Political and Economic Environment

The political and economic environment is the foundation of fiscal health. The initial diagnosis looks at the most immediately relevant environmental factors.

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State of the economy State financial situation
State financial situation State financial situation Changing service demands
Internal Leadership and Management

Overall State of the Economy

The condition of the economy is a prime determinant of financial condition. Take stock of key economic indicators such as unemployment rates, housing starts, and consumer confidence.

National indicators are compiled by the GFOA at Regional indicators are often compiled by local universities or regional economic development agencies.

An assessment of economic conditions reveals if:

  • Economic growth can be expected to help improve financial conditions
  • Conditions may worsen, thereby requiring a more robust recovery strategy
  • Conditions should remain stable


State/Provincial Financial Situation

Financial distress in state/provincial government may cause the state/provincial government to reduce shared revenues or even redirect traditional local sources to state/provincial use.

Distress could lead the state/province to raise taxes, thereby reducing citizens’ tolerance for any increase in local taxes.

States/provinces may also shift or mandate certain services to be performed at the local level that had traditionally been housed within a state/provincial agency.

Pay careful attention to the state/province’s financial situation to avoid being caught unaware by state/provincial policy decisions that could worsen local conditions.

Changing Service Demands

Look for increases in service demands that could cause pressure for increased expenditures. In a depressed economy and period of high unemployment, human services could experience greater demand.

Look for areas of service that are experiencing reduced demand that could be cutback. A slowed construction market might reduce demand for development planning, permitting, and inspection services.

Internal Leadership and Management

Seriously examine leadership and management practices that contribute to financial distress. Look for:

  • Unclear lines of accountability
  • Lack of accountability for 
    • Getting results
    • Staying on budget
    • Staying within schedule (especially for capital projects)
  • Lack of team-based management (i.e., excessive departmentalization)
  • Excessive red tape

Fixing management weaknesses like these are an important part of strengthening financial condition.

Continue to the next part of the Recovery Process, Part 5-Fiscal First Aid

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