Incrementalism Redux: State Roles in Local Government Fiscal Crises∗
Presented by:
Beth Walter Honadle Director, Institute for Policy Research, and Professor, Political Science University of Cincinnati
∗ Presented at the 59th International Atlantic Economic Conference, London, England, March 12, 2005. The author gratefully acknowledges the C. P. Taft Memorial Fund for an international conference travel grant, which allowed her to present this paper at the conference. She also appreciates assistance on preparing the manuscript from Yana Keck, a graduate student at the University of Cincinnati working at the Institute for Policy Research.
Incrementalism Redux: State Roles in Local Government Fiscal Crises
Beth Walter Honadle
Abstract
State governments in the U. S. have a major stake in the fiscal health and condition of local governments inasmuch as local fiscal emergencies can adversely impact the states’ finances and, to the extent that local services receive state funding, the states want to ensure responsible management of state funds. This paper contributes to understanding how states have developed their roles relative to this ostensibly local governmental issue. Drawing on survey data collected by the author, this paper examines how states have developed their roles relative to local government fiscal crises. The generic state-level roles that the study explored are: to predict, to avert, to mitigate, and to prevent recurrence of local government fiscal crises. Taken as a whole, these roles are assumed to approximate the rational- comprehensive approach to public policy. At the other end of the spectrum is the incremental approach, which involves small steps and changes in response to opportunities. This paper investigates three questions to determine whether states are more rational-comprehensive or incremental in their policies for dealing with local government fiscal crises: (1) Are States comprehensive in their approach? (2) At what point in the “life” of a crisis do states get involved (if at all)? (3) When states opt to make changes to their policies relative to local governments, how (piecemeal, incremental or comprehensive) are states’ policies evolving to deal crises? The conclusion is that states are predominantly incremental in their formation of policies relative to dealing with local government fiscal crises.
Incrementalism Redux: State Roles in Local Government Fiscal Crises
Introduction
The role that states play in dealing with local governmental fiscal crises in federal systems is very salient. In the United States local governments are beholden to states for their very existence as well as specific provisions regarding their structure, functions, financing options, and other features. States have a stake in the fiscal health and condition of local governments inasmuch as local fiscal crises can affect the state’s bond rating, the economic development potential of the state, and the quality and quantity of public services within the state. Also, since states invest considerable state-raised resources in local governments, it is in the states’ interest to ensure that the managers of those funds are on sound fiscal footing. States have wide latitude in how they interact with local governments and their policy choices are instructive for other states.
In an earlier paper (Honadle, 2003) I presented exploratory research on the role of the 50 states in dealing with local government fiscal crises. It presented a conceptual framework of the potential roles states might play before, during, and/or after fiscal emergencies or crises occur. The research was based on the proposition that there are four broad roles that states could play relative to local government fiscal crises: (1) predict, (2) avert, (3) mitigate, and (4) prevent a recurrence.
That exploratory study found that states are usually not aware of potential local government fiscal crises before they occur. When they are aware of fiscal crises, they normally do not have the authority to avert them. The diverse range of responses from the states points to the fact that states vary considerably in the degree to which they assist local governments to manage their own problems versus directing them to change their budgets, lay off employees, raise taxes, restructure debt, and so forth.
The previous article did not suggest solutions to fiscal crises of local governments. However, a number of states have enacted legislation to prevent future crises. Often these reforms are adopted in the aftermath of local government crises in those states. The question then becomes, what kind of policies are being created to address local governmental fiscal crises? Specifically, do states follow a rational-comprehensive approach (Weimer and Vining, 1989, 1992) or a more incremental approach (Lindblom 1959, Sparer, 2004)?
This paper is an attempt to explain the states’ policy formation by looking at how states have developed their policies relative to local government fiscal crises. Using the rational- comprehensive model of decision-making as an ideal, I investigated whether the behavior of the states better fits this model or the incremental approach. Examples of both models exist within state government. This paper will attempt to understand the differences among states in their approaches and to learn about rational-comprehensive as opposed to incremental state policymaking relative to local government fiscal crises.
The current paper incorporates essential material from the earlier article to build a foundation for the present analysis. It expands on the earlier work by posing three simple, focused questions intended to probe and delineate distinctions in how states are developing policy relative to local government fiscal crises. I begin with a brief discussion of the nature of fiscal crises and a
cursory overview of popular models of public policy making. I then present the approach to the current study, findings, and conclusions.
What is a Fiscal Crisis?
