Review Note : Local Government Reform and Local Government Finance Commonwealth Journal of Local Governance

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and Macro Federalism and Local Finances (2007).
In addition to this collection of books, it is possible to identify numerous other recent noteworthy contributions in a similar vein in the local government literature.These include Boyne (1998) Public Choice Theory and Local Government, Bailey (1999) Local Government Economics, Dollery, Crase and Johnson (2006)  The review note is divided into two main parts.Section 2 provides a synoptic outline of Financing Local Government in order to give the reader a brief account of the general thrust of the book.Section 3 discusses the neglected problem of financial sustainability in local government and the difficulties involved both with the concept and its application to local government.The note ends with some concluding remarks in section 4.

Financing Local Government
Financing Local Government should be seen against the background of a global trend towards decentralisation of the public sector, which has taken place in many nations, including Commonwealth countries.This trend has been driven by various economic, political and social forces, not least an attempt to address local needs and regional differences in many developed and developing nations, as well as the failure of the 'fiscal stress' (Pagano and Moore 1985), 'fiscal capacity' (Johnson and Roswick 1991), and 'fiscal crisis' (Campbell 1991).By contrast, in Australia the term 'financial The aim of these exercises in constructing comparative indicators that can be applied to a whole local government system is certainly laudable.Policy makers seek some kind of 'objective' measurement tool that will enable them to compare the performance of individual local authorities and make recommendations that are unbiased.However, in the Australian context at least, this approach has been flawed.In this regard, Woodbury, Dollery and Prasada Rao (2003, p. 78) sustainability' has recently acquired almost universal acceptance, despite the fact that it lacks concrete meaning in Australian policy discourse.One can readily understand how conceptual difficulties of this kind have arisen in the financial analysis of local government.For example, should financial health refer to short term or long run time periods?Similarly, how long should time horizons be?In an analogous vein, should the financial circumstances of a given council be judged exclusively in the light of financial magnitudes, such as operating expenditure, operating revenue, indebtedness, and the like, or should the yardstick reside in standards of service provision and community expectations?After all, cynics have often pointed out that a local council can easily improve its fiscal standing by simply reducing or eliminating service provision!Put differently, should financial performance in local government be assessed in its own terms or relative to operational effectiveness in service provision?What weight should be accorded to operational efficiency that can be determined by management compared with external factors beyond the control of local authorities?Secondly, quite apart from the difficulties involved in developing a satisfactory definition of financial distress in local government, further unresolved problems exist in adequately measuring financial performance.For instance, the first attempt at systematically evaluating the fiscal standing of local government was undertaken by the American Advisory Commission on Intergovernmental Relations (ACIR) in 1973 which devised six early 'warning signs' of 'local financial emergencies' in the form of financial indicators.This engendered a rapidly growing literature on the development of performance indicators for local government in the United States (see, for example, Kloha, Weissert and Kleine 2005), which culminated in the construction of comparative indicators, typically in the form of financial ratios (see, for instance, Brown 1993; 1996).Parallel developments have occurred in various other national contexts.For example, Australian local government has recently witnessed a series of state and national inquiries into local government that have sought to find the 'holy grail' of an operational definition of financial sustainability in local government.Thus the methodologies developed in the South Australian Financial Sustainability Review Board's (2005) Rising to the Challenge, the Financial Sustainability of NSW Local Government's (2006) Are Councils Sustainable, and the Queensland Local Government Association's (2006) Size, Shape and Sustainability all attempted to define financial sustainability and develop attendant comparative measures of local government financial performance.
Secondly, substantially heightened demands on local government, together with limited access to adequate funding, have seen the genesis of a deepening crisis in the financial sustainability of local government entities.Although local government has almost always been a much neglected area of intellectual concern, especially compared with academic interest in higher levels of government, this time local government in general, and local public finance in particular, has attracted considerable attention from scholars.This is evident from the plethora of recent books dealing with local government finance.Perhaps the most significant contribution has come in the form of an ongoing stream of books produced in the World Bank Public Sector Governance and Accountability Series under the series editor Anwar Shah.These volumes first began appearing in 2005 with the publication of Public Services Delivery as well as Public Expenditure Analysis.Since that time a steady stream of books has emerged, all edited by Anwar Shah, including Local Governance in Industrial Countries (2006), Local Governance in Developing Countries (2006), Intergovernmental Fiscal Transfers (2006), Participatory Budgeting (2007), Budgeting and Budgeting Institutions But since the central government has excess revenue relative to need and lower levels are faced with the reverse, this implies a need for fiscal transfers between the different tiers of government.Three possible avenues have been employed: tax sharing, financial transfers from central and/or provincial governments, and the devolution of tax powers.It is obvious that if the magnitude of funds transferred to local government through these three methods is inadequate, then a financial problem will develop in local government if current service provision is to be maintained.This is especially relevant under circumstances where additional functions are transferred to local government without accompanying additional funding as a result of decentralisation policies.
