10.

1177/1078087404268076
Hendrick / FISCAL HEALTHURBAN
IN CHICAGO
AFFAIRS REVIEW / September 2004

ASSESSING AND MEASURING

THE FISCAL HEATH OF
LOCAL GOVERNMENTS
Focus on Chicago
Suburban Municipalities
REBECCA HENDRICK
University of Illinois at Chicago

This study presents a framework for assessing the financial condition and fiscal health of munici-
pal governments, develops indices for some dimensions of the framework, and applies the indi-
ces to 264 suburban municipalities in the Chicago metropolitan region. The framework is based
on a systems view of local government financial condition. It shows that fiscal health is a com-
plex and multidimensional concept with varying time frames. Furthermore, the dimensions are
related but often in indirect or nonlinear ways, indicating they must be measured separately
rather than combined into a comprehensive indicator of fiscal health. Indices developed here for
targeted dimensions of the framework are assessed and compared to alternative indicators of
fiscal health developed by others in the field.

Keywords: suburbs; fiscal stress; local government; monitoring; Chicago; measurement;

fiscal slack

Since the 1960s, urban municipal governments have faced cycles of fiscal
boom and bust that have produced wide fluctuations in their financial condi-
tion. In the 1960s and early 1970s, municipal revenues grew significantly
from both local sources and federal aid. This picture changed considerably
by the late 1970s as the flow of federal money ceased, the economy moved
into a deep recession, inflation soared, and citizen opposition to further taxa-
tion increased. In conjunction, the movement of population and businesses
from the central cities to the suburbs beginning in the 1950s drained central
cities’ revenue base and increased service demands in small suburban gov-
ernments that often were ill equipped to provide additional services. This

URBAN AFFAIRS REVIEW, Vol. 40, No. 1, September 2004 78-114

DOI: 10.1177/1078087404268076
© 2004 Sage Publications

78

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 Hendrick / FISCAL HEALTH IN CHICAGO 79

pattern was later repeated in suburbs near the central city as people and enter-
prises migrated to suburbs farther away. Although fiscal pressures stabilized
for most urban governments by the late 1980s (Bowman, MacManus, and
Mikesell 1992), the early 1990 recession lengthened the period of fiscal
stress for many until the mid-1990s when economic conditions improved
dramatically and local tax revenues increased faster than spending. However,
conditions have reversed once again for local governments since 2001 with
the precipitous decline of the stock market and accompanying recession that
have reduced state-shared and nonproperty tax revenues (Pagano and Hoene
2003).
The fiscal pressures faced by central cities in the late 1970s and early
1980s spawned numerous efforts across disciplines and organizations to
assess local government fiscal health and financial performance and, in some
cases, to develop indices of these conditions. Economists working in this area
primarily targeted environmental factors directly affecting revenues and
expenditures (Ladd and Yinger 1989; Bahl 1984; Advisory Commission on
Intergovernmental Relations [ACIR] 1971, 1979). Studies from political sci-
ence and sociology included some of these variables but added others focus-
ing on politics, demographics, and intergovernmental relations (e.g., politi-
cal culture, voting preferences, and state statutes) (Clark and Ferguson 1983;
Nathan and Adams 1976). Studies from public administration placed more
emphasis on governments’ finances and other aspects of their fiscal structure
over which officials have more control, such as operating position (e.g.,
liquidity), debt, and revenue and expenditure trends (Aronson and King
1978; Groves, Valente, and Shulman 1981; Brown 1993). Also during this
period, many governmental and nonprofit organizations commissioned stud-
ies of fiscal stress and financial condition for their specific needs (e.g., invest-
ment ratings and distribution of aid). (Burchell et al. [1981], Aronson [1984],
and Ross and Greenfield [1980] summarize and critique many measures
from this time period. Honadle and Lloyd-Jones [1998] compare measures
from public administration.)
Almost 20 years have passed since this body of research was completed,
and much has changed in that time that is relevant to assessing local govern-
ment financial conditions. Local governments have new sources of fiscal
stress, including tax limitations and unfunded mandates, and their fiscal
structure has become more complex and diversified (Sbragia 1996; Bahl
1996). In addition, there are many more suburban governments, and more
people live in suburbs than central cities or rural areas than in the past
(Ruchelman 1996).1 Most of the early measures of fiscal health were devel-
oped for larger, central cities rather than smaller, suburban municipalities,

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80 URBAN AFFAIRS REVIEW / September 2004

which presents unique challenges for measuring and conceptualizing fiscal

health.
The combination of these changes, the limited applicability of many ex-
isting measures, and the wide range of emphases across measures from dif-
ferent fields demonstrate the need for more current and comprehensive
assessments of municipal fiscal health. One means of increasing comprehen-
siveness is to ground analysis and development of fiscal health measures
within a theoretical framework, which many current measures lack. Such a
framework provides structure to the complex concept of fiscal health in a
manner that facilitates its conceptualization and measurement and clarifies
the relationship between component measures. A theoretical framework also
helps interpret the overall and component measures and presents strategies
for measuring fiscal health under different circumstances.
This research presents a theoretical framework for assessing local govern-
ment fiscal health that is based on an ecological and systems view of govern-
ment and specifies different dimensions of the concept. This view is more
closely associated with organizational theory than economics, sociology, or
political science, but it can encompass variables from these other areas. The
framework also recognizes different types and time frames of fiscal health.
Indicators of fiscal health are developed for four of the dimensions proposed
here and then applied to suburban governments in the Chicago metropolitan
region using fiscal, demographic, and economic data from 1997 to 2000. The
next section of this study presents this framework and assesses other mea-
sures of financial condition in the context of this framework. Subsequent sec-
tions describe features of Chicago suburbs and Illinois municipalities that
affect how measures of fiscal health are operationalized in this setting, define
and operationalize the fiscal health indicators used here, and evaluate these
indicators. The final section discusses further steps in assessing and measur-
ing fiscal health here and in other states.

DIMENSIONS OF FISCAL HEALTH

AND FINANCIAL CONDITION

The research presented here defines fiscal health very generally as the
ability of government to meet its financial and service obligations. It pro-
poses different dimensions of factors that affect fiscal health to varying levels
or degrees, and it recognizes that changes to fiscal health within these dimen-
sions occur in different time frames. Fiscal health measures based on this
approach will be useful to external groups and other financial stakeholders in
assessing the status of local government fiscal health and, more generally,

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 Hendrick / FISCAL HEALTH IN CHICAGO 81

better understanding the causes of fiscal problems. However, such informa-

tion will be particularly useful for developing state policies, fiscal or other-
wise, that affect local governments and their fiscal capacity.
The proposed framework views government as an open system that is dis-
tinct from its municipal, state, regional, or national environment (for excel-
lent summaries of research and theory using this approach, see Levinthal
1991; Baum 1996; Scott 1998). The government system includes various
subsystems or institutions that directly affect financial decisions cumula-
tively and in the short run. Examples of institutions are the government’s
political structure or governing culture. Examples of subsystems are depart-
ments or other working groups that participate in the government’s financial
management functions. The government’s environment encompasses more
immutable and less controllable conditions that establish demands for ser-
vices and constrain spending and revenues over time such as the age of its
infrastructure, which affects maintenance needs, or the value of municipal
property that determines the availability of property tax revenue. Although
government officials determine the actual levels of services provided or taxes
collected, the environment limits their options. Voters’ preferences or state
statutes are also examples of environmental factors that place boundaries and
demands on officials’ choices and governments’ actions.
Governmental (system) features place additional constraints and de-
mands on fiscal choices and provide other opportunities for resolving finan-
cial problems. For instance, all things being equal, a municipality with low
fees or a high fund balance has more opportunities for managing fiscal stress
than does one with high fees and a low fund balance. However, the govern-
ment’s political culture may also limit the acceptable levels of fees or fund
balances. In contrast to the environment, system-level structures and institu-
tions are more likely to change in the short run and be manipulated by gov-
ernment officials and other stakeholders who participate directly in financial
decisions. For instance, government officials can alter revenues and fund bal-
ances subject to the boundaries established by the governing culture or estab-
lished policies, but they can also directly change policies. Similarly, a new
mayor or municipal manager can change the governing culture. In contrast,
property values, population density, and crime levels that affect spending
needs and revenue limits change more slowly and respond less quickly to
government actions. An important attribute of this framework is the rela-
tionship between the governmental system and its environment.
This systems approach, which draws heavily from Berne and Schramm
(1986) in a financial context, lends itself to thinking about fiscal health and
developing measures of this condition according to different dimensions.
Table 1 presents these dimensions and a brief description and representative

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82 URBAN AFFAIRS REVIEW / September 2004

