relationship between organizational and structural characteristics and local authorities fiscal...

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RELATIONSHIP BETWEEN ORGANIZATIONAL AND STRUCTURAL CHARACTERISTICS ANDLOCAL AUTHORITIES FISCAL HEALTHAuthor(s): ABRAHAM CARMELISource: Public Administration Quarterly, Vol. 26, No. 3/4 (FALL 2002-WINTER, 2003), pp. 426-464Published by: SPAEFStable URL: http://www.jstor.org/stable/41288180 .

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RELATIONSHIP BETWEEN

ORGANIZATIONAL AND

STRUCTURAL CHARACTERISTICS

AND LOCAL AUTHORITIES

FISCAL HEALTH

ABRAHAM CARMELI Drexel University

ABSTRACT

This study explores the fiscal health of local authorities in Israel as a function of three factors: demographic characteristics; residents' socioeconomic status; and perceived organizational reputation. The results showed that each factor was independent to its prediction of the fiscal health of the local authorities examined. When the three factors entered together in the equation, they explained 51.2% of the variance in the fiscal health of the local authorities.

Arab-Druze authorities were found to have inferior fiscal health in relation to Jewish local authorities. A high correlation between residents' socioeconomic status and fiscal health was also found. Finally, it was demonstrated that perceived favorable organizational reputation and fiscal health are highly associated. The results may lead us to a better understanding of why so many Israeli local authorities have been in an inferior financial position compared to others. The findings call for further investigation of the differences between Arab-Druze and Jewish local authorities. The study urges local authority heads to invest their efforts in creating a solid and favorable organizational reputation.

INTRODUCTION

The local government in Western countries plays a

significant role in the affairs of the country, community, and individual.1 The local government has influence in

many aspects of residents' lives through its increased activities in accordance with the central government. The rate



PAQ WINTER 2003 (427)

of local government expenditure from the total public expenditure has been continuously growing (Goldsmith and Newton, 1988; Leach, Stewart, and Walsh, 1994; Sharpe, 1988). In Israel, the average expenditure per local authority in the regular (ordinary) budget has grown from NIS 79.4 million in 1996 to NIS 88.6 million in 1997 to NIS 97.3 in 1998. Growth has increased in the expenditure of the non-

ordinary (developing) budget as well, rising from NIS 59.1 million in 1996 and NIS 70.8 million in 1997 to NIS 85.2 million in 1998 (Ministry of Interior, 1998, 1999).

One of the important themes is how well local authorities perform. In several Western countries, the local

government displays an inferior fiscal health with a budgetary deficit that may lead to a state of insolvency. The case of the City of Bridgeport, Connecticut, exemplified this situation in its filing for bankruptcy as a result of its insol-

vency derived from a budgetary deficit (Lewis, 1994). In Israel, many local authorities have ongoing fiscal stress, putting some in a position of severe crisis. The accumulated deficit in the Israeli local government's ordinary budget has increased from approximately NIS 3.9 billion to 4.3 billion and 5.2 billion in 1996, 1997, and 1998, respectively. This inferior state of finance reveals its inability to supply high- standard municipal services in terms of both quality and quantity.

Studies typically address local authorities as political entities drawing on political approaches and focusing on political issues. In so doing, they do not grant the appropriate attention to perceiving local authorities as organizational units which are charged to meet well-defined purposes. The present study aims to bridge this gap and argues that, while local authorities are indeed very much political entities, they are also organizational units charged to meet well-defined purposes. This study explores the



(428) PAQ WINTER 2003

variance in local authorities' fiscal health in Israel by taking such an integrated approach which considers more structural and organizational factors. In particular, the study explores the influence of three factors on local authorities' fiscal health: demographic characteristics, residents' socioeconomic status, and perceived organizational reputation.

BACKGROUND

Israeli Local Authorities Fiscal Health

The Israeli local government is in a critical fiscal stress and some may call it a financial crisis (e.g., Carmeli and Cohen, 2001). In the annual budget proposal for 2001, it was noted that during 1997 the Ministries of Interior and Finance reached an agreement to overcome the "ongoing budgetary problems facing the local government" (Ministry of Finance, 2000:1 1 1).

