Association for Public Policy Analysis & Management

According to the U.S. Census Bureau’s 2011 estimate, there are 19,492 municipalities and 3,143 counties in the United States.  There are also many special districts, such as school districts, parks districts, utilities districts, and community colleges. These local governments have been experiencing different levels of fiscal stress in the past decade due to economic downturns as well as the changed intergovernmental financial relationship (such as reduced aid and more unfunded mandates) and have been exploring different strategies to not only improve current fiscal positions but also to achieve a long-term financial sustainability.

Professional organizations such as the Government Finance Officers Association (GFOA) have recommended that local governments adopt a multi-year year budgeting and fiscal planning framework as a means of better understanding their fiscal outlook, thereby enabling budget decisions to be made that strategically address future fiscal challenges and support long-term strategic budget priorities. Internationally, what have been termed Medium-Term Expenditure Frameworks (MTEFs) are used by the central governments of 132 countries; and empirical studies provide evidence that such practices have a positive impact on fiscal discipline, financial sustainability and allocative efficiency.

We present evidence on the range and scope of multi-year budget development and strategic fiscal planning among U.S. local governments, and on the impact of applying some elements/components of MTEFs on local fiscal decisions and results.  The data for the analysis are drawn from a survey of municipal governments’ strategic planning practices and outcomes which is matched with fiscal outcome data from respondents’ CAFRs (Comprehensive Annual Financial Reports) and data from an annual GFOA survey. 

Our analysis finds that many of the governments responding to the survey have implemented longer-term budget and strategic planning frameworks of varying breath and stringency; and that use of such measures has the potential to produce improved fiscal outcomes.  We also find that the manner in which MTEFs are implemented affects the success of such measures in achieving better fiscal health. 

In addition to examining the impact of MTEFs, we also examine the impact of other factors on fiscal performance.  We find that the presence of fiscal constraints such as balanced budget requirements, revenue and/or tax limitations, and fund balance policies implemented consistently have a statistically significant and positive effect on fiscal outcomes.  We also find that the level of unionization has a negative effect.