TABLE 1: Dimensions of Fiscal Health in Municipal Governments

I) Properties of government’s environment: conditions that are immutable, less controlla-

ble by government, and often due to regional trends
A) Revenue wealth: value of tax bases and other revenue sources that governments are
permitted to collect by state statutes, for example, property value or sales receipts
B) Spending needs: conditions that determine the level of services governments must
provide to ensure the health and safety of its residents and visitors, for example,
miles of road. Spending needs are also a function of the range of services govern-
ments provide and the costs of service delivery, for example, salaries and wages.
C) Socioeconomic, political, and demographic features: features of the municipal
population, economy, and other underlying conditions that determine A and B
above. Also represent state, national, or regional economic conditions.
D) Changes in IA, IB, or IC
II) Balance of fiscal structure with environment: direct comparison of features in dimen-
sions I and III to determine the balance or level of adaptation of a government’s fiscal
structure to environmental conditions, for example, property taxes collected relative to
property wealth or public safety spending relative to need. Changes in I and III encom-
pass change in II.
III) Properties of the government’s fiscal structure: outcomes of officials’ and other direct
participants’ financial choices (cumulative and current). Participants have more direct
control over features in III than in I. This dimension includes revenue and spending
levels and the subdimensions below. Reflects government’s adaptation to environment
and other structural features.
A) Fiscal slack: level of flexibility, discretion, or surplus in the fiscal structure that
allows governments to moderate or buffer the effects of environmental changes and
uncertainty over several years, for example, fund balance and discretionary spend-
ing. Adaptation: for example, dependence on sales tax fosters high levels of slack
(which reduces risk).
B) Relativity of components within major structural areas: relative levels of revenue
sources, spending functions, debt instruments, or other areas of financial activity,
for example, percentage state aid or general obligation debt (of total debt). Adap-
tation: for example, high sales receipts foster dependence on sales taxes (which
increases risk).
C) Current operating conditions: reflects the government’s ability to meet short-term
obligations during the fiscal year, for example, liquidity, fund deficits, fund borrow-
ing, or short-term borrowing.
D) Future financial obligations: reflects the degree to which current financial choices
and conditions have obligated future resources, for example, debt, pensions, de-
ferred maintenance, long-term contracts, and unfunded liabilities.
E) Changes in IIIA, IIIB, or IIIC

examples of indicators in each. The two primary dimensions, which reflect

different levels or time frames of financial condition and impacts of fiscal
choices, are properties of the government (III) and properties of its environ-
ment (I). The fiscal environment includes the value of the government’s reve-
nue base (IA), the strength of its spending needs (IB), and underlying eco-

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 Hendrick / FISCAL HEALTH IN CHICAGO 83

nomic, demographic, political features (IC) that determine fiscal wealth and
spending needs. Properties of the government’s fiscal structure include con-
ditions or policies that can develop over time in response to the fiscal environ-
ment (e.g., increasing reliance on sales taxes) or choices made in the short run
to accommodate more immediate problems (e.g., raising property taxes this
year or cutting back on purchasing). 2
In addition to revenues and spending levels, a government’s fiscal struc-
ture includes other features that can be characterized in different dimensions
with varying time frames. Fiscal slack (IIIA) represents the government’s
ability to buffer against environmental threats and uncertainty over a practi-
cal time period (Cyert and March 1963). Fiscal slack can be defined literally
as surplus resources, such as high fund balances. More generally, it is any
structural feature that increases a government’s financial options and flexi-
bility in managing risk and uncertainty, such as a diversified revenue struc-
ture or a higher level of discretionary spending in the budget. Relativity of
components (IIIB), another dimension of fiscal structure, is not really an
indicator of health as much as it modifies other conditions. For instance, high
dependence on sales tax revenue creates more risk for government due to the
greater volatility of sales receipts (sales tax revenue base) and thus a greater
need for higher levels of slack than a government more dependent on
property taxes.
Financial managers also recognize very short-term conditions of fiscal
health (IIIC), usually related to a government’s operating position. Measures
of this dimension focus primarily on cash flow and whether the government
can generate enough cash during the fiscal year to pay its bills on time. Oper-
ating deficits and liquidity (cash/liabilities) rates are examples of indicators
of very short-term fiscal health, in contrast to indicators of midterm fiscal
health. Measures of midterm fiscal health, which include indicators of slack
and risk, examine a government’s ability to meet budgetary obligations over
a few years and focus on features that facilitate or hinder its adaptation to fis-
cal shocks or declines.3 Another governmental dimension of fiscal health
reflects the degree to which current financial decisions have obligated future
resources (IIID). Although this dimension represents long-term fiscal health,
it is qualitatively different from the environmental dimensions because gov-
ernment controls these obligations. In this case, the decision to issue more
bonds or slow pension contributions are choices that reduce future slack
rather than increase future spending needs. Future debt and pension spending
needs are a function of interest rates, an uncontrollable feature of the envir-
onment, that determine the cost of debt and the return on pension investments.
Measures of balance or adaptation (II), which is another midterm measure
of fiscal health, assess how well government’s fiscal structure, over which

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84 URBAN AFFAIRS REVIEW / September 2004

officials have more control, accommodates environmental conditions, over

which officials have less control. As such, balance or adaptation is not really
a separate entity from the government or environment. Rather, it is a process
or condition that interfaces the two dimensions and reflects their relationship.
This condition is often measured using ratios of the two dimensions. For
example, total revenues divided by revenue wealth shows the level of burden
that a government places on its revenue sources. Spending relative to needs
shows the degree to which government is funding services, and the level
of revenue diversification relative to the availability of different revenue
sources shows whether government’s overall structure matches environ-
mental conditions.
Other studies of fiscal stress have made similar distinctions in time frames
and levels of financial condition. Groves and Valente (1994) describe long-
run fiscal health as service-level solvency, or the ability of a government to
provide adequate services over many years given the existing resource base.
Clark and Ferguson (1983) incorporate the concept of adaptation into their
analyses of fiscal stress using ratios of fiscal structure to environment to mea-
sure this event. They define fiscal health as the extent to which a government
has balanced its fiscal structure with the risks, demands, and pressures of the
environment to reduce the incidence of more short-run budgetary and fiscal
deficits. Somewhat earlier, Howell and Stamm (1979) recognized that the
appropriate fiscal structure for a government is contingent upon its environ-
ment. Groves and Valente (1994) also distinguish between midrange and
short-range levels of fiscal health. They label the former budgetary solvency
and define it as the government’s ability to balance its budget or generate
enough resources to cover expenditures during a reasonable time period. The
latter type of fiscal health is called cash solvency and reflects whether the
government can generate enough cash to pay its bills on time.
Changes in the fiscal environment (ID) and fiscal structure (IIIE) are two
additional dimensions of fiscal health that should be measured separately
from the others. The significance of these dimensions is apparent from re-
search that examines the role of environmental change to current levels of fis-
cal stress (Morgan and England 1983; Stonecash and McAfee 1981; Bunce
and Neal 1984; Bahl 1984). This research suggests that governments can face
more immediate fiscal threats from a worsening of prior conditions than from
bad fiscal conditions that have existed for some time. For example, wealthy
governments that are experiencing a significant drop in revenues or a decline
in property values may have more stress than governments that have adapted
to a relatively stable but poor resource environment. The need to examine
changes separately in the environment and fiscal structure is apparent when
one realizes that reductions in slack or current operating position are worse

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 Hendrick / FISCAL HEALTH IN CHICAGO 85

for poor communities than wealthy ones but less threatening to both types of
governments than reductions in sales receipts or property values.
Although measures of fiscal health and conditions are likely to be related
across dimensions, the examples above demonstrate these dimensions may
vary independently or in nonlinear ways. A government with high environ-
mental stress (low property and residential wealth with high spending needs)
is more likely to have low slack, high future obligations, and more difficulty
meeting payroll. Similarly, it will be easier for a government with low envi-
ronmental stress to maintain adequate slack, maintain a solvent budget, and
meet short-term obligations. But these outcomes are not always certain. A
government with high environmental stress that is well managed and has a
history of sound fiscal decisions may find it difficult but not impossible to
have a good budgetary position and short-term solvency, although maintain-
ing short-term fiscal health will be more difficult. Likewise, a government
with low environmental stress may experience more budgetary stress, lower
slack, and more short-term insolvency if it is poorly managed and has a his-
tory of unsound fiscal practices, although it will have more options for raising
revenue or reducing spending than governments in less wealthy or more
needy environments. Thus, municipalities with high levels of stress on one
dimension may not necessarily have high or low levels of stress on other
dimensions, although they are more likely to have high levels of stress across
dimensions, and, over time, stress in one area may lead to stress in other
areas. To complicate matters further, interpretation of conditions in one area
may depend on conditions in another area, such as whether the level of slack
is appropriate to the level of risk in the fiscal structure and volatility of the
environment. The complexity and indirect nature of the relationships
between dimensions make it difficult to construct one, comprehensive indi-
cator of fiscal health or financial condition. Rather, measures of these dimen-
sions should be constructed separately and assessed in relation to one another
to produce a complete and more accurate picture of fiscal conditions.
This study focuses its analyses on four dimensions in Table 1: revenue
wealth (IA), spending needs (IB), fiscal balance (II), and fiscal slack (IIIA).
Table 2 presents a summary of the most widely cited recent and past fiscal
health indicators and comments on how they compare to the set of dimen-
sions and system of measurement proposed here. Table 2 also comments on
other qualities of the indicators, including their applicability to local govern-
ments in other states or suburban governments and their appropriateness for
broad-based monitoring of local conditions. Although some indicators in
Table 2 produce very good measures of dimensions IA, IB, and II, not all
are appropriate for suburban governments or can be adapted easily to local
governments in other states. Many indicators also combine dimensions, and
(text continued on page 90)