Various authors have attempted to distinguish between common budget problems and fiscal crises. A fiscal crisis, according to Hirsch and Rufolo, is “when a government reaches a state such that the normal budgetary flexibility no longer exists. If no combination of acceptable expenditure cuts, revenue increases, and borrowing exists, then the government is in a crisis situation.” (Hirsch, Rufolo, 1990) Inman’s definition of a fiscal crisis is “when a city’s potential to raise revenues is insufficient to cover the city’s legally required expenditures” (Inman, 1995). In other words, fiscal crises are when the local government is incapable of functioning because it is running out of the financial ability to operate.
There are various reasons for local governmental fiscal crises including institutional constraints, economics, management problems, demographics and politics. Among the most publicized local financial crises in the United States are New York City’s in 1976, Philadelphia’s in 1990, Orange County’s in 1994 and Miami’s in the 1990’s. One study cited New York City’s fiscal crisis as “a wake-up call for every other state” (Citizens Research Council of Michigan, 2000).
A Brief Review of Public Policy: Making Models
A number of basic models describing public policy making have been identified: Lindblom (1959), Cohen, March and Olson (1972), Simon (1976), Kingdon (1995), Dunn (1994), Anderson (1994), Theodoulou (1995), Kime (1996), Dye (1998), (Weimer & Vining (1999), Birkland (2001). These include (to borrow Kime’s list) The Generic Model, The Rational- Comprehensive Model, The Incremental Model, The Garbage Can Model, Bounded Rationality, and the streams metaphor for making public policy. Each of these models is described briefly below:
The generic model is the basic model that social scientists agree include the five stages of public policy making, including: identifying the problem, place on the public agenda, creating the proposal to be considered by a decision making body, adopting the proposal, and implementing the proposal. Finally, the consequences of actions taken to implement the policy are evaluated. This model is concerned with the logical steps in the policy-making process.
The rational-comprehensive model is typically used by urban planners and is also known as the “common sense model”. Generally viewed as the ideal model, the model assumes a logical process with rational decision-makers presented with the best information possible and that these decision makers will select the solution that will maximize the benefits and minimize the costs of the stated goals. Politics, human factors, time, and money make this model difficult toattain.
The incremental model is associated with Charles Lindblom. In his 1959 article, “The Science of Muddling Through,” Lindblom argued that the public policy process is not rational but is an incremental process that is a function of timing and opportunity. Because of political barriers, decision-makers often need to make small, incremental changes occurring over time, which then
2 become a comprehensive public policy. Thus, Lindblom’s contribution was to challenge the notion that policymakers set about problem-solving in a comprehensive way, but rather take series of steps along the way that accumulate to form policy.
As Weimer and Vining (2005) state, “….Rarely is there adequate theory or data for the construction of reliable comprehensive models. Further, all important factors are not readily subject to quantification. In particular, the appropriate weights to place on the multiple goals that characterize public issues are usually not obvious; the analyst’s choice may cloak value judgments in apparent objectivity. Additionally, the mystique of quantification may give simplistic models more attention than they deserve.”
The garbage can model (Cohen, March and Olsen, 1972), another alternative to the rational- comprehensive model, combines a variety of policy alternatives, issues, actors and solutions mixed in a “garbage can” of problems and issues. Kime describes the process as “Problems are looking for solutions and vice versa while actors are seeking ways to get problems and solutions together” (Kime, 1996).
The bounded rationality model, offered by Simon (1976), recognizes that humans and organizations (and their machines) are bounded by limitations in their capacity to process large amounts of complex and complicated information. Therefore, the ideal rational-comprehensive model, in its purest sense, is not reasonable and this needs to be considered in the model.
The streams metaphor, created by John Kingdon (1995), offers the approach of looking at different “streams” which converge to find a solution to public policy problems. These streams include a problem stream, a policy stream, and a political stream. The model also considers the process in describing how the streams converge. For example “policy entrepreneurs” are the official public policy actors who have a solution to a particular problem and when the “policy window” or opportunity opens up, the policy entrepreneur takes advantage of this opportunity to apply the solution.
In his research, Kime finds that the transfer of fire safety technology from research to practice requires public policy. This then becomes a political problem as well as a technical problem. The technology used by fire safety officials can be given “public value” (Moore 1995) if it becomes public policy through one of the above models. Thus, there is an interplay between the solutions to problems, the technical answers, and public policy in that the choice of what techniques to use is a policy decision.
This resonates with how states decide what approaches to use in dealing with local government fiscal crises. There are techniques and methods that might be used, but the policy decision about what approach to use is both political and technical.
Study Method
This research takes a conceptual framework developed for the initial study, qualitative survey data collected using this framework, and seeks to answer three questions that are intended to
3 illuminate our understanding of how rational/comprehensive states are in their approaches to dealing with local government fiscal crises in their respective states.
