North Carolina's County and Municipal Fiscal Analysis Tool: Research Review

Have you ever used the County and Municipal Fiscal Analysis tool that is housed on Treasurer’s website?  It allows municipalities and counties in the state to see how they are doing with regard to financial condition and compare their performance to peers.  It has recently become the focus of new research coming from colleagues at the University of South Dakota and Indiana University.  Ed Gerrish and Luke Spreen presented their research on our benchmarking tool earlier this month at the Public Management Research Conference and it is forthcoming at the Journal of Public Administration Research and Theory.  In this Research Review I am going to discuss their research and pull a few findings that are especially notable for those of you that work in budgeting and finance.

Their paper “Does Benchmarking Encourage Improvement or Convergence? Evaluating North Carolina’s Fiscal Benchmarking Tool” evaluates whether the introduction of our benchmarking tool led to improvements in the performance of local governments or did it lead to some of the lower performing governments doing better and some of the high performing governments doing worse?  In that second option, the middle would stay in the middle, because that is fine, but the top may actually decline because they are already the best and doing a little worse will not matter in terms of their benchmarks.  Obviously, that is not the preferred outcome.  So think about it like this…maybe before the benchmarking tool we had a normal distribution of performance amongst our local governments that looked like this: 

Then we adopted benchmarking and everyone moved towards the middle, those far away from the mean (high and low) became more centered.  This is good for the bottom, but bad for the top.  The new distribution of communities might look something more like this:

The authors find support for convergence rather than improvement.  They find that the mean performance of government is essentially unchanged but that poor performers moved toward the mean by improving and high performers moved towards the mean by doing more poorly.  So the movement of these two groups offset each other.

In other words, the authors identify star performers, those governments that are in the best financial position.  These star performers “appear to slack towards the mean following the introduction of the benchmarking tool…This suggests that those local governments made financial decisions that altered their fiscal position but kept them better positioned than the average government” (Gerrish and Spreen, pg. 29).

However, that might not always be a bad thing!  One measure is of fund balance and reserves.