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 86
TABLE 2: Summary of General Health Indicators

Index Name Applicable Categories from Table 1 Variables in Indicators

A) Nathan and Adams (1976): Intercity Hardship IC Unemployment, dependency of population, educa-
Index (Brookings) tion, income, crowded housing, poverty
B) Congressional Budget Office (1978): Urban IA, IB, IC, ID (1) Social need: unemployment, per cap income (2)
Need Index Economic need: employment change, population
change, per capita income change, density, pre-
1940 house (3) Fiscal need: tax effort, property tax
base, service needs index composed of community
need index, tax effort, and property tax base
C) U.S. Department of the Treasury (1978): urban IIIE Average change in weighted variables: population,
fiscal strain per capita income, own-source revenue burden,
long-term debt per capita, property value (full
market); revenue burden = own-source revenues
per capita
D) Advisory Commission on Intergovernmental II, IIIE Tax effort and change in tax effort, as a percentage of
Relations (ACIR) (1979) fiscal blood pressure median; tax effort = own-source taxes/personal
income
E) Howell and Stamm (1979): urban fiscal crisis All of I, II, IIIA, IIIC (1) Economic: change – population, single-family
(Touche, Ross & Co. and First National Bank, housing starts, manufacture-unemployment ratio,
Boston) manufacture capital spend; family income, manu-

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facture capital spend; (2) Social: minority popula-
tion, poverty, unemployment, pre-1940 house;
(3) Structural: population density and financial
performance Financial performance: (1) revenues:
3 variables; (2) debt: 3 variables; (3) expense:
7 variables
 F) Clark and Ferguson (1983): fiscal strain IA, IB, ID, II, IIIE Four sets of ratios all constructed similarly (1)
Expenditures per cap (ED): divided by city wealth
(CW) index, population change, income, and
residual of ED on functional performance [FP]/FP
(2) FP index of spending and residual of spend per
capita on FP over CW (3) Revenue: similar to 1
(4) Debt: similar to 1
G) ACIR (1971, 1988) representative tax system IA, II Calculated for separate tax bases and summed with
per capita alternative; revenue capacity is based on
a regional rate
H) Ladd and Yinger (1989): fiscal health index IA, IB, ID, II, IIIE (1) Revenue-raising capacity similar to ACIR (G)
above but adjusts for tax burden on nonresidents
(2) Costs and spending needs for general, police,
and fire (3) FH index = #2 – #1 (4) Changes to FH
index
I) Brown (1993): 10-point test of financial II, IIIC, IIID 10 indicators: total revenues per cap, % own-source
condition revenue, % transfers in, % capital expenditures,
operating deficits, % unreserved fund balance,
cash and investment/liabilities (liquidity), % liabil-
ities, debt per cap, % debt service
J) Kloha, Weissert, and Kleine (forthcoming): ID, II, IIIA, IIIC, IIID Nine indicators: population change, change in tax-
10-point scale of fiscal distress able value, large decrease in taxable value, spend-
ing/taxable value, current operating deficits, prior
operating deficits, % fund balance, current or pre-
vious year deficit in major fund, debt/taxable value
K) International City/County Management Associa- All of II and III Thirty measures of financial factors; examine trends

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tion (ICMA): financial trend monitoring system in each factor over a minimum of five years
(1980, 1994, 2003)

(continued)

87
 88
TABLE 2 (continued)

Index Name Construction Notes Comments

A) Nathan and Adams (1976): Intercity Hardship Standardize, then average all variables Limited to one dimension. Data are easily available.
Index (Brookings)
B) Congressional Budget Office (1978): Urban Community index constructed from fac- Most variables are easily available if state govern-
Need Index tor analysis of 20 variables represent- ment collects tax base information, but the index is
ing age of population and infrastruc- extremely complex and double counts some vari-
ture, poverty, race, crime, and so on. ables or constructs. Merges change dimension
Standardize variables as index and with others.
average all variables in each
dimension.
C) U.S. Department of the Treasury (1978): urban Sum of weighted z values Reliance on per capita distorts suburban conditions.
fiscal strain Weights are somewhat arbitrary. Limited to
change.
D) ACIR (1979) fiscal blood pressure Establishes a 2 × 2 table (4 categories) of Four categories are gross indicator only. Consider
fiscal blood pressure at a cutoff of 100 change directly. Income is only tax base and mea-
for both variables, or retain as ratio of sure not easily adjusted to other bases.
static/dynamic
E) Howell and Stamm (1979): urban fiscal crisis Maps average of all financial perfor- Similar dimensions as proposed here and recognize
(Touche, Ross & Co. and First National Bank, mance variables on 16 categories of nonlinearity between dimensions. However, not
Boston) fiscal condition defined by economic, summarize as indicators within dimensions. Most
social, and structural variables economic variables are not available. Reliance on

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per capita distorts suburban conditions.
F) Clark and Ferguson (1983): fiscal strain Some numerators and denominators in Differences between indicators in each area are not
each of four areas are calculated as clear. Unlike revenues, data on spending catego-
ratio of one year over another to ries are less available. Overlooks important reve-
reflect change. CW = (median income nue bases in some states (e.g., sales, payroll) but
× % nonproperty tax) + (equalized can be adjusted.
assessed value × % property tax)
 G) ACIR (1988) representative tax system Calculate for each revenue source, then Data easily available, but measures limited to one
sum (1) determine regional revenue environmental and governmental dimension. Per
rates, (2) multiply #1 by revenue base capita measures distort suburban conditions but
in government, (3) divide actual reve- can be adjusted.
nue by #2, (3) calculate per capita #2
and divide by regional revenue base
H) Ladd and Yinger (1989): fiscal health index Spending needs: (1) service responsibili- Nonresident information and variable for costs are
ties index for all service areas = spend not available or easily obtained for smaller munic-
in government/total spend region × ipalities. Calculation of index is extremely
average per capita spend region, then complex.
sum; (2) cost index = parameters from
regression with many variables are
used in cost function that includes
selected variables from other factors
and adjustments
I) Brown (1993): 10-point test of financial For each indicator, assign a numeric Dimensions are combined. Some measures of condi-
condition value from 1 to +2 based on quartile tions are very indirect. Reliance on per capita dis-
and sum numeric values torts suburban conditions and revenue base.
J) Kloha, Kleine, and Weissert (forthcoming): Use standard deviations to establish cut- Dimensions are combined. Taxable value is defined
10-point scale of fiscal distress off points that define a binary value for as property tax only, overlooks other revenue
each indicator. Points are assigned or bases. Assignment of points is somewhat arbitrary.
detracted based on binary value.
Calculate sum of binary values.

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89
90 URBAN AFFAIRS REVIEW / September 2004

others have unreasonable data and calculation requirements that limit their
use by external organizations for monitoring purposes. For this reason, new
measures of these dimensions are explored here.
The next section discusses characteristics of the municipalities in the Chi-
cago region and the fiscal data used here. Subsequent sections identify the
measures, show how they are calculated, and evaluate their validity by ex-
amining their associations with other dimensions and comparing them to
selected indicators in Table 2.

