Since the recent economic downturn, local governments have faced declining revenues, decreasing levels of intergovernmental aid, and increasing demand for services. For many local governments, expenditures have rapidly outpaced revenues in recent years. For example, in fiscal year 2008-2009, nearly two-thirds of cities in California ended the year with expenditures exceeding revenues, and approximately one-quarter of municipalities saw expenditures exceed revenues by more than 15 percent. How can local governments reverse this trend and restore the fiscal health of municipalities?

Scholarly research suggests that there are a number of factors that influence local government fiscal health, including the state and local economy, demographics, state and federal aid, labor costs, and local government management (Honadle, Costa, Cigler 2004, Reed and Swain 1997). While some of these factors are out of the realm of municipal control, city managers do have the authority to make important fiscal policy decisions. In many ways, a city manager, as the highest serving official in a managerial capacity, is the public sector equivalent of a CEO (Hayes and Chang 1990, ICMA 2007) and has broad authority to impact fiscal policy. City managers oversee and direct the administrative operations of the municipality, including the hiring and firing of municipal employees, and play a significant role in forecasting revenues and managing expenses by preparing the annual budget for council consideration.

In the midst of the widespread fiscal stress resulting from the great recession, many municipalities hired new city managers to oversee the operations of their cities. For example, since 2008, nearly 80 percent of municipalities operating under the council-manager form of government have hired a new city manager. But how do leadership change, manager qualifications, and political climate affect local government fiscal health? Previous research has suggested that public managers who move from one organization to another are more likely to push for new, innovative policies than are executives who have previously worked within the organization (Teodoro 2009, Villadsen 2012).While this line of research has examined executive turnover at the federal and state level, no previous scholarly work has not addressed the relationship among bureaucratic executive turnover, electoral competitiveness, and fiscal health at the local level.

Using a unique data set including information on newly hired city managers, financial data, and employment data at the municipal level in California, I show that a change in local government management is associated with an improvement in fiscal health, conditioned upon the managers experience and education and the political climate in the municipality. The dataset includes 345 cities operating under the council-manager form of government in California, and I use both an ordinary least squares regression model and a probit regression model to measure and estimate the impact of management change, manager qualifications, and local political condition on fiscal health.  This study has important implications for scholars seeking to better understand the conditions under which newly hired local government managers are able to positively impact local fiscal health.