Maintaining the financial capacity to provide quality services to the community over the long-run is a concern for all local governments. A promising new approach to financial sustainability has its roots in a phenomenon in economics called “the tragedy of the commons”. This is a hypothetical scenario in which a group of farmers has common ownership of a grazing area. An individual farmer has an incentive to send his animals to the common grazing area as much as possible because there is no additional cost for using it, and if he doesn’t send his animals, the other farmers’ animals will still graze, thus depriving the farmer’s herd of potential food. The result is that the common area is eventually overgrazed and becomes barren. The tragedy of the commons inspired a line of Nobel Prize-winning economic research called “common pool resource theory,” which is concerned with how to create sustainable management of commonly owned resources such as grazing lands, fishing stocks, or forests.
A local government budget has important similarities to the commonly owned grazing area. A government and its financial resources are commonly owned by all citizens of the government. Each stakeholder of the government has an incentive to extract resources from the public budget. Stakeholders often find themselves in “competition” with others to get resources and therefore try to get as much as possible, lest they lose the resources to others. The long-term result could look very much like the commonly owned grazing area.
Over the last few years GFOA, the National Civic League, researchers at the University of Southern California and the University of San Francisco, and the Lincoln Institute of Land Policy have worked together to translate the lessons from common pool resource theory to public finance and to validate them using case study research.
Here are two documents to help you learn more and put financial sustainability into practice:
GFOA is taking applications to join a pilot program to test out the new financial sustainability framework.