MUNICIPALITIES IN THE
CHICAGO REGION AND FISCAL DATA

As Orfield (2002) reminds us, suburban communities are not monolithic

entities with common social experiences and economic and political needs.
Although they are affected by and benefit from the same regional economy,
suburbs are exceedingly diverse by comparison to each other yet homoge-
nous within their own boundaries. Tiebout (1956) explains why such frag-
mentation increases along with growth of suburban regions. Given variation
in preferences, sovereignty, and mobility, consumers of local government
services will move to communities that provide bundles of services that
match their preferences. These dynamics increase both the number of local
governments in a region and the product mix they offer. Fragmentation also
occurs along racial, economic, and political dimensions over time within
regional populations (Rusk 1995), which creates widely varying levels,
causes, impacts, and means of managing fiscal stress across suburban local
governments. In addition, measures of fiscal health for larger and more cen-
tral cities will not be appropriate or will distort actual conditions within sub-
urbs. For instance, employment and payroll levels of businesses that are used
in some assessments of fiscal health may not be relevant to suburbs, espe-
cially if they are primarily residential. Similarly, per capita measures may
distort conditions in suburban municipalities that are primarily industrial-,
commercial-, or service-based sectors for the larger region.
The six-county Chicago metropolitan region exemplifies fragmentation
of suburban governments more than most areas of the nation and thus pro-
vides a good challenge for measuring fiscal stress in this setting. Illinois is
noted for having the highest number of local governments (6,836) of any
state, many of which are concentrated in the Chicago region (1,303). These
governments consist of special districts, authorities, corporations, and com-
missions that supply many types of local services to communities, including
education, fire, library, parks, sanitation, and water. Although none of the

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 Hendrick / FISCAL HEALTH IN CHICAGO 91

municipalities in this region are responsible for education, their responsibili-

ties vary greatly in the other areas of local service provision depending on
whether they are located in special districts. Fire districts are critical to sub-
urbs’ fiscal health in the region because fire protection is a significant source
of spending needs and, unlike parks or libraries, not discretionary.
Another factor that complicates measuring fiscal stress among govern-
ments in Illinois is the wide range of taxes the state allows its municipalities
to levy, which also vary by home rule status. In addition to the property tax,
municipalities in Illinois may levy taxes on cigarettes, photo finishing, motel
occupancy, automobile rental, and utilities (telephone, natural gas, and elec-
tricity). But home rule municipalities can levy many other taxes, including
an additional sales tax, and they are not subject to property tax limitations.4
Home rule status is automatically granted to municipalities with populations
greater than 25,000. Smaller municipalities can obtain home rule status via
referendum. The breadth of revenue-raising options and variation in access
to these privileges, statutory or otherwise, requires that measures of fiscal
stress and financial condition for suburbs in this region account for these
factors.
Appendix A defines the variables used to measure fiscal stress in this
study, and Appendix B presents descriptive statistics for the same variables.
Appendix B demonstrates the tremendous disparity among 264 suburbs in
the Chicago region, particularly with regard to demographic features such as
income per capita, median age of housing, percentage White population, per-
centage population that is managerial and professional, and percentage
change in population. Statistics for percentage of equalized assessed value
(EAV) that is residential, as opposed to commercial or industrial, show the
breadth of the composition of properties among the suburbs and suggest why
per capita measures are inappropriate for many suburbs. For instance, per
capita values of any variables are extremely high for Bedford Park, McCook,
and Rosemont, each of which has a high concentration of industrial and com-
mercial properties (less than 10% residential) because few people live there.
In this case, standardizing fiscal measures using population, such as revenue
per capita, dramatically distorts their fiscal health. Although the percentage
residential EAV in these three suburbs is relatively extreme, this problem
demonstrates how per capita measures will become more distorted as
suburbs become less residential.
The growth and decline of suburban areas in the Chicago region is not
unlike other central cities of the Midwest and Northeast. When residents
began leaving the central city during the 1950s, many settled in the inner-ring
suburbs relatively close to Chicago. During the 1960s and 1970s, migration
of businesses and residents continued farther out to a middle ring. By the

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92 URBAN AFFAIRS REVIEW / September 2004

1980s, large areas of an outer ring, beginning about 35 miles from Chicago,
were beginning to develop heavily and encompass the region’s four, larger
satellite cities: Elgin, Aurora, Waukegan, and Joliet. As development in-
creased in the middle and outer rings, many suburbs in the inner ring declined
economically and looked more like depressed areas of the inner city. How-
ever, the pattern of development and decline in the Chicago region and
around the city was not uniform. Residential development and new centers of
employment tended to concentrate in the north and northwest suburbs of the
middle and outer ring, but many inner-ring suburbs to the north retained their
White, wealthy, and professional residents. In contrast, many inner- and
middle-ring suburbs south of Chicago, and many suburbs in the near south-
west and west sides, have become poorer, less White, and more blue-collar
(Orfield 2002).
Data used to measure the fiscal health variables are from two primary
sources. Socioeconomic and demographic data were obtained from the 1990
and 2000 U.S. census. Financial data were obtained from the Illinois Comp-
troller’s Office (IOC) and the Illinois Department of Revenue. At the end of
each fiscal year, all governments issue an annual financial report that con-
tains their primary balance sheets and statements of revenues, expenditures,
and expenses. All local governments in the state of Illinois are required to
report much of this information to the IOC every year. All financial data were
averaged for the years 1997 to 2000 to reduce measurement error and the
incompatibilities associated with variation in accounting practices among
the suburbs. Given that 18% of the governments in this region may still prac-
tice cash accounting, the most important source of such variation is cash ver-
sus accrual accounting. Averaging eliminates the effects of these timing dif-
ferences and reduces the impact of unique events that may dramatically affect
revenues or expenditures in the short run.5 Finally, unless indicated other-
wise, all measures of fiscal structure, such as revenues and fund balances,
include all governmental funds (general, debt service, special revenue, and
capital funds where indicated) and do not include proprietary funds (enter-
prise and fiduciary/pension).

FISCAL STRESS AND

FINANCIAL CONDITION MEASURES

As indicated previously, this study focuses its analysis on four dimensions

of fiscal health: spending needs, revenue wealth, balance with the environ-
ment, and slack. Measures of these features are summarized as three primary
indices. Table 3 presents the indices and component variables for selected

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 TABLE 3: Fiscal Health Indices
a
(C )
a a b
(Ba) Weighted (D ) (F ) (I )
a
(Aa) EAV Sales Wealth (E ) Weighted Need
a b
Income per Receipts Total Median Crime (G ) H Total Ext Health:
Municipality per Square per bzA + (D2) Age in per Reverse Fire bzE + bzF + (I2) Wealth – Need
Number Municipality County Capita Mile Capita bzB + bzC Order Household 1,000 Density District bzG + bzH Order (D2 – I2) Order

I) Environment
1 Alsip Cook 80.3 163.1 82.4 –0.516 63 96.9 92.6 94.2 0 –0.305 99 –36 85
2 Arlington Heights Cook 130.5 232.2 137.0 0.156 188 103.1 78.6 74.9 0 –0.44 75 113 193
3 Barrington Cook 172.0 170.5 444.4 1.523 247 118.8 81.8 110.4 0 –0.12 126 121 200
4 Barrington Hills Cook 284.2 19.7 19.3 1.412 245 106.3 60.1 242.8 1 –0.28 102 143 219
a
(K ) Balance:
Weighted (M) (Na) (P) Expenditure/
a
Own-Source (La) Revemue/ Weighted (O ) Expenditure/ Need –
Municipality Revenue Wealth Total Wealth (M2) Expenditures Need Total Need P2 Revenue/
Number Municipality County per Capita Order bA + bB +bC (K/L) Order per Capita Order bE + bF + bG + bH (N/O) Order Wealth(P2 – M2) Order

II) Balance
1 Alsip Cook 62.2 33 81.9 0.76 69 69.6 48 94.4 0.74 43 –26 99
2 Arlington Heights Cook 112.1 158 133.5 0.84 90 106.0 149 85.8 1.24 136 46 174
3 Barrington Cook 199.4 242 308.0 0.65 39 186.2 235 100.8 1.85 208 169 237
4 Barrington Hills Cook 248.7 250 186.0 1.34 197 205.5 241 85.1 2.41 222 25 150

Slack:
a a a
(Qa) (R ) (S ) (T ) Average of %
Municipality % Fund % Capital % Enterprise % Debt % Median Residential
Number Municipality County Balance Expenditures Fund Service Q, mR, mS (100 – T)a Order Home Rule EAV Order Population

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IIIA) Fiscal structure: slack
1 Alsip Cook 17.7 5.6 33.2 15.6 77.8 54 1 33.6 14 19,725
2 Arlington Heights Cook 116.5 11.0 26.1 14.5 114.5 166 1 60.4 66 76,031
3 Barrington Cook 185.4 6.3 25.6 6.1 120.3 177 0 62.4 77 10,168
4 Barrington Hills Cook 70.4 8.9 0.0 0.0 78.5 60 1 98.1 258 3,915

NOTE: EAV = equalized assessed value; z = z value; b = standardized regression slope; m = % of median for all cases. All rank orders are presented as ascending.
a. Presented as % of median value for all cases.
b. Presented as Z value.

93
94 URBAN AFFAIRS REVIEW / September 2004

municipalities.6 This section discusses each of the indicators, and the follow-
ing section evaluates the indicators relative to other measures of fiscal health
and demonstrates their use through mapping.

