Article by Harold Wolman and George Peterson
This article examines strategies state and local governments employ in responding to fiscal pressure. Fiscal pressure is defined here as a situation in which a governmental unit, faced with the requirement of achieving a balance between revenues and expenditures, must, even after accounting for any increase in tax revenues due to an expanding tax base, choose between: (1) taking action to increase revenues in order to maintain existing real expenditure and service levels, (2) reducing real expenditures and services, or (3) engaging in same combination of these activities. Fiscal pressure, as thus conceived, may be brought about by a variety of causes including secular or cyclical decline in the local tax base, a reduction in intergovernmental revenues, rapid cost increases, over-expansion of services, mismanagement, or imposition of a formal fiscal limitation on revenues and/or expenditures.
The focus of this paper is upon strategies governmental units adopt in response to fiscal pressure. Do governments respond by increasing revenues or by reducing expenditures? If the former, do they increase source or intergovernmental revenues and through what means; if the latter, for what functions, program areas, or objects are expenditures reduced? These strategies may assume several different dimensions:
1. Decision Level: Three identifiable levels of decision are involved in responding to fiscal pressure. First, there is a fiscal choice level; to what extent should the governmental unit increase revenues and to what extent should it reduce expenditures? Second, governments confront the functional or departmental allocation decision; if expenditures are to be reduced, how are these reductions to be allocated among departments or functional areas? Third is the intradepartmental decision; if a department must reduce its expenditures, what services, activities, or objects of expenditure will be cut?
2. Vertical—Among Levels of Government: Given the differences in institutional and political structure and service responsibilities among the various levels of government—states, counties, and municipalities—strategies may well differ by level of government. Most cities have few income support responsibilities, for example, while many counties do. Differences in objective situations present different opportunities for strategic responses.
3. Horizontal—Among Governments of the Same Level: Even within the same level of government, there may be important institutional and service delivery differences from state to state, county to county, or municipality to municipality. In addition, the fiscal pressures faced by governments may differ in other respects which affect their strategic responses; causes, severity or duration of fiscal pressure, citizen preferences, and leadership characteristics, for example, may exert considerable influence. Indeed, our work suggests that the responses of governmental units are frequently determined by a variety of relatively unique circumstances.
The above discussion should not be interpreted as an indication that generalizations concerning strategy responses are impossible; indeed, the ensuing analysis suggests quite the contrary. Rather, in view of the above, we would caution against expecting many invariant and universal patterns of behavior. In the presentation of our data which follows we will distinguish, as appropriate, between strategy responses which differ according to decision levels, levels of government, or types of government.
A governmental unit facing fiscal pressure—whether it be state, county, school district, or municipality—is fundamentally an organization faced with a problem which it must solve in order to achieve organizational goals. It thus must initiate a search for a solution or set of solutions which will satisfy the problem—in our case, the establishment of a balance between revenues and expenditures. As Cyert and March write: "Search is problem oriented. A problem is recognized when the organization either fails to satisfy one or more of its goals or when such a failure can be anticipated in the immediate future. So long as the problem is not solved, search will continue." In the case of a governmental unit experiencing fiscal pressure and faced with the problem of equating revenues with expenditures, there are many logically possible solutions. However, only a small number may satisfy the organization's needs. What are these needs?
An organization may be conceived of as a system which takes in resources and support from its environment and produces output which must, to some degree, satisfy the environment in order to obtain continued support. Thus, the organization must establish an equilibrium between consumer resources and output. In addition, the organization consists of a variety of participants—for governmental units, the central management apparatus, departmental and agency leaders and employees—who must be induced to cooperate in order to produce the organization's product. Thus, an internal as well as an external equilibrium must be maintained.
The organization's participants are, in a sense, its internal constituency. The organization's environment defines its external constituency—for governments, the citizens who are the recipients of governmental services. This external constituency also provides a substantial portion of the organization's resources (intergovernmental sources provide another portion) as well as the support necessary to sustain the organization.
An organization requires some threshold degree of support and resource commitment from both its internal and external constituencies in order to achieve an equilibrium which will permit it to function adequately. The problem for the organization is to arrive at a solution which establishes a balance between revenues and expenditures at a level which satisfies the minimum expectations of both its internal and external constituencies. In short, the organization seeks not only a solution which will work technically, but one which is feasible for adoption and implementation and which satisfies the need for support from the organization's internal and external constituencies.
The foregoing discussion suggests that, operationally, the governmental unit will attempt to balance expenditures and revenues through means which minimize the loss of employment of existing employees (its internal constituency) and the decline in services to the public (its external constituency). The formulation of that balance is constrained by the governmental unit's perception of the amount of additional resources it may extract from the public without suffering defeat at the next election and by the amount of intergovernmental assistance available.
About the Author
Harold Wolman. Senior Research Associate, The Urban Institute, Washington, D.C.; B.A. 1964, Oberlin College; M.A. 1965, Ph.D. 1968, University of Michigan; M.C.P. 1976, Massachusetts Institute of Technology.
George Peterson. Principal Research Associate and Director, Public Finance Program, The Urban Institute, Washington, D.C.; B.A. 1963, Amherst College; B.A., M.A. 1965, Oxford University; Ph.D. 1973, Harvard University.
Citation
55 Tul. L. Rev. 773 (1981)