Financial Management Implications of “Service Delivery Insolvency”

In opining on whether the cities of Stockton, California, and Detroit, Michigan, were eligible for relief under Chapter 9 of the Bankruptcy Code, the judges found that both cities were “service delivery insolvent.” By using that term, the judges concluded that the cities were not only unable to pay their debts as they came due, but also unable to provide services at the level and quality required for the health, safety, and welfare of the citizenry. The prime responsibility for maintaining sound financial health rests with the elected officials and the key financial managers of each municipal government, and municipal financial managers need to work together to place greater emphasis on maintaining a sound financial condition. Financial condition should be viewed as a major program, like public safety and education, and should include intermediate and longer term financial planning, reasonable fund balances and “rainy day” funds, measuring and auditing service delivery performance, and financial condition reporting and early warning systems. Recent judges’ references to “service delivery insolvency” in Stockton and Detroit suggest that, despite the excellent progress some governments have made in performance measurement and reporting, more needs to be done.