund balance.
5. Portions of this section were adapted from Marlowe (2005).
6. It should be noted, however, that many states also restrict the size of their stabilization funds to 5% of current expenditures.
7. The sample does not include counties.
8. Wolkoff’s (1987) study of municipal rainy day funds reached a similar conclusion.
9. Hembree and Shelton (1999) define fund balance as the total of the reserved, designated, and unreserved portions.
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Chapter 15
A Manageable System of Economic Condition
Analysis for Governments