Association for Public Policy Analysis & Management

Milena I. Neshkova

Florida International University

mneshkov@fiu.edu

Hai (David) Guo

Florida International University

haguo@fiu.edu

This study examines whether and how the short-term budget-gap closing strategies undertaken during the Great Recession affected the long-term fiscal solvency of local governments. The analysis matches the choice of budget-balancing strategies to subsequent fiscal health of municipalities in the Post-Recession era. The short-term strategies include both cost-cutting and revenue-generating initiatives. Following Hendrick’s (2011) administrative response model, we categorize the strategies into three main categories in order of increasing political cost and visibility: 1) delaying; 2) stretching and resisting; and 3) cutting and smoothing strategies. The analysis employs eight different financial ratios to gauge the long-term fiscal solvency of governments. These include measures of cash solvency, budgetary solvency, long-term debt solvency, and service solvency. The data on budget gap-closing strategies used by local governments between 2008 and 2010 come from Florida counties and municipalities with population of over 6,000.

We find that the most visible and politically costly budget-balancing strategies—those of the cutting and smoothing type—are associated with better fiscal health in the Post-Recession era. The findings are rather sobering and speak to the limited range of options local governments have in situations of prolonged fiscal distress.