In Israel there are 263 local authorities consisting of 2 industrial local councils, 148 local councils, 62 munici-

palities, and 53 regional councils. Of the 263 local authorities, 53 are Jewish municipalities (with a Jewish majority), nine are Arab-Druze (with an Arab-Druze

majority), 76 are Jewish local councils, 72 are Arab-Druze local councils, 52 are Jewish regional councils, and one is an Arab-Druze regional council.

Among the 263 local authorities, there is an annual deficit of NIS 1,611,301,000 in the regular budget. Moreover, the current assets of NIS 1,622,823.000 com-

pared to current obligations of NIS 7,220,112,000. This

represents a poor liquidity structure, even an insolvency situation. Examining the situation, municipalities suffer from an annual deficit of NIS 314,459,000 and the regional councils suffer from an annual deficit of NIS 123,255,000.




Comparing the current assets to the current obligation, the

municipalities face a deficit of NIS 995,507 to 5,058,- 488,000, the local councils NIS 319,403 to 1,421,168.000 and the regional councils NIS 307,913 to 740,456,000, respectively (Ministry of the Interior, 1999).

This brief summary tells us that, under the measures of Groves (1980), Israel's local government, in general, is in a state of insolvency and this problem has affected many of the local authorities. For example, the local council of

Kiryat-Malachi could not pay the salaries of its employees for several months in 2000. Further evidence of this situation is the strike of the Arab-Druze local authorities which continued for months without any effective solution. The fiscal stress requires further exploration in order to identify its causes. As this study is focused only on three factors, the discussion must be limited to the major causes. In general, two explanations have been provided: the central government and the local government both accusing each other as the source of the problem.

CENTRAL GOVERNMENT CONTENTIONS

The main argument by the central government, espe- cially by the Ministry of Finance, concerns the mismanagement of the Israeli local authorities. Managing local authority is a difficult assignment not just because of its many functions but also the scope of its assets and budgets (Audit Commission, 1988). Scholars describe management competencies as a source of creating rent (Castanias and Helfat, 1991) because the quality of the managerial staff is a critical factor for success (Meyer and Zucker, 1989).

The central government argues that the local authorities' fiscal stress is a result of improper and wasteful management. An example is the entrance of local authorities into




new fields of activity without careful and coordinated

planning with the central government (Ben-Elia, 1996; Kalchheim, 1997). Supporting this claim of wastefulness is a comment made by the popular former mayor of Tel Aviv- Jaffa, Solomon Lanat: "I regret I did not spend more

(money). It hurts me knowing I could not find more money to complete the projects that have already begun" (quoted in Dery and Auerbach, 1997:91).

Further justification for the central government's argument is that of the Municipality of Lod which, despite falling into a state of insolvency, still employs 1,000 employees, one employee per 70 residents. Another case

demonstrating this trend is that of the Assyfia local council found to be spending in excess of most of its budgetary expenditure items on audit performed by the Ministry of the Interior (1998b) This behavior is a sort of strategy adopted by some local authority leaders who do not care about the huge deficit as long as the residents are satisfied, knowing that the central government will be forced to assist them.

The heads of many local authorities lack even basic

competency (Ben-Elia, 1997). In Israel, there are no minimum entrance requirements for the position of local

authority head, Furthermore, since many of the elected heads also serve as chief executive officer (CEO), the

problem is even more acute. This management issue is not

unique in Israel alone. In Britain, acknowledging the need for managerial competency as has been the case in the

private sector, led to a discussion of the management aspect of local authorities in terms of the political process and its

legitimacy (Leach, Stewart, and Walsh, 1994). For instance, Stewart (1986) claimed that the "traditional man-

agement" could not deal with the new changes and

challenges facing the local government. He called for "new




management" emphasizing the need for flexibility and the

ability to adapt to changing environmental tendencies. The situation is not substantially different in the United

States. Golembiewski and Gabris (1994, 1995) argued that successful management of a city could lead to failure, meaning that the success may be the source of failure because the elements which once fit certain circumstances have changed and no longer fit well under different circumstances. In order to avoid such a situation, the mayor of the

city should concentrate on emphasizing effectiveness over

efficiency, enhancing teamwork, striking the right balance in the council-manager relationship and seeking lasting improvement. A change in the right direction should not be made without the acknowledgment of the importance of

building proper managerial competencies; otherwise, local authorities will find it difficult to establish well-functioning organizations.

