Performance Management and Deficit Adjustment in U.S. Cities: An Exploratory Study

ABSTRACT

Performance management or PM has been promoted as a tool to transform government. Claims that PM will enable governments to “do more with less,” “increase efficiency,” provide “value for money,” and make “rational budget decisions” abound. Has PM helped city governments in the United States cope with the effects of the 2007–2009 Great Recession? Theory suggests that PM can provide the informational and analytical foundation necessary for city officials to implement comprehensive but conflictive budget-cutting and revenue-raising strategies. By facilitating deep expenditure cuts and tax increases, PM can indirectly influence budget deficits. Using data from a national survey of city governments and multiyear audited financial reports, the empirical analysis shows that PM cities favored what are essentially decremental responses to fiscal crises that lead to marginal changes in revenues and expenditures. Not surprisingly, there is no evidence that PM influences the size and change in budget shortfalls.

KEYWORDS:

• City budget deficits
• local fiscal crisis
• performance management

Notes

¹ Unfortunately, the ICMA survey did not provide information on whether the property (or sales) tax increase involves an increase in rate or expansion of the tax base. It is assumed here that the tax increase targets the rate rather than the base.

² Some states require city governments to have balanced budgets at the beginning of the year (i.e. the proposed budget). A stricter requirement is to have balanced end-of-year operating budgets.

³ In general, cities are allowed to incur debt to fund capital projects, but requirements vary across states, with some requiring a referendum before guaranteed debt can be issued.

⁴ Case studies provide evidence that use of PI in decision-making can serve as an impetus for management to undertake cost-saving personnel-related decisions. In a study of the municipal benchmarking project in North Carolina Riverbank, Ammons and Roenigk (2005) showed that analysis of PI in one municipality led to the elimination of an authorized but unneeded position. In another municipal government, Rivenbark, Ammons, and Roenigk (2005) showed that PI analysis identified cases of overstaffing and low service demand, leading to the decision to reduce personnel.

⁵ Bureaucrats also succeed because of vote-maximizing legislators who self-select to committees that approve budget requests of bureaus whose outputs benefit the politician’s constituencies. The majority rule in legislatures also matters: A committee presents a bureau’s budget to the entire assembly as a take-it-or-leave-it offer, with the assembly having limited time to review the proposed budget and other alternatives (Niskanen, 1971).

⁶ Of course, it is also possible that satisfied citizens will demand more services from their governments, thereby increasing pressure on the budget. However, very few governments enjoy the luxury of increasing expenditures in a period of fiscal decline. It is more likely that additional revenues will be used to maintain current service levels, rather than expand them.

⁷ Specifically: (1) The number of municipalities in Census Division 1 as a percentage of all municipalities in the United States. in 2007 was .84%, while the number of municipalities in the same division that responded to the survey as a percentage of the total number of municipalities in the survey sample was 1.69%; (2) for Division 2, the figures stood at 10.05% and 1.69%; (3) 20.16% and 18.13% for Division 3; (4) 23.48% and 18.97% for Division 4; (5) 12.50% and 14.25% for Division 5; (6) 7.80% and 5.53% for Division 6; (7) 13.38% and 14.82% for Division 7; (8) 5.90% and 8.06% for Division 8; and (9) 5.90% and 18.28% for Division 9. The results for Divisions 2 and 9 can be explained by the fact that the ICMA survey targeted chief administrative officers or CAOs in council-mayor forms and city managers in council-manager government forms. Municipalities in Division 2 (which include New York, New Jersey, and Pennsylvania) are mostly council-mayor forms, but not all of them necessarily have CAOs (which explains the underrepresentation in the sample of cities from this area). Municipalities in Division 9 (which covers states such as California, Oregon, and Washington) tend to have council-manager government form (which explains overrepresentation in the sample of cities from this area).

⁸ I did not collect 2008 CAFRs because my data for PM are for 2009. It will not make sense to include 2008 deficit data when there is no information that cities, at this point in time, already had PM systems.

⁹ For example, in between decennial censuses, only the American Community Survey collects socio-demographic and economic information for cities with less than 10,000 population.

¹⁰ The unreserved fund balance is the “portion of the total fund balance that is not restricted for future payments to satisfy outstanding or future liabilities” and is used to manage cash flow and cover unexpected operational deficits (Hendrick, 2006, p. 17). Capital expenditures, on the other hand, are usually the first to be cut to close budget gaps (Jimenez & Pagano, 2012).

¹¹ I also run regression analysis for cities with budget deficits only. The main conclusion is unchanged: PM practices have no systematic effects on deficit levels.

¹² Notable exceptions include, among others, Ammons and Rivenbark (2008), Moynihan (2008), and Heinrich (2012).