ENVIRONMENTAL INDICATORS:
REVENUE WEALTH AND SPENDING NEEDS

The measures of environmental features presented here are own-source

revenue wealth, which reflects a government’s capacity to generate revenue,
and spending needs. Separate indicators are calculated for each subdimen-
sion and then combined into a single indicator of environmental health. The
wealth portion of the index must also take into account that home rule gov-
ernments have greater access to this wealth than do non–home rule govern-
ments. Revenue wealth is assessed using the variables income per capita,
EAV per square mile, and weighted sales receipts per capita. The four sources
of own-source revenue for municipalities in this region are property tax (µ =
33% of total own-source revenue), sales tax (µ = 24%), nontax revenue (µ =
31%; e.g., fines, licenses, and charges), and other tax sources (e.g., utility).
Property tax capacity is measured as EAV per square mile, and sales receipts
per capita measures the wealth of the sales tax revenue base. The appropriate
base for nontax revenue and other taxes is not clear given that much of it may
be exported to nonresidents and persons doing business within the commu-
nity. In this case, income per capita may be the best measure of revenue
capacity for other revenue (Berne and Schramm 1986; Rafuse and Marks
1991).
As discussed previously, using per capita measures can overestimate con-
ditions in suburbs with a high percentage of nonresidential properties. For
instance, EAV per capita in Bedford Park, with only 3.4% of its EAV from
residential properties, is $7,407 compared to the regional median EAV per
capita of $94. Thus, EAV per square mile is used rather than EAV per capita.
In addition, most of the per capita measures reported here are weighted (mul-
tiplied) by the percentage of total EAV that is residential property, which
deflates per capita measures for municipalities with high levels of nonresi-
dential properties and inflates it for high residential communities.
As indicated in Appendix A and demonstrated in Table 3I, the wealth
index was created by converting the three component variables into z values,
weighting each value by a standardized regression slope, and then summing
the weighted values. The slopes were obtained from a regression analysis
with weighted own-source revenues per capita as the dependent variable and
the three component wealth measures as independent variables and then run

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 Hendrick / FISCAL HEALTH IN CHICAGO 95

separately for home rule (R2 = .61) and non–home rule (R2 = .58) municipali-
ties. Using a different set of slopes to construct the wealth measure for home
rule and non–home rule governments recognizes their different opportunities
to collect taxes. As indicated in Appendix A, EAV and sales are more impor-
tant to non–home rule governments, and personal income is more important
to home rule municipalities. Although it may seem contrary to expectations,
the low slope for EAV and high slope for income per capita in home rule gov-
ernments may reflect their larger size and greater access to a broader range of
taxes and revenues than non–home rule governments. Thus, EAV taxes may
be less important to home rule governments because of expanded revenue
opportunities and greater capacity to collect revenue.
The spending needs measure is constructed from four variables: median
age of housing, weighted crime rate per capita (percentage residential), pop-
ulation density (population/square miles), and whether a municipality is in a
fire district. Measures of spending needs developed in prior research for
larger and central cities target many more factors, such as age of the popula-
tion, poverty, and employment, that may not be relevant to suburban govern-
ments that do not provide extensive social or health services (Ladd and
Yinger 1989; Rafuse and Marks 1991). In this case, prior analyses of spend-
ing in the Chicago suburbs indicate that age of housing and crime rate have a
significant effect on expenditures, whereas other variables such as age of the
population and poverty have no effect. Past studies have shown crime rate to
be a good general indicator of public safety expenditures (e.g., police, fire,
and inspection), and age of housing is often used to measure infrastructure
and public works maintenance needs (Clark and Ferguson 1983).7 Popula-
tion density measures the economies of scale for service delivery: The more
people per square mile, the less costly to deliver services (Berne and Schram
1986).8 Finally, municipalities that are in a fire district will have substantially
reduced spending needs for salaries, equipment, and pension obligations.
Similar to the wealth index, the spending need index was created by con-
verting the four component variables into z values, weighting them with stan-
dardized regression slopes (weighted expenditures per capita as the depend-
ent variable), and them summing the weighted values. Because demand for
services is such a big factor in determining actual spending in communities,
regardless of their needs, income per capita was included in the regression
equation as a measure of demand for services (R2 = .53). Using income per
capita as a measure of demand is well documented in the fiscal stress litera-
ture (Ladd and Yinger 1989; Clark and Ferguson 1983).
The composite index of environmental fiscal health was created by sub-
tracting the rank order of each municipality on the need index from the rank
order of each municipality on the wealth index. The reason for using rank

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96 URBAN AFFAIRS REVIEW / September 2004

orders rather than the z values is to remove the distributional effects associ-
ated with extreme values and outliers in either the wealth or need index but
not the other. Measures of fiscal health for municipalities with this condition
can be highly distorted by a composite index using z values, which was dem-
onstrated from the obvious misplacement of some municipalities in the bot-
tom and top 15% of the scale.9 Using “sophisticated” ordinal scaling (rank
orders) rather than interval scaling (z values), in effect, relaxes assumptions
about the measurement precision of the component variables in the final
index, which may be prudent under these circumstances.

FISCAL BALANCE INDICATORS:

REVENUES/WEALTH AND SPENDING/NEEDS

The measures of balance or adaptation of a government’s fiscal structure

with its environment (see Table 3II) reflect the extent to which the govern-
ment has used up or captured the revenue resources in its environment and
whether it provides adequate services to its constituents (businesses and resi-
dents). The more resources it has used up, the less resources that are available
for current needs. Similarly, the more services have been underfunded, the
greater the difficulty in cutting spending without jeopardizing the health and
safety of residents. This dimension of fiscal health is measured with two
ratios: own-source revenues relative to wealth and expenditures relative to
needs. The ratio of a government’s revenues over which it has control to the
value of its resource base or capacity is often used as a measure of revenue
effort or revenue burden (depending on one’s perspective). The balance of
spending with needs is meant to reflect the extent to which a government is
providing the appropriate level of goods and services. In this case, the higher
the ratio of spending to need, the more municipalities are meeting the ser-
vices needs of the community, although higher ratios may also indicate that
the municipality is providing unneeded goods and services rather than better
quality services.
Both own-source revenues and expenditures are calculated as per capita
and weighted by percentage residential EAV. The denominators of these indi-
cators are the wealth and need indices used to measure external fiscal health
in which the component variables have been recalculated as a percentage of
the median for all cases, rather than using z values. Because z values are both
negative and positive, they cannot be divided meaningfully or in a way that
will retain the municipality’s appropriate place on either index. Thus, an
alternative method of standardization was used for these indices.10 Columns
L and O in Table 3II present the alternative calculations for these two indices.

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 Hendrick / FISCAL HEALTH IN CHICAGO 97

Finally, a composite measure of balance with environment was created by

subtracting the rank orders of the expenditure-need index from the revenue-
wealth index. Similar to the composite index for environmental health, sub-
tracting the actual subindex values to create the composite balance index
results in inappropriate placement of some municipalities at the ends of the
scale.

FISCAL STRUCTURE:
SLACK

The importance of a government’s fiscal structure, especially its fund bal-

ance, to its fiscal health is well documented. Poterba (1994) demonstrates
that larger fund balances allow state governments to absorb fiscal shocks
better than smaller fund balances do. Other authors emphasize the impor-
tance of fund balances and rainy day funds in maintaining a balanced budget
and preserving financial flexibility (Sobel and Holcombe 1996; Pagano and
Johnston 2000; Pagano 2002). Gold (1986) also notes that fund balances are
significant indicators of state fiscal conditions, and MacManus and Pammer
(1990) find that fund balances affect the use of expenditure rather than reve-
nue strategies. Other structural features such as dependence on particular
sources of revenue (e.g., percentage intergovernmental aid) or overall diver-
sification of revenue have been used to indicate governments’ fiscal perfor-
mance with respect to risk and vulnerability to change and system shocks
(ACIR 1981, 1989; Shannon 1987; Holcombe and Sobel 1997).
One area of fiscal structure that affects budgetary solvency and reflects
a government’s ability to manage risks, uncertainty, and environmental
changes over a few years is organizational slack. In effect, organizational
slack enhances a government’s ability to adapt to and remain balanced with
the environment (Cyert and March 1963). Unreserved fund balances are a
primary source of fiscal slack for governments, but there are other features
that improve or decrease adaptability such as size of the government, high or
low levels of discretionary spending, and the level of off-budget fiscal
activities.
Here, four variables are combined to form an index of fiscal slack (see
Table 3IIIA): percentage unreserved fund balance, percentage capital expen-
ditures, percentage enterprise income, and percentage debt service.11 Unre-
served fund balance is the portion of total fund balance that is unencumbered
at the end of the fiscal year after all spending commitments are made. It rep-
resents surplus dollars that the municipality uses to manage cash flow
throughout the year (Table 3IIIC), and it is used as a rainy-day fund to help