Another issue raised by the central government is the size of the Israeli local authorities. Studies have indicated the effects of size on performance. As the organization increases in size, its chance of survival grows (Drummond and Chell, 1994; Hager et al., 1996). The factor of the size of local authorities is also not unique to Israel. In fact, Israel shares this problem with many European countries including Sweden, France, and Britain (on the other countries, see Martins, 1995).

As of December 1996, about 56% of 247 Israeli authorities (their population was known) had less than 10,000 residents (Israel, The State Comptroller, 1998). Razin (1998a, 1998b) showed that small local authorities in Israel suffer from fiscal weakness as compared to larger ones. Further evidence of this situation was presented by the Committee of Local Authorities which stated that "(we) can conclude. . .that in the small local authorities inefficiency




derives from the absence of the economies of scale"

(Ministry of the Interior, 1998:58). The effects of size of the local authorities have also been

discussed in other countries. In Britain, for instance, the Redcliffe-Maud Committee, charged with exploring the function of the local government, determined that only local authorities above 250,000 residents could meet their

goals. Martins (1995) pointed out that, to efficiently supply four categorized services, the recommended size for local authorities in the Netherlands is above 11,000 residents. Still, the differences between countries as well as disagreement regarding the recommended size of local authorities leave us lacking a clear position. This decision is reinforced

by Martins (1995) who contends that there is no such thing as an optimal size for local authorities as well as by Leach, Stewart, and Walsh (1994) who argue that large size leads to a bureaucratic organization that cannot fulfill its duties.

Although the idea of merging local authorities in Israel has been acknowledged, it has not yet been made politically feasible and, therefore, only poor results have been achieved thus far. On January 17, 2001, the Director General of the Prime Minister's Office in Barak's administration, Yossi Kucik, pronounced a proposal for merging Daliat El-Carmel and Assyfia. Such a move would repre- sent a boost to Druze local authorities in northern Israel by creating the first Druze City in Israel with economic and social leverage (Israel, Spolesperson, 1.17.01).

Although this pronouncement was made only three weeks before the election for prime minister, the suggestion was originally made almost three years earlier by the Com- mitee for Unification of Local Authorities (Ministry of the

Interior, 1998c). The infeasible notion of merging local authorities is due to a strong disagreement among then local authorities themselves and their residents, evident in




the plan for merging the local council of Mevasereth-Zion into the City of Jerusalem while the Mevasereth-Zion's heads and residents have strongly demonstrated against the

plan. The central government blames the local government for the decline in the merged plans.

Local Government Perspective

The heads of Israeli local governments argue that the fiscal stress of many of the local authorities is due to the local government's structure, the resource allocation system, and the residents' socioeconomic level.

With respect to the local government structure, the activities of the local government in Israel are very much related to those of the central government. This relationship is not entirely established and suffers from difficult problems such as task division and faulty coordination between ministries leading to the poor treatment of local government issues (Renveni, 1987). It appears that the entrance of local authorities into new fields of activity without careful and coordinated planning with the central government is not merely a managerial issue but a comprehensive one. Kalchheim (1997) argued that, contrary to the popular opinion, local authorities have autonomy to manage their affairs. Yet, the unorganized relationships continue to make the functioning of local authorities difficult.

Sharkanski (1997) has pointed out that the central government has the power to run local and metropolitan systems effectively. Thus, focusing on local authorities while the power is in the hands of the central government turns out to be irrelevant. A different view is presented by Razin (2000) who claims that the centralized structure faces problems of accountability which result in its developing strategies not attuned to local preferences. An extension of




Razin's (2000) perspective should lead us to acknowledge the problematic nature of the inter-organizational structure. In Israel, there is an absence of regulated mechanisms for

cooperation among the local authorities themselves, making it difficult for them to meet about local-level needs such as education, immigration, and ecological issues

(Ministry of the Interior, 1998c; Razin, 1999). In order to overcome this inadequate organizational structure, a

restructuring of the overall municipal system is needed.

