Three reasons why you should want to know your hometown’s fiscal score

Eric Lupher is director of local affairs for the Citizens Research Council of Michgan, a nonprofit, nonpartisan research group.

Those of us who have been around for a while remember the opening of each “M*A*S*H” episode, with the doctors and nurses rushing to the incoming helicopters to retrieve and assess the newly injured soldiers.  In the medical profession, the exercise they performed is known as triage, a system of sorting patients into three groups based on the need for immediate medical attention, the need for intermediate assistance or low-level needs.

Because few of us have the technical ability to assess our governments’ financial health, or have measuring sticks against to which to judge the results we do find, it is useful to have a method of measuring the fiscal health of our governments in an unobtrusive way that would allow for a deeper look for those governments with scores that warrant.

Several years ago, the Michigan Department of Treasury developed such a scoring system to perform triage on the fiscal health of Michigan’s local governments, with the help of Michigan State University. Munetrix (www.munetrix.com) has incorporated this scoring system into their online services.  Now, after working with a group from the Michigan Government Finance Officers Association, modifications have been made to that scoring system to better reflect municipal finance practices.

The scoring system looks at 10 ratios of the economy and financial circumstances and a government scores a point if each ratio has moved in the wrong direction (e.g. tax base loss) or is beyond designated thresholds. The ratios are designed to measure factors that are external to government operations, such as population and tax base change, and factors that are internal to government operations, such as operating deficits and the debt load. Low scores reflect strong fiscal health and higher scores reflect poor fiscal health.

Three examples to heed

Three local units of government highlight the benefits of the scoring system and how the hold scoring system differs from the new system: Wayne County, Buena Vista Township in Saginaw County and the city of Holland that straddles Ottawa and Allegan counties.

Wayne County scores an “8” in the new scoring system. The score results from erosion of the tax base, which cannot be terribly surprising given the financial troubles of many of the local governments that lie within Wayne County. But it also results from having high levels of expenditures, running deficits, a depleted fund balance. All of these reflect an inability or unwillingness by county leadership to react to the economic conditions within which the county operates. The ways in which Munetrix’s new scoring system better identifies financial weaknesses are evident in that Wayne County moved from a “5” in the old system to an “8” in the new system.

Buena Vista Township, which scores a “4” in the new scoring system, has been in the news lately because the school district that shares its name closed its doors early after it became apparent it would not be able to make payroll for the remainder of the school year.  Financial data in the new scoring system show that the township has been running minor deficits and has eaten into fund balance to some extent to make up the difference.  While this may be a reflection of the weak economy more than anything else, a score in the middle suggests that awareness of potential issues is warranted and that township officials should be wary of fiscal practices that are unsustainable.

The city of Holland moved from a “5” under the old scoring system to a “1” in the new scoring system. Although the city’s finances have not been as strong as they were prior to the economic downturn, the city has kept spending in check and had sufficient reserves to compensate for revenue shortfalls. Examples like Holland would suggest that the old scoring system may have been prone to reporting false positives when measuring fiscal health.

These three units illustrate the varying states of fiscal health exhibited by our local governments in Michigan.  Clearly Southeast Michigan has been among the regions hardest hit by the economic downturn that afflicted the nation and the state, but ultimately the fiscal health of each individual government rests with the elected leaders and their abilities to react to the changing resources available to them.

Fiscal scores are not meant to provide a complete indication of local governments’ fiscal health, but they can provide an early warning system for those unable to undertake full scale analysis of those governments’ finances.  They can allow the state to monitor thousands of local governments in an unobtrusive manner and they provide to residents and businesses the technical expertise and built in benchmarking to judge the fiscal health of their governments.