Municipal budgets, balance sheets, and acute fiscal shock

Not all financial emergencies can be adequately provided for in advance. When disasters strike, municipal governments exhibit acute preferences for liquidity. It is access to liquidity that permits an immediate disaster response. Governments will draw upon their existing (pre-disaster) balance sheet stocks of liquid and near-liquid assets. This highlights the vital importance a healthy mix of liquid (current) and non-liquid (noncurrent) assets, in ways that go beyond considerations of fiscal health under normal operating conditions. This chapter provides a framework for assessing the liquidity of governments’ balance sheets, employing a revised version of the late economist John R. Hicks’s classification of balance sheet assets into running, reserve, earning and investment asset categories. Hicks’s revised framework is recommended as means to both analyze governments’ relative preparedness to access liquidity on short notice, as well as to provide researchers with an analytical approach that frames government balance sheets in a useful manner.