Multi-Year Projections and Fiscal Planning in Local Governments: Does It Work and What Affects Its Effectiveness? Open Access
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Local governments in the United States have generally experienced fiscal distress in the past decade, due to the economic downturn, reduction in Federal and State aid, and rising costs for providing services partly due to pensions and healthcare. Many governments are worried about their long-term financial sustainability. Professional organizations such as Government Finance Officers Association (GFOA) have been recommending budgeting with a multi-year fiscal planning framework as a best practice, noting that it can assist local governments in understanding their fiscal outlook and in making budget decisions that strategically address their future fiscal issues and support their long-term strategic priorities. Internationally, Medium-Term Expenditure Frameworks (MTEFs) have been practiced by the central governments of 132 countries with empirical studies showing a positive impact on improving fiscal discipline, financial sustainability and allocative efficiency. (World Bank, 2013) However, limited studies exist on such practices among local governments in the United States.This dissertation draws on existing literature on MTEFs, multi-year (revenue) projections, and financial sustainability to examine the factors that may affect the usefulness of multi-year fiscal planning to policy makers. A survey instrument, which serves as the primary data source for this research, was distributed to local governments. Five hundred and thirty-seven effective responses were collected from different types of local governments in 44 states. Statistical analysis was then conducted, using multiple regression and cumulative logistic regression, to evaluate the potential impact from different features of multi-year framework on its perceived usefulness as measured by survey respondents' ratings. In addition, panel data studies were employed on certain municipalities that use multi-year fiscal planning to study the impact of different features of this framework on nine fiscal health indicators. Five-year financial data from years 2003, 2005, 2007, 2009 and 2011 in the GFOA database was used to construct these fiscal health indicators developed largely based on a modified version of Brown's 10-point system (Brown, 1993).The results contribute to a better understanding of the current status and practices of multi-year projections and fiscal planning used in local governments in the United States. It also helps shed light on whether implementing multi-year framework makes a positive impact on achieving different policy goals (e.g., fiscal health) and what factors affect its effectiveness or usefulness. In particular, statistical analysis results suggest that several features of multi-year fiscal planning have a statistically significant positive impact on fiscal health and other budget goals. Identified factors include: the quality and content of projection material (e.g., whether strategies or options are included to address identified issues); the purpose of multi-year projections and fiscal planning (e.g., whether it targets at achieving certain fund balance levels); the timing of presenting multi-year projections results the legislative authority (which shows the connection between multi-year projections and the annual budget); the engagement of key stakeholders in developing multi-year projections and fiscal plans; the integration between multi-year fiscal planning and strategic planning; and the history or experience of using this policy tool.These findings support the claims by researchers and practitioners that multi-year projections and fiscal planning can help improve a local government's fiscal health and promote other budget goals. In particular, it offers empirical evidence that certain features of the multi-year fiscal planning framework can affect its usefulness. This research fills a gap in existing literature and collects useful information that lay the groundwork for future research.