Regarding the resource allocation system, the major claim holds that many local authorities are in a financial crisis due to their task burden and lack of proper resource allocation (Hecht, 1997). As Ben-Elia (1998:8) asserts: "On the state level we have witnessed for more than ten years a

process of decentralization which encourages an increasing volume of municipal activities without providing capabilities and resources in parallel." This resource allocation

system has come under serious criticism in relation to the Arab-Druze sector. It has been argued that their inferior fiscal position is due to injustice and deprivation in the allocation of government grants (e.g., Al-Haj and Rosen-

feld, 1990). The argument of insufficient resource allocation is not

unique to Israel but in Israel no uniform empirical evidence has yet appeared. Newman et al. (1993) tested the resource allocation issue in towns in the Negev area (southern Israel). They sought to explore the suitability of financial resources to the increment in the activities of towns due to the mass immigration from the former Soviet Union between 1987 and 1992. They showed that, with the excep- tion of one town, all towns benefited significantly from

budgetary increases. Most towns even increased their

budget more than twofold in real values in order to supply the proper quality and scope of municipal services to the




increased population. The expectation that the expenditure of the towns would be equal or slightly different as com-

pared to the increased population has not been fulfilled. It has, however, represented almost the same increase from the two sides of the budgetary coin.

Contrary to this claim, Ben-Elia (1999) showed that the main source for the financial crisis of the Israeli local authorities - a loss of 13 billion NIS - is the central government's avoidance of budgeting municipal activities. By definition, these activities should be funded by the central

government but the finding was not transferred, perhaps, deliberately. Only half of this amount was covered solely by increased municipal taxes. However, as shown above, the lack of financial resources is also due to the wasteful

management of the local authorities themselves.

Comparatively, the increasing volume of local government activities on the account of the central government is not unique to Israel. This phenomenon is manifested by the amount of local government expenditure within the total

public expenditure (Goldsmith and Newton, 1988; Sharpe, 1998). England experienced a similar process during the second half of the 1960s and the first years of the 1970s when there was a significant increase in the expenditures of local governments which claimed that their volume of services had grown. In practice, the significant increase of the local government expenditure was due to faulty budgeting and was not necessarily related to the volume of activities. When the central government planned to stop this practice in 1975, local government authorities called for a continued increase in local government funding (Leach, Stewart, and Walsh, 1994) just as the local governments in Israel are doing today.

Finally, local authorities with an inferior resident socioeconomic status have argued that one cannot expect them




to be in a state of fiscal health. The reason is obvious in that the most important financial resources are derived from the

ability of local residents to pay taxes. Besides affecting the self-income of the local authorities, it also prevents businesses from relocating facilities into their jurisdictions, known to be an important financial source. In a knowledge- based economy, a high level of education in the workforce is required but cannot be provided by local authorities

serving residents with an inferior socioeconomic status. The differences in the socioeconomic status of local populations are very much a structural problem calling for increased strategic planning mainly to direct greater resources to the education system - the very basic structure.

PERCEIVED ORGANIZATIONAL REPUTATION

A third dimension, which has not yet received considerable attention, is the organizational reputation of the local

authority. What is the precise definition of organizational reputation? This question has arisen in light of the differ- ential aspects comprised in the construct. In this regard, it has been argued that reputation is a "fragile resource" (Hall, 1993:616) which changes over time (Ching, Hols-

apple, and Whinston, 1992:291) yet enjoys relative stability (Barney, 1997:226), reflects cumulative investments (Fom- brun and Stanley (1990:254), and exists as a distinct

concept from other organizational behavior constructs

(Jones, 1996:286). Organizational reputation thus embodies a wide range of

facets. Fombrun (1996:72) suggests that corporate reputation consists of four interrelated characteristics: credibility, reliability, responsibility, and trustworthiness. Petrick et al.

(1993:63) have extended this view, claiming that reputation capital is the initial part of social accountability. Thus, the




definitional difficulty can be understood in the argument raised by Clark and Montgomery (1998:65) that reputation is determined in the eyes of the observer's perceptions and

interpretation. For instance, Yoon, Guffey, and Kijewski (1993) found that a purchaser's response to a service is consistent with his or her attitude toward the reputation of the vendor.

Generally, there are two types of approaches to identify- ing the multiple facets in the construct of reputation: one with a more comprehensive view and one with a narrower view. The comprehensive view is held by Olins (1990) who asserts that the reputation of an organization is in a large part derived from its identity, encompassing everything that the organization does and concerns itself with in four major areas of its activity: (1) products/services - what it makes or sells; (2) environments - where (the physical place) it makes or sells; (3) information - how it describes and

publicizes its activities; and (4) behavior - how the

organization members behave toward each other and toward non-members. A similar view is offered by Vergin and Qoronfleh (1992:22) who suggest that reputation reflects behavior exhibited every day through numerous small decisions.

