Understanding the Economic Factors that Impact the Financial Health of Local Governments

The state of Louisiana has been hit by several severe hurricanes in recent years, and these disaster events have placed a financial burden on parish budgets. As such, local governments have been compelled to bear various cleanup and recovery costs in the short and long term. Therefore, this research sought to evaluate the factors that drive the variation in the financial health of local governments in Louisiana. This research made two contributions. The first contribution sought to develop a comprehensive measure of economic activity at the county level, and the second contribution used econometric methods to estimate the effect of selected macroeconomic indicators on the financial health of local governments.Gross domestic product (GDP) was selected as the economic activity metric because it was found to be a more comprehensive economic activity metric than the other economic metrics historically applied to measure the size and scope of a region. Three methods to estimate GDP at the county level were developed, and a systematic approach was used to select the best method.Whenever earnings data were fully disclosed, this research used a ratio of state earnings to state GDP to estimate GDP at the county level. When earnings data were not fully disclosed, however, a ratio of state employment to state GDP was used.To examine the effect macroeconomic indicators of local government financial health, nine financial ratios were generated using data from county financial statements. These ratios came from the categories of profitability, liquidity, capital structure, and performance. Two methods were developed to regress each of these ratios against selected economic and demographic indicators, including GDP, assessed valuation, hurricane damage, and lagged or initial values of the ratio being examined. The first method was a double-log random effects model, and the second method was an ordinary least squares model, which used the change over time in each of the variables as the parameters. Both methods found the damage variable to have a significant negative effect on county government financial health, supporting our hypothesis.