(Clark and Appleton 1989),ich typically exceeds the expenditure requirements of central government agencies.The main reason for this unbalanced fiscal structure rests on the existence of substantial economies of scale in tax collection.Secondly, and in common with vertical fiscal imbalance, most systems of government also exhibit horizontal fiscal imbalance, which describes a condition in local government where different local authorities have different revenue-raising and expenditure characteristics.In short, some local governments are 'rich' and others 'poor', with small rural local governments often falling into the latter category.This has invidious equity implications for local service provision to local communities.In many local government jurisdictions, the problems posed by horizontal fiscal imbalance are addressed to various degrees by means of fiscal transfers.Nonetheless, it is obvious that under decentralisation the quantum of horizontal fiscal imbalance will intensify and thereby exacerbate disparities between different local authorities.Against this background, both practitioners and scholars will find Financing Local Government, part of an ongoing Commonwealth Secretariat Local Government Reform Series, a useful addition to the literature on local government finance outlined earlier.Chapter 4 deals with the financing of capital investment by local government.Borrowing is considered in detail as well as other sources of capital investment funds.In Chapter 5, Pritha Venkatachalam extends this discussion by focusing on various innovative methods of financing local government infrastructure adopted in Tamil Nadu.Chapter 6 moves outside 'own-source' revenue and tackles the question of intergovernmental transfers.The full range of transfers from central government to subnational and local governments is considered, which includes tax/revenue sharing arrangements, general (block) grants, specific grants, deficit grants, capitalisation grants and subsidised loans.Chapter 7 focuses on budgeting and expenditure management in local government.It discusses setting expenditure priorities, financial planning, and financial control.Chapter 8 extends this discussion by dealing with accounting and auditing in local government, using British illustrative examples.Chapter 9 completes this section of Financing Local Government by outlining citizen participation in budgetary processes and local government accountability.In most local government jurisdictions in rich and poor countries alike, central and/or provincial governments periodically assess the financial circumstances of the local authorities in their local government systems.If this process exposes financial distress in particular municipalities, then this can lead to intervention by central and/or state government agencies.Financial oversight by state government agencies of local councils is a thorny question because it inevitably involves developing methods of assessing the financial performance of local authorities.The conceptual and empirical difficulties involved in formulating and implementing accurate financial performance measurement systems are formidable.haveproposedabewilderingarray of terms, including 'fiscal health' (Berry1994), 'financial condition'(Lin and Raman 1998), 'fiscal strain'(Clark and Appleton 1989), Worthington and Dollery (2000) local government 'performance has been exclusively assessed by either comparing performance indicators against data for similar councils, primarily the "average council" figure for that state, or by comparing current performance with earlier indicators for a given council'.The problem is that 'little effort has been directed at explaining why there are differences between councils, determining what constitutes "best practice" levels of efficiency, or how state governments can best apply direct pressure to force inefficient councils to The Financial Analysis of Governments,Berne and Schramm (1986, p. 93)stress that 'the judgment factor will never be replaced entirely by cookbook formulae' offered by the apparent 'objectivity' of quantitative financial ratios in comparative local government performance indicators.Similarly, in direct reference to Australian performance indicators,Worthington and Dollery (2000)emphasised the significance of 'nondiscretionary variables' in performance indicators that cannot be altered by the behaviour of a given council.Nondiscretionary variables include items such as pensioner rate rebates, non-rateable properties in a local government area, the proportion of non-English speaking and Aboriginal people, and a host of economic and social factors that cannot be influenced by a council.In this review note, we have considered the literature on local government finance, placed Financing Local Government in this context, and then demonstrated that the problem of defining financial sustainability in local government is unresolved and the application of this concept to local authorities in the form of various financial indicators is flawed.We have argued that the literature on local government finance is deficient in the sense that it often ignores this problem.Financing Local Government shares this problem with comparable books published over the past decade.While Financing Local Government represents a useful addition to the literature on local government finance, especially in terms of its accessibility to practitioners in local government, it does not provide the reader with a complete picture because it has neglected the question of financial sustainability.This is a pity since a significant proportion of contemporary local government policy making is devoted to financially unsustainable local authorities.
a scale.An inability 'to focus on one locality' is a further problem that plagues systems of comparative indicators since 'ratios for all local governments must be computed