Teece, Pisano, and Shuen (1997:52) refer to reputation as an intangible asset, representing a kind of summary stat- istic about the firm's current assets and position as well as its likely future behavior. Fombrun and Shanley (1990: 234) argue that the construct of reputation I concerned with the multiple constituents that assess it, hence it is not just an issue of economic effectiveness but also of non-economic, that is, sociological significance. Shrum and Wuth- now (1998) claim that reputation status is not just a function of market position but is more complex insofar as it is a function of past performance, structure, and network




position of the organization. Elsbach and Glynn (1996) suggest three types of reputation that firms attempt to cultivate: toughness, high quality, and distinction.

The narrower view is basically grounded on the claim that past financial performance yields the core nature of the

reputation construct. McGuire, Sundgren, and Schneeweiss

(1988) showed that accounting-based measures, in particular return on assets (ROA), proved to be the significant predictor of a firm's reputation for social responsibility. According to another empirical subsoil suggested by Hammond and Slocum, Jr., two financial factors - standard deviation of the market return of the firm and return on sales are found to be an explanation of subsequent reputation. Other perceptions are less dominant and deal with other aspects, for instance, reputation as a way to signal quality (Nachum, 1996) and reputation of human resources and their determinants (Jones, 1996).

Organizations compete on building a unique and favorable reputation. Weigelt and Camerer (1988:452) elucidate this point with illustrations from a wide range of corporate situations where behavioral forms of reputation affect stat-

egic choice by generating future rents. Fombrun (1996) gives a further demonstration as to why reputation is a

strategic asset. When we enter into a contract with any product or service supplier (travel agent, contractor, lawyer, accountant, etc.), it is most likely that our decision to choose one over the other will be based on recommendations or information, meaning that it will be based on their

reputation. Shrum and Wuthnow (1988:909) argue that

"reputational status becomes a critical resource for organizational managers." Fombrun and Shanley (1990:234) de-

pict reputation as the outcome of a competitive process in which firms signal their key characteristics to constituents in order to maximize their economic and non-economic




(social) status. Hall (1992:138) claims that reputation can be a major

factor in gaining competitive advantage and fortifying the

position of the organization insofar as the competitors have difficulties in matching the same kind of fame and esteem created by the reputation. In his research, Hall (1993) identified reputation as the second (product reputation) and the third (corporate reputation) intangible strategic resources creating sustainable competitive advantage among six successful firms. In contrast, non-strategic reputation can lead to a lack of sustainable competitive advantage and, therefore, inferior performance. For instance, opportunistic behavior could be perceived as an unfavorable reputation indicating profit performance (Collis and Montgomery, 1998).

By arguing that organizations compete for a favorable

organizational reputation, we presume that local authorities do this as well. On the other hand, one could claim that local authorities are political entities competing primarily for political power. This study takes a different approach according to which local authorities are organizational units with large operational freedom that desire to be in a

superior position compared to their competitors. As such, local authorities compete to attract businesses in order to

improve their financial and employment position. Several examples of competition between local author-

ities can be mentioned. The competition between the cities of Tel Aviv- Jaffa and Ramat-Gan demonstrates this issue as both have invested considerable effort to attract and preserve businesses in their respective jurisdictions, knowing that it would improve their ability to supply more quality services. Recently, an acrid dispute erupted between the City of Netanya and the Regional Council of HofHasharon regarding the jurisdiction of a territory




planned to be an industrial zone. Both local authorities understand the potential benefits derived from the industrial zone - more employment opportunities, enlargement of self-income, and increased attraction of new residents of

high socioeconomic status. Acquiring such benefits creates a favorable organizational reputation. In other words, the more favorable the local authority's reputation, the greater its capabilities to provide efficient and effective high- quality service programs.

Many businesses exploit their favorable organizational reputation in order to achieve a superior performance (Fombrun, 1996). Likewise, local authorities exploit their

organizational reputation to gain superior performance. For instance, the City of Raanana in Israel has been building a favorable reputation while creating an effective municipal system which it exploits to attract new residents from the middle and upper classes. Creating a positive residential

immigration balance, consisting mainly of the middle and

upper classes, enables a city to be more competitive in

attracting high technology companies interested in the

quality of local human resources. A local government with a superior position regarding the potential to attract high quality residents and corporations would benefit from their

municipal taxes to improve its state of finance.

RESEARCH HYPOTHESES

Drawing on the above theoretical frameworks, the study suggests several hypotheses to be tested.

Demographic Characteristics and Fiscal Health

The organizational demographic is known as one of the most important factors explaining variance in performance




and organizational survival (Baum and Oliver, 1991; Hagen et al. , 1996; Hannan and Freeman, 1989; Levinthal, 1991; Morgan, 1986; Pfeffer, 1982). In examining local government in Israel, a special consideration should be given to its

unique characteristics, particularly the sector variance which basically consists of two sectors: Arab-Druze and Jewish. As evidence indicates that the Arab-Druze sector is

laggard (e.g., Al-Haj and Rosenfeld, 1990), we shall accept that that sector is an important factor in the prediction of variance in performance. Hence, this logic suggests the

following hypothesis:

Hypothesis 1: The size and age of the local authorities will be associated positively and sector (Arab-Druze local authorities) will be associated

negatively with fiscal health.

Residents ' Socioeconomic Status and Fiscal Health

Residents' socioeconomic status is considered as an important variable in explaining the variance in local authorities' fiscal health. Local authorities with an inferior socioeconomic base argue that one cannot expect them to be in a state of fiscal health since the most significant financial resources are derived form the strength of the local authorities' residents to pay taxes. Besides affecting the self-income of the local authorities, it also prevents businesses from relocating facilities into their jurisdictions. In a knowledge-based economy, the need for highly edu- cated residents cannot be met by local authorities serving residents with an inferior socioeconomic status. The difference in the socioeconomic status of local populations are very much a structural problem and thus we shall expect that socioeconomic status will affect the local authorities'




fiscal health. This logic suggests the following hypothesis:

Hypothesis 2: The residents ' socioeconomic status will affect the local authorities 'fiscal health.

Perceived Organizational Reputation and Fiscal Health

This study argues that local authorities' perceived organizational reputation is related to their fiscal health. As Fombrun (1996) demonstrated, when we enter into a contract with any product or service supplier, it is most likely that our decision to choose one over the other will be based on recommendations or information, meaning that it will be based on their reputation. The same is true for local authorities in that a person or business makes a decision to relo- cate to a certain municipality based upon information about the reputation of that municipality about the specific issues which are most relevant.

In fact, all of the activities of the local authority are embodied in its own organizational reputation. If a local

authority acts in an irregular manner by, for instance, paying salaries beyond that which has been allocated, hiring incompetent employees, or just displaying a lack of

managerial capabilities, it will probably find itself in a state of fiscal stress. Perceived organizational reputation or con- strued external image (Dutton, Dukerich, and Harquail, 1994), which refers to the organizational members' view of the belief of outsiders, is likely to be related to the organization's fiscal health. This logic suggests the following hypothesis:

Hypothesis 3: The more favorable the perceived organizational reputation of the local authorities, the better their state of financial health.




Magnitude of Explanation of the Three Factors

In order to express the differences between the local

government and the central government regarding the fiscal stress of many local authorities, this study aims to explore the magnitude of explanation of the three factors examined. The most interesting is what will be the magnitude of explanation of the structural factors, i.e., demographic characteristics and socioeconomic status, in comparison to perceived organizational reputation. As the study claims that there is room for self-operation of the local government, it is likely to expect that all three factors will explain variance in the state of finance but greater magnitude will be provided for perceived organizational reputation. This logic suggests the following hypothesis:

Hypothesis 4: More variance in the state of financial health will be accounted for by perceived organizational reputation in comparison to demographic characteristics and socioeconomic status.

METHOD

Sample

The sample is from 263 local authorities in Israel consisting of 62 municipalities, 148 local councils (not including two industrial local councils as their function is very different), and 53 regional councils. The Israeli municipal structure is organized into three legal statuses defining forms of local authorities: (1) municipality - with the largest population normally above 20,000 inhabitants; (2) local council - with less than 20,000 inhabitants having responsibility for only one municipal settlement; and (3)




regional council - with responsibility for more than one rural settlement. As for the internal distribution, 53 munici-

palities belong to the Jewish sector and 9 to the Arab-Druze sector; 76 councils belong to the Jewish sector and 72 to the Arab-Druze sector; 52 regional-councils belong to the Jewish sector and one to the Arab-Druze sector.

A survey was mailed to each general manager or

local/regional council