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Needed in Virginia: A Fiscal Early Warning System

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In the wake of the City of Petersburg’s fiscal meltdown, the General Assembly has appointed Del. R. Steven Landes, R-Augusta, to head a subcommittee to study how other states deal with fiscally stressed localities. In surveying best practices in other states, it’s a good bet that Landes will familiarize himself with a new report, “State Strategies to Detect Local Fiscal Distress,” published by the Pew Charitable Trusts.

It turns out that 22 states, many of whom have learned from hard experience, have established mechanisms for monitoring the fiscal health of local governments. The idea is to spot the warning signs of fiscal distress in the hopes that local elected officials will take action before their municipality becomes the next Detroit, Mich., Stockton, Calif., or Central Falls, R.I.

Virginia requires cities, counties and towns to file audited documents called Comprehensive Annual Financial Reports (CAFRs), but the oversight ends there. No one at the state level analyzes the data or conveys findings to the public.

Of the 22 states that monitor local fiscal health, Pew classifies eight as “early warning states” with laws defining when local governments are in “fiscal distress” and systems to identify when a locality reaches that status. As Pew notes, an early warning system can save states big headaches and liabilities down the road if it can avert local government failure.
Another big bonus: Credit-rating agencies look positively upon such systems. “All else being equal, we tend to assign higher ratings to troubled governments in states with strong oversight, well-established policies of intervention, and a track record of success,” the study quotes Moody’s Investors Service as saying. Among the key indicators that analysts in other states scrutinize:

  • Audits and other financial information submitted on time
  • Deficits and minimum fund balances
  • Size of debt-service obligations, and debt service as a ratio of population and operating revenue
  • Sufficiciency of cash for services
  • Total revenue and expenditures per capita
  • Unrestricted fund balances
  • Cash-to-liabilities ratio
  • Pension plan funding ratios

Few local elected officials have the financial training to read municipal balance sheets and spot the signs of impending trouble. A state report card on key indicators and ratios would be invaluable to them and to members of the public. Flashing warning signs would give them time to address problems before they reached the point where, like Petersburg, city officials have to make catastrophic cuts to core government services.

(This article first ran in Bacon’s Rebellion on October 10, 2016)

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