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98 URBAN AFFAIRS REVIEW / September 2004

balance the budget during times of fiscal stress (Bahl 1984; Gold 1986). This
variable is calculated as a percentage of total minus capital expenditures.
Enterprise funds are another source of slack in a government’s budget,
although their use in managing fiscal stress is more indirect than unreserved
fund balances. Within the Chicago region, 88% of municipalities have enter-
prise funds dedicated primarily to water and sewerage. Although provision
of water and sewerage increases municipal spending burdens, it also pro-
vides opportunities for municipalities to share revenues and costs with a sep-
arate set of funds that are less visible to public scrutiny. Extensive interviews
with financial officials in the region indicate the importance of these funds as
an indirect source of slack (e.g., charging a larger portion of public works sal-
aries to the water and sewer fund during fiscal stress). Percentage enterprise
fund is measured as enterprise income as a percentage of enterprise income
plus own-source revenues.
Another slack measure is percentage capital expenditures of total expen-
ditures. The practice of increasing capital expenditures during good times
and decreasing them during bad times is well known (Levine, Rubin, and
Wolohojian 1981). This is especially true for municipalities that use pay-as-
you-go financing of capital items. Alternatively, a high percentage of debt
service expenditures represent fixed, nondiscretionary spending that reduces
slack. In this case, percentage debt service must be reversed by subtract-
ing the value from 100 to accommodate the order of the other three slack
indicators.
All four slack variables are measured as a percentage of their median and
then averaged to form the composite index of fiscal slack. Although no
weights were given to the component variables, this should be explored in
future research given that their contribution to adaptation or fiscal perfor-
mance may vary. However, this task will require a better understanding of the
role of slack in governments’ fiscal affairs and the potentially complex rela-
tionship of slack to other dimensions of fiscal health, especially current oper-
ating conditions (Table 3IIIC) and change (Table 3ID and 3IIIE).
An additional important source of slack that is well documented, but not
included here due to its nonlinear relationship with the other variables, is
organizational size. Although size is often recognized in organizational and
managerial theories as an element of slack, it can be defined in numerous
ways (e.g., population, municipal employment, or value of budget). Larger
organizations have more horizontal and vertical linkages that increase offi-
cials’ options and opportunities for managing their environment and struc-
ture (Thompson 1967). The greater volume of activities in larger govern-
ments also increases their capacity to share or trade off among activities,
which gives them more flexibility than small governments (Mattson 1994;

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 Hendrick / FISCAL HEALTH IN CHICAGO 99

MacManus and Pammer 1990). Smaller governments also have reduced

slack because they devote a larger portion of their budget to salaries, which
most government officials view as less discretionary compared to other line
items.

ANALYSIS AND MAPPING OF INDICES

Table 4 compares indices A, B, F, and G from Table 2 with appropriate

indices and subindices from Table 3 for municipalities that demonstrate sig-
nificant differences among the indices being compared.12 Table 4IA shows
how the revenue wealth (RW) index constructed here (column D, Table 3)
compares to the Clark city wealth (CCW) index (row F, Table 2) and the rep-
resentative tax system revenue capacity (RTS-RC) measure (row G, Table 2).
Although all three RW indicators are correlated highly, the values for the five
municipalities in this portion of Table 4 show effects of excluding sales
receipts in the CCW measure and using uncorrected per capita measures in
both the RTS-RC and CCW measures.13
For instance, the RTS-RC and CCW indices for Bedford Park show it to be
one of the wealthiest municipalities among the 264 suburbs in the region
compared to the RW measure, which puts the town more in the middle of the
distribution. This discrepancy is explained by Bedford Park’s having the low-
est level of residential property in the region, which the RW measure corrects
for. In contrast, Bridgeview, Countryside, and Crestwood demonstrate the
impact of the CCW measure excluding sales receipts, which is an important
revenue base for municipalities in this state as seen from the lower CCW val-
ues compared to the RW and RTS-RC measures. RW values for Alsip show
the combined impact of using uncorrected per capita measures for a munici-
pality with low levels of residential property and low sales receipts. In this
case, the RW and CCW indices are fairly close, but the RTS-RC value is
significantly higher.
Table 4IA and 4IB compares the spending needs (SN) (column I, Table 3)
and environmental health (EH) (last column, Table 3) indices with the
Brookings hardship (BH) index (row A, Table 2) and the social need (CBO-
SN) and economic need (CBO-EN) components of the Congressional Bud-
get Office index (row B, Table 2). In this case, correlations show that the com-
bined EH index is comparable to the BH and CBO-SN measures but that RW
and SN are not always the same as underlying economic and social condi-
tions as demonstrated by the values for Bridgeview and Crestwood.14 The
CBO-EN index is presented to show the effects of combining change and
static dimensions of fiscal health, which is particularly evident in Alsip and

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 100
TABLE 4: Fiscal Health Index Comparisons

Median G) %
% RTS % Median Weighted
Municipality Wealth Total % Median F) Revenue Capacity Ressidential Sales Receipts
Number Municipality County bzA + bzB + bzC Order Clark City Wealth Order per Capita Order EAV Order per Capita Population

IA) Revenue wealth

1 Alsip Cook –0.516 63 83.01 79 112.57 165 33.6 14 82.4 19,725
6 Bedford Park Cook 0.132 184 607.53 261 2,688.34 263 3.4 1 308.1 574
11 Bridgeview Cook –0.019 162 79.21 64 137.8 198 36.3 21 174.1 15,335
23 Countryside Cook 0.558 219 128.15 186 302.05 254 30.8 11 435.8 5,991
24 Crestwood Cook 0.238 195 66.05 35 123.95 180 58.1 60 249.9 11,251

Environmental
Health: Brookings B) CBO B) CBO
Municipality Need Total Wealth – Need Hardship Reverse Social Reverse Economic
Number Municipality County bzE + bzF + bzG + bzH Order (D2 – I2) Order Index Order Need Order Need Order Population

IA, IB) Revenue

wealth and
spending needs
1 Alsip Cook –0.305 99 –36 85 18.57 76 12.47 66 40.2 120 19,725
11 Bridgeview Cook –0.12 128 34 128 22.76 46 12.87 64 48.05 98 15,335
14 Buffalo Grove Cook –1.58 5 201 239 7.95 216 –2.48 216 58.1 70 42,909
24 Crestwood Cook –0.83 35 160 228 16.66 98 10.71 77 46.55 100 11,251

Municipality Revenue/Wealth F) Clark G) RTS

Number Municipality County (K/L) Order Revenue Effort Order Revenue Effort 1 Order Population

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II) Balance: revenue
1 Alsip Cook 0.76 69 1.08 199 1.04 171 19,725
4 Barrington Hills Cook 1.34 197 0.68 123 0.63 50 3,915
11 Bridgeview Cook 0.59 28 1.34 227 1.01 162 15,335
23 Countryside Cook 0.47 11 1.17 213 0.65 58 5,991

NOTE: RTS = representative tax system; EAV = equalized assessed value; CBO = Congressional Budget Office. All rank orders are presented as ascending.
 Hendrick / FISCAL HEALTH IN CHICAGO 101

Buffalo Grove. The indices RW, CCW, and BH all show Alsip to be relatively
poor, but it has had moderate increases in population and employment
between 1995 and 2000. This situation accounts for its moderate ranking for
the CBO-EN measure and distinguishes it from other municipalities that are
both poor and have had recent declines in revenue wealth and underlying
economic conditions. In contrast, Buffalo Grove has the opposite problem. It
is a very wealthy community (RW rank = 206) that has experienced recent
declines in revenue wealth and economic conditions.
The bottom portion of Table 4 (II) shows three balance measures for reve-
nue. These measures are the revenue burden index proposed here (RWW),
Clark’s revenue effort (CRE) measure, and the RTS revenue effort (RTS-RE)
measure. These indicators are correlated highly but demonstrate key differ-
ences, which are related to differences already discussed with the RW indi-
ces.15 In this case, not correcting for per capita distortions only enhances the
distortions in the ratio calculations. Thus, the RTS-RE index will be higher
than the RWW index but lower than the CRE index for municipalities with
lower levels of residential properties such as Alsip, Bridgeview, and Coun-
tryside. The opposite situation exists for a municipality such as Barrington
Hills, which is a very wealthy residential community with a five-acre mini-
mum lot size and therefore very low EAV per square mile. In this case, the
RWW index shows Barrington Hills placing a lot of revenue burden on its
residents, in comparison to the RTS-RE index, which shows that residents
have far less revenue burden.
With respect to the slack index, one way to demonstrate this measure’s
performance is to examine correlations of this variable with other variables to
see if the values are in the expected direction. Table 5 demonstrates how well
the wealth, need, and balance indices predict slack in the municipalities. As
expected, slack is higher in municipalities that are wealthier, have higher
spending needs, and are better balanced. Given that slack also improves flexi-
bility and coping ability, one would expect that governments needing less
flexibility and coping opportunities to have less slack built into their budget.
This is supported by the correlations showing that home rule and larger gov-
ernments, and those with more revenue diversification and greater depend-
ence on property taxes, have less slack. The correlations also show that the
CWW, CRE, and RTS-RE indices are related in the expected direction but
demonstrate a problem with the alternative indicators of fiscal health. Specif-
ically, the uncorrected per capita values create more extreme outliers in the
distributions for these indices, which produce less stable correlations (i.e.,
the correlations change greatly as outliers are removed).
To demonstrate how suburbs cluster according to the three primary fiscal
health indices, three different maps of the Chicago suburbs also are pre-

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102 URBAN AFFAIRS REVIEW / September 2004