The Framework
The basic conceptual framework for this study is based on the proposition that a rational- comprehensive state approach to dealing with local government fiscal crises would include the deliberate and distinct actions of predict, avert, mitigate, and prevent a recurrence as mentioned earlier in the paper. That is, a state (presumed to be operating as an individual actor) would have to know what the problem is, consider options for dealing with it, choose the best approach possible, and implement it. This conceptual model also parallels an idealized capacity-building framework to public policy in which the government anticipates and influences change through a series of logical actions forming a cycle (develop policy; develop programs; attract and absorb resources; manage resources; evaluate current policy to guide future action (Honadle, 1982). A key indicator I will use to determine whether a state’s approach is basically rational- comprehensive is at what point or stage of a fiscal crisis (or potential crisis) the state intervenes.
Predict. States could deliberately or intentionally try to predict local government fiscal crises so they can be prepared to deal with them or at least warn the local government(s) affected. This proactive measure is part of the idealized state role since this stage would be a necessary first step for the state to be able to take calculated, purposeful action to prevent the fiscal crisis.
Avert. If a state does have evidence that a local government is heading for a fiscal crisis, the state could choose to take action to help the local government avert the catastrophe. It is included here as a distinct step because a state might take a wait-and-see stance or move aggressively to try to avoid potential problems escalating to become a crisis situation.
Mitigate. Once a local government actually experiences a fiscal crisis, the state could decide at that point to take steps to get the local government back on sound financial footing or at least contain the problem. By contain, I mean either keeping it from getting worse for that local government or keeping it from adversely affecting other local governments or the state.
Prevent a recurrence. After a local government has passed the crisis stage, the state could conceivably take action to try to keep the crisis from happening again. This could involve public policy changes such as new legislation, technical assistance, intensive monitoring, and other steps.
Figure 1 is a flow chart depicting the various points at which a state could choose to intervene. It shows how a particular state might participate in all, some, or none of the sequence of actions listed above as a fiscal crisis unfolds.
4 Figure 1. A flow chart of the states’ role in local government fiscal crises (from: Honadle, 2003, p. 1437)
Local government headed for fiscal crisis
State is not aware of impending crisis
State predicts a crisis Impending crisis is bought to State’s attention
State attempts to avert the crisis State does not attempt to avert the crisis
Crisis Crisis occurs (if previously unaware, state averted may become aware of crisis at this point)
State attempts to mitigate the crisis No state mitigation
Crisis ends with or without state mitigation
State tries to prevent State takes no recurrence of fiscal crisis preventative action
5
The Survey
The data used for this paper are from a telephone survey consisting of 10 questions, which were administered to members of the National Association of State Auditors1, Comptrollers and Treasurers in each of the fifty states between April and August, 2002. The ten questions are as follows:
1. How do you define a fiscal crisis for local governments in your state (e.g. indicators or defining events)?
2. Has your state had local governments in fiscal crisis mode in recent history? (Asked them to name them or give examples.)
3. Did the state get involved in dealing with this crisis? If so, at what point in the crisis and how was it involved? (Asked them whether it was before, during, or after the crisis occurred.)
4. What policies does your state have in place that are largely designed to avert fiscal emergencies in local governments? How are these policies administered or enforced?
5. Does your state do anything to predict potential fiscal crises by local governments (e.g. a monitoring program?)?
6. If the state has an early warning that a local government is heading for a fiscal crisis, what actions, if any, would be taken by the state to try to avert the catastrophe?
7. Once a local government has reached the point of fiscal crisis, what does your state do (or has it done) to mitigate the situation (e.g., technical assistance, financial bailout, sanctions)?
8. After a local government is past the crisis stage, does the state get involved in trying to prevent a recurrence of fiscal crisis?
9. What do you perceive to be the role of the states in dealing with fiscal crises by local governments?
10. In your opinion, what are the main causes of fiscal crises (e.g. economics, management)?
1 If the first person contacted did not respond to an electronically mailed solicitation or referred the survey to another official(s), another potential respondent was contacted with a request to respond to the survey. If electronic mail was not producing a response to the survey from a particular state, phone calls were then made and leads were followed up on until a 100% response rate for the fifty states was achieved. In some states there were multiple respondents. For example, two or three officials participated on a conference call or separate electronic-mail responses to the questionnaire were provided when, in the estimation of the state official contacted, certain people were in the best position to answer particular questions.
6 Three Focused Questions
This paper seeks to determine or test whether states are more rational-comprehensive or more incremental in their approaches to dealing with local government fiscal crises. This research paper looks at this issue by using the results of the survey to answer three focused questions as follows:
1. Are States comprehensive in their approach? I classified only those states that engage in all four of the hypothesized steps as rational-comprehensive in their approach. Being comprehensive in their approach thus means states following all four of the above-mentioned actions of predict, avert, mitigate, and prevent recurrence.
