Khola, Weissert, and Kleine deal with the prediction of state financial difficulties in “Developing and Testing a Composite Model to Predict Local Fiscal Distress”.
The main reasons for local fiscal distress are i) population & job market shifts ii) governmental growth iii) interest groups demands and iv) poor management.
States can adopt a 10-point scale to detect local financial difficulties before they become serious. The components of this scale are i) population growth ii) real taxable value growth iii) large real taxable value decrease iv) general fund expenditure as a percentage of taxable value v) general fund operating deficit vi) prior general fund operating deficits vii) size of general fund balance viii) fund deficits in the current or previous year and ix) general long term debt as a percentage of taxable value.
The problems of this scale are i) too many variables ii) exclude key variables iii) ignore incentive problems iv) use relative rather than absolute measures v) use data that are not often readily available.
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