TABLE 5: Correlation of Slack Index with Other Indices and Variables

Correlation Probability of Correlation

Revenue wealth .23 .00

Spending needs –.34 .00
Environmental health .38 .00
Balance: revenue/wealth –.22 .00
Balance: spending/needs .05 .43
Balance index .22 .00
Home rule –.13 .04
Log population –.19 .00
Percentage sales tax .08 .21
Percentage intergovernment tax .09 .00
Percentage property tax –.24 .00
Revenue diversify –.20 .00
a
Clark City wealth .50 .00
a
Clark revenue effort –.15 .01
a
RTS revenue capacity –.04 .46
a
RTS revenue effort –.30 .00

NOTE: RTS = representative tax system.

a. Correlations unstable due to extreme outliers.

sented. In all cases, the suburbs are grouped into quartiles on the relevant
index. Figure 1 presents the map of the index for environmental health. Fig-
ure 2 presents a map of the primary balance index. Both figures show the
extent to which a government’s balance with the environment is limited by
external conditions but not completely determined by them. Thus, a suburb’s
ability to adapt to its environment in a positive way depends strongly on the
opportunities and demands it faces, and there may be little that an extremely
poor and needy suburb can do to improve financial performance; some
municipalities with poor environmental health adjust better than others do.
Although these two maps display some similarities to the map of tax
capacity for Chicago suburbs presented by Orfield (2002, map 1-27), there
are some distinct differences. Both sets of maps show the impoverished sub-
urbs south of Chicago and the wealthy suburbs to the north and northwest.
However, Figures 1 and 2 show a distinct band of wealthy/low need and well-
balanced suburbs surrounding the inner-ring suburbs to the west and on the
near southwest side. Also, environmental heath is shown to be worse and fis-
cal balance more precarious for the outer-ring suburbs that are composed of
satellite cities and low-density, rural suburbs. The primary difference
between Orfield’s maps and those presented here is that Orfield’s measure
of tax capacity focuses on property tax (weighted according to other tax

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 Hendrick / FISCAL HEALTH IN CHICAGO 103

Figure 1: Environmental Fiscal Health (Wealth – Need): Quartiles

NOTE: Darker shades indicate better health, and lighter shades indicate worse health. White in-
dicates unincorporated, missing, or other district.

sources), whereas the environmental indices presented here include all

sources of wealth.
Figure 3 and the correlations in Table 5 show that municipal slack is influ-
enced but not necessarily dictated by the environment or balance levels. In
this case, municipalities with low slack are spread around the Chicago
region, and slack is not as great as one might expect for the wealthy and bal-
anced municipalities just beyond the inner ring. In fact, there is a tendency for
more slack in the inner-ring suburbs to the west and southwest sides of the
city and the far south side of the region. Thus, high wealth, low need, and
good balance do not necessarily dictate a suburb’s ability, need, or desire to
buffer risk and uncertainty.16

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104 URBAN AFFAIRS REVIEW / September 2004

Figure 2: Balance, Structure with Environment (Spending Effort – Revenue Effort):

Quartiles
NOTE: Darker shades indicate better balance of spend and revenue with the environment, and
lighter shades indicate poorer balance of spend and revenue with the environment. White indi-
cates unincorporated, missing, or other district.

CONCLUSION

The indicators developed here attempt to demonstrate the complexity of

local government fiscal health, identify and measure some of its basic com-
ponents, and then apply this work to suburban governments with a wide
range of conditions and practices. The indices of environmental health and
balance developed here are similar to the alternative measures discussed
here, so the primary objective in this case is applying these measures to sub-

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 Hendrick / FISCAL HEALTH IN CHICAGO 105

Figure 3: Structural Fiscal Health (Slack): Quartiles

NOTE: Darker shades indicate more health, and lighter shades indicate less slack. White indi-
cates unincorporated, missing, or other district.

urban governments, which tend to be smaller and more homogenous inter-

nally than measures developed for central cities and larger municipalities.
Many components of the environmental health index, such as sales receipts
per capita and home rule status, are specific to Illinois but could be adapted to
suburbs in other states by adding or subtracting sources of revenue capacity
and rules of access to them. Other indices of fiscal health presented here, such
as Clark’s, could also be adjusted for different revenue bases and per capita
distortion in a manner that is consistent with the original measure.
In contrast, there is very little empirical research on budgetary solvency
including how to measure it, the role of slack, or the relationship of slack to

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106 URBAN AFFAIRS REVIEW / September 2004

long-term fiscal health and more short-term operating functions. Some rela-
tionships in this area are fairly obvious. For instance, revenue deficits, which
are a feature of current operating position (Table 3IIIC), obviously reduce
slack in the short run and are likely to threaten budgetary solvency over time.
More serious problems with fiscal structure or long-term solvency also make
revenue deficits and budgetary insolvency more likely, but these effects and
their relationship to other areas of midterm fiscal health are less well
understood.
Particularly critical for measuring fiscal health is to determine how the
different dimensions of slack are related to one another, which requires a
broader understanding of the impact of slack on overall fiscal performance.
For the most part, economists and political scientists have overlooked this
aspect of financial condition and how it fits into the dynamics of govern-
ments’ financial activities, in both the long run and short run. As such, much
improvement could be made to developing measures of slack and exploring
its role in budgetary and other levels of solvency. Including a measure of size
of government in slack is one option discussed previously, but there are many
ways of measuring size, and its relationship to other dimensions or compo-
nents of slack is highly contingent. With respect to overall financial health,
fiscal slack will have to be assessed relative to other dimensions, especially
risk and other areas of fiscal structure.
Risk and current operating position are two other areas requiring more
research on measurement and their impact on financial performance, but
there is already much research in public accounting and on debt from various
disciplines that address relevant questions on these topics. More problematic
and less well understood are the dimensions of environmental and structural
change, especially how and when particular changes affect fiscal health.
These relationships can be particularly complex and nonlinear. For instance,
it is generally recognized by research and financial officials that population
change signals and improves fiscal health, but rapidly developing municipal-
ities face a host of different problems, opportunities, and constraints than do
nondeveloping ones. Little is known about how population change affects
municipal fiscal health relative to conditions in the other dimensions.
Although the research presented here does not offer a complete set of
measures of fiscal health, it does provide a useful starting point for future
research. Remembering that the purpose of developing such measures is to
allow policy makers and financial stakeholders to evaluate the fiscal health
and financial condition of a wide range of governments, future research will
have to link indicators to outcomes in a manner that is useful to them. This
will require future discussions and analyses of the properties of balance and
adaptation, such as stability or sustainability, in the context of financial per-

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 Hendrick / FISCAL HEALTH IN CHICAGO 107

formance. More simply, useful measures of fiscal health should distinguish

between municipalities in different categories of fiscal health such as insol-
vency versus fiscally threatened. Thus, interpretation will be an important
part of efforts to improve measures of local fiscal health and their application.

APPENDIX A
Operationalization of Fiscal Indicators

Most financial variables are calculated as an average for the years from 1997 to 2000,
corrected for inflation, and (unless indicated otherwise) represent totals for all gov-
ernmental funds that include general, special revenue, debt, capital, and expendable
trust. Governmental funds do not include enterprise funds. Sales taxes include home
rule sales taxes plus state-shred sales taxes because they are distributed based on point
of sale. Equalized assessed value (EAV) is corrected for the underassessment of resi-
dential and commercial properties in Cook County. The source for most of the finan-
cial data is the Illinois Office of the Comptroller (IOC). Other financial data were ob-
tained from the Illinois Department of Revenue (IDOR). Socioeconomic and demo-
graphic data are from the U.S. Census Bureau (1990, 2000). Population figures for
1997-2000 that are used in the per capita calculations are extrapolated from census
figures for 1990 and 2000.
ro = rank order
rate of change = (t – (t – 1)/(t – 1))
z = z value transformation
m = value presented as a percentage of its median
b1i = standardized slope of regression equation with weighted own-source reve-
nues per capita as dependent variable; home rule governments only
b2i = standardized slope of regression equation with weighted own-source reve-
nues per capita as dependent variable; non–home rule governments only
b3i = standardized slope of regression equation with weighted (total expenditures –
capital expenditures) per capita as dependent variable
TOSR (total own source revenue) = property tax + sales tax + other tax + nontax

TABLE 3I: ENVIRONMENTAL HEALTH

Wealth – spending needs: higher values = better health: roD – roI

D) Wealth: sum of z scores weighted by standardized regression slopes with
own-source revenue per capita as dependent variable
For home rule municipalities: b11zA + b12zB + b13zC; b11 = .63, b12 =
.02, b13 = .34
For non–home rule municipalities: b21zA + b22zB + b23zC; b21 = .35, b22 =
.15, b23 = .50
A) per capita personal income: 1999

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108 URBAN AFFAIRS REVIEW / September 2004

