Association for Public Policy Analysis & Management

Identifying and preventing local government fiscal distress have been pervasive policy issues. Particularly, state governments are concerned about fiscal distress at the local government because it would affect the intergovernmental fiscal relation and state bond rating. Previous studies document there is a wide variation in state government intervention, such as predicting fiscal distress and proactively assisting or requiring local governments to take remedial action (Kloha et al. 2005; Coe 2008). However, few studies exist in evaluating this system. This study is a step toward filling this gap by focusing on the fiscal monitoring system in New York.

New York State has implemented the fiscal monitoring system based on five categories – 1) Year-end fund balance, 2) Operating deficits, 3) Cash position, 4) Use of short term debt, and 5) Fixed cost. The state government labels local governments with more than 65 points as a significant fiscal stress entity. This system allows us to compare a set of local governments above and below the cutoff score about their financial condition, which is the main feature of regression discontinuity design in program evaluation literature. In addition, we take advantage of difference-in-difference strategy and further investigate whether local governments change their financial behavior in response to fiscal score as well. Findings would inform us whether this labeling system is working effectively and how we can design a better fiscal monitoring system. This study has a potential to inform discussion about the role of state government in enhancing local government’s financial condition.