2. At what point in the “life” of a crisis do states get involved (if at all)? The point at which the state gets involved is another indicator of the state’s willingness to deal with local government fiscal crises in a comprehensive way. My assumption is that, for a state to behave in a rational- comprehensive fashion, state actors would have to be proactive and not just reactionary in terms of dealing with local government fiscal crises. The extent to which a state puts off getting involved until later stages in the trajectory of a crisis is another indicator of its eschewing the ideal of the rational-comprehensive approach.
3. When states opt to make changes to their policies relative to local government fiscal crises, how (in what fashion) are states’ policies evolving to deal crises? The specific purpose of this article is to determine if policies are evolving through an incremental approach or a rational- comprehensive approach. So, the third test was whether the states that did enact legislation to deal with local government fiscal crises took a piecemeal, remedial, or incremental approach or rather a more comprehensive tack of overhauling the system with an eye to evolving a rational- comprehensive approach.
Findings
A review of the survey data revealed the following findings:
Are states comprehensive in their approaches?
Only 21 states or 42% claimed to be doing something in all four areas of predict, avert, mitigate, and prevent recurrence investigated in this study. Thus, the majority of states are adhering to a less rational-comprehensive approach to policy making in this particular policy area. New Jersey and New Mexico are examples of states that could be classified as following the rational- comprehensive approach. Descriptions of how they have dealt with actual local government fiscal crises are presented here to illustrate the rational-comprehensive nature of their approaches.
In New Jersey, the state takes a very proactive approach in that it approves all local government budgets to make sure they are solvent and checks that revenues are not overestimated and that
7 budgets meet statutory criteria. This state certifies local fiscal managers. It is very involved in all aspects of the fiscal management of local governments. When a local government has a crisis, the state can assume fiscal responsibility by having the Local Finance Board intervene. If a locality is having problems, it is placed in the Distressed Cities Program, which provides discretionary state aid and technical assistance such as management, tax collection processes and efficiencies. After a state takeover, the state continues to monitor and provide unusual oversight under the Distressed Cities Program. In the case of Camden, New Jersey, the state passed special legislation providing for a state-appointed Chief Operating Officer with broad authority. The legislation also required a formal management study, appointment of new directors, and the provision of economic development funds for the city in crisis.
The State of New Mexico’s survey respondent identified two counties as having fiscal problems that rose to the level of state intervention. In both cases the state warned the counties 9 months to 2 years in advance of the crisis and repeatedly thereafter that there were problems. State officials appeared before the county commissioners when the counties did not take corrective action (as they normally do in this type of situation). Often, the media attention from these visits was reported to be enough to stimulate local action. The state also provides technical assistance. In addition, the Board of Finance has an emergency fund to occasionally make loans (e.g., Grant County, so it could meet payroll). After a crisis is over, the state continues to monitor the budget and audit findings to make sure the locality does not experience another crisis.
At what point in the “life“ of a crisis do states get involved (if at all)?
In only one case did the state, New Mexico, get actively involved before the fact; almost invariably the states got involved after the crisis occurred. As mentioned above, the state not only takes a proactive approach, but has preventative measures in place as well. New York State has played a variety of ad hoc roles after a local government has reached a fiscal crisis. In some instances, the state has allowed a locality to borrow money for between five and ten years to bond itself out of a deficit. When larger cities have fiscal crises, the state legislature has established control boards, which usurp local authority having different functions depending on the nature of the crisis.
The state of Connecticut has also set up control boards in four cases where cities asked the state to secure their debt in a last-ditch effort to avoid bankruptcy. However, Connecticut has no formal policies in place to take preemptive measures. So, it follows that it gets involved later in the life of a crisis.
After the crisis occurred, some states have worked with local governments to alleviate the financial crisis and to get them out of debt. For example, in South Dakota, two cities approached the state and indicated that they were “flat broke” (in the words of the survey respondent). The state responded by providing technical assistance in the form of establishing a cash flow plan and establishing the cities’ assets and liabilities. Once the crisis was over, the state monitored the situation every few months to ensure that the crisis was indeed over.
8 When states make changes to their policies relative to local governments, how are states’ policies evolving to deal with crises?
Two major ways in which states change policies to deal with fiscal crises of local governments are special legislation and what I will call reform legislation. Special legislation refers to specific local legislation designed to aid a particular unit of local government. Reform legislation refers to a remedy for a particular cause of a local government fiscal crisis, but not an overhaul of the entire system for state dealings with local government fiscal crises. Put another way, reform legislation exemplifies the incremental approach in that it is about small series of changes in response to particular issues rather than stepping back and developing a rational- comprehensive approach in the wake of a fiscal crisis.
Several states provide examples of the special-legislation approach to making policy: