The Behavior of Interperiod Equity-Related Performance Measures Over Time

Although the goal of government is to maintain or improve citizens' well-being, govern­mental commitments are subject to fiscal constraints. Given constraints on resources, governments need to "live within their means" (GASB 1987, para. 59). Concepts Statement No. 1 (GASB 1987, para. 61) discusses the notion of interperiod equity (IPE), i.e., whether "current year revenues are sufficient to pay for the services provided that year." From a financial reporting perspective, the Board believes that the appropriate concept is that of "yearly balance" and that services rendered during the current year should be paid for by revenues raised during that year. The public economics literature (e.g., Aguilar et al. 1991; Mattoon and Testa 1991) suggests that the time horizon of public officials is longer than a single fiscal year and that taxes and spending are smoothed over a multi-period time frame. This literature indicates it would be unrealistic for govern­ mental revenues and expenditures to be balanced each and every year. Despite the potentially wide disparity between a one-year and a multi-year budgeting perspective for governments, we are not aware of any extant research on the issue. This paper provides an empirical analysis of three interperiod equity-related performance measures for 40 large cities over a 35-year period in order to examine which budgeting perspective seems, in fact, to exist. We use a partial adjustment model under the hypothesis that cities' performance measures tend to move toward governmental norms in a manner similar to Lev's (1969) findings for businesses. Our empirical results (1) are consistent with a multi-year budgeting horizon, (2) provide bench­ marks for each of the three performance measures against which users of financial statements can compare governmental results, and (3} suggest that the speed of adjustment toward governmental norms (which varies across cities) could be useful to users of financial statements as a measure of a government's capacity to adapt and adjust to changing economic circumstances.