B) equalized assessed value per square mile: average 1997-2000[EAV/

square mile]
C) weighted sales receipts per capita: [average 1997-2000(sales receipts/
population)] × [average 1997-2000(residential EAV/total EAV)]
I) Spending needs: sum of z scores weighted by standardized regression
slopes with expenditures per capita as dependent variable
b31zE + b32zF + b33zG + b34zH; b31 = .27, b32 = .19, b33 = .34, b34 = .19
E) weighted crime per 1,000 population: [average 1996-2000(number
serious crimes – state of Illinois crime report/population)] × [average
1997-2000(residential EAV/total EAV)]
F) reverse median age housing: 2003 – median age of house, 1990
G) reverse density: 10 – (population/square mile), 2000; 10 = highest
density
H) fire district: whether municipality is in a fire district; 1 = yes, 0 = no

TABLE 3II: BALANCE

(expenditures/need) – (revenues/wealth); higher values = better balance; roP – roM

M) Weighted revenues/wealth: higher values = capture more wealth; mK/mL
K) Weighted own-source revenues per capita: m[average 1997-2000
(TOSR/population)] × [average 1997-2000(residential EAV/total EAV)]
L) Wealth: same as item D only using medians rather than z values
P) Weighted expenditures/need: higher values provide more services than
need; lower values indicate that they do not provide enough services;
mN/mO
N) Weighted total expenditures per capita: [average 1997-2000(total
expenditures; IOC/population)] × [average 1997-2000, IDOR
(residential EAV/total EAV)]; capital expenditures excluded
O) Need: same as item I only using medians rather than z values

TABLE 3IIIA: SLACK

Average of indicators, higher values = more slack

average of mQ, mR, mS, and mrT
Q) Unreserved fund balance as a percentage of expenditures: average
1997-2000 (unreserved fund balance/total expenditures); capital
expenditures excluded
R) Capital expenditures as a percentage of total expenditures: average
1997-2000 (capital expenditures/total expenditures)
S) Enterprise income as a percentage of total income and own-source
revenue: average 1997-2000 [enterprise income/(enterprise income +
own-source revenue)]

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 Hendrick / FISCAL HEALTH IN CHICAGO 109

T) Debt service as a percentage of expenditures: average 1997-2000 [debt

service/total expenditures]; capital expenditures excluded; order
reversed (47 – T)

OTHER INDICATORS

Population: percentage change population: 1990 – 00, @

Percentage non-White population: 2000
Percentage population managerial and professional: average 1997-2000
[percentage of the population in the community that have managerial or
professional occupations]
Percentage owner-occupied housing: 2000
Percentage residential equalized assessed value: average 1997-2000
[residential EAV/total EAV]; with correction for lower residential assessments
in Cook County. Nonresidential EAV is primarily composed of industrial or
commercial properties.
Home rule: Illinois Municipal League, 1998; 0 = no home rule; 1 = yes home rule
Percentage property tax: average 1997-2000 [property tax/total own-source
revenues]
Percentage sales tax: average 1997-2000 [sales tax/total own-source revenues]
Percentage intergovernmental revenue: average 1997-2000 [state and federal
revenue/total revenue]
Revenue diversification: based on the Hirschman-Herfindahl Index; average
1997-2000 [{1 – [(property tax/TOSR)2 + (sales tax/TOSR)2 + (other tax/
TOSR) + (nontax/TOSR) ]}/.75]
2 2

APPENDIX B
Descriptive Information for All Variables
Mean Median Minimum Maximum SD

A) External environmental
conditions
Income per capita 29,712 25,031 7,818 97,999 15,163
Sales receipts per capita 16,813 9,477 46 574,583 39,397
Equalized assessed value
(EAV) per square mile
(100s) 55,524 45,381 521 230,240 40,413
Crime per 1,000 population 41.2 28.3 3.95 1057 74.0
Median age housing 1,969.4 1,971 1,939 1,997 13.0
Density 3,204 2,747 24.8 15,378 2,495
Fire district 0 = 141 1 = 118 (45%)
(continued)

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110 URBAN AFFAIRS REVIEW / September 2004

APPENDIX B (continued)
Mean Median Minimum Maximum SD

B) Fiscal balance
Expenditures per capita 837.3 583.1 45.2 24,040 1,856
Own-source revenue per cap 722.2 499.2 34.8 21,917 1,649
C) Internal conditions: slack
% fund balance 75.9 58.5 –92.5 609.7 –92.5
% enterprise revenue 23.6 24.4 00 70.0 13.9
% debt service 9.0 8.0 00 39.4 7.5
% capital expenditures 8.0 7.2 00 38.3 5.9
D) Other indicators
Population 17,623 10,653 106 142,990 20,850
% change population 33.9 10.1 –97.5 1,489 107.8
% White population 80.9 89.4 1.77 99.3 22.2
% managerial and professional 35.6 34.1 7.97 70.4 14.1
% owner-occupied housing 36.2 35.9 20.9 53.8 4.9
% residential EAV 70.0 72.6 3.4 100.0 19.7
Home rule 0 = 165 1 = 96 (37%)
% property tax 32.7 33.3 00 74.8 15.5
% sales tax 24.2 21.8 00 84.6 15.6
% intergovernmental 20.3 18.6 1.0 64.6 9.0
Revenue diversification 0.86 0.88 0.28 0.997 0.11

NOTES

1. A U.S. Census Bureau (1999) Internet release for 1999 shows that 52% of total family
households in the United States are located in suburban areas compared to nonmetropolitan areas
or central cities.
2. Another important environmental factor that could be represented as a separate dimension
is service demands, which are a function of stakeholder preferences rather than a component of
need.
3. Municipal governments often reserve three months of spending in their fund balance to
maintain good cash flow in the short run and use the remaining portion of the fund balance as a
more long-term rainy-day fund.
4. Non–home rule municipalities may not increase property taxes more than the lesser of 5%
or the rate of inflation.
5. Discussions with financial managers and auditors in the region indicate that major timing
differences in accounting for revenues and expenditures disappear over a three- to five-year
period. Although each year of financial data is corrected for inflation using the Chicago con-
sumer price index, the correction has no effect on the relative values of the measures among
municipalities. Thus, regression slopes, z values, and percentage median values will be the same
for inflation-corrected and uncorrected variables.

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 Hendrick / FISCAL HEALTH IN CHICAGO 111

6. A complete list of the indicators for all municipalities in the Chicago region is available
from the author upon request.
7. Unfortunately, the crime variable reduces the number of cases from 264 to 241 because
some municipalities do not have their own police. These municipalities rely on the county to pro-
vide police services, and separate crime statistics are not reported for them. Most of these munic-
ipalities have populations less than 1,000 and are in Lake County.
8. Another variable that should be included here is miles of roads given suburbs’ responsi-
bilities in this service area and its high cost. However, this information is not available centrally,
which makes obtaining these data over time almost impossible. Median age of housing and den-
sity may measure some of the attributes of public works spending needs, but not all.
9. Correlations of the external health index calculated with z values versus rank orders with
various fiscal structural features, such as dependence on property tax and intergovernmental rev-
enue, show little difference between the two indices.
10. One means of maintaining consistency in the method of standardization across all vari-
ables is to use percentage of median rather than z values to construct the environmental fiscal
health index. However, correlations of the two forms of the wealth and need indices with other
indicators of wealth and fiscal structure, and the use of both forms in analyses in other research
projects, demonstrate that z values are better indicators of environmental fiscal health than are the
median values.
11. Correlations between unreserved fund balance and the other three slack variables range
between .2 and .3. However, there is little association among these other three variables.
12. Clark’s functional performance index cannot be calculated meaningfully with the Illi-
nois Comptroller’s Office (IOC) spending data because the IOC spending categories are too
aggregate.
13. Pearson’s r: revenue wealth (RW) and Clark city wealth (CCW) = .55; RW and represen-
tative tax system revenue capacity (RTS-RC) = .84; CCW and RTS-RC = .77.
14. Pearson’s r: environmental health (EH) and Brookings hardship (BH) = .77; EH and so-
cial need component of the Congressional Budget Office (CBO-SN) = .72; BH and CBO-SN = .95.
15. Clark’s revenue effort (CRE) = own-source revenues per capita/city wealth. Pearson r:
revenue burden index proposed here (RWW) and CRE = .74; RWW and RTS revenue effort
(RTS-RE) = .86; CRE and RTS-RE = .86, after removing eight outliers.
16. Space does not permit a detailed discussion of municipalities with relatively low levels of
environmental health and relatively good balance and/or high slack.

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Rebecca Hendrick holds a joint appointment as associate professor of public administra-

tion in the College of Urban Planning and Public Affairs and the Institute of Government
and Public Affairs at the University of Illinois. Her research on budgeting and financial
management, policy science and analysis, and state and local governance has been pub-
lished in American Review of Public Administration, Public Administration Review,
Journal of Public Administration Research and Theory, Western Political Quarterly, Pub-
lic Budgeting and Financial Management, Social Science Quarterly, Public Productivity
and Management Review, Public Budgeting and Finance, and Publius.

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