How Effective are Measures that Predict Fiscal Stress? A Retrospective Examination of California Cities

RM 218

Public finance literature has an abundance of research that has examined the topic of fiscal stress, from various perspectives, albeit with slightly different measures of the same mutual term. After several decades of incremental development there is now available an extensive body of scholarly and practical work on the subject. But these efforts have not yet converged on a single approach, much less a specific system of indicators that optimally balances predictive efficacy with parsimony in terms of requirements for data and analytic effort. Partisans of various conceptual and practical approaches debate issues that include, but are not limited to, the relative merits of explicitly comparative versus absolute measurement, the use of accrual versus cash-based data, focus on the general fund or all funds, and the precise nature of what should be measured in the first place. The aim of this study is to examine if commonly relied upon measures of fiscal stress are accurate in their predictions. Specifically, the research will examine a sample of California cities, including those who have recently filed for bankruptcy (San Bernardino, Vallejo and Stockton) to ascertain the appropriateness of common measures of fiscal stress. To conduct the analysis, the content of each municipality’s Comprehensive Annual Financial Report (CAFR) will be examined. The aim of this research study is to retrospectively explore whether commonly used measures that assess fiscal stress are effective, in particular to the cases of the three California cities who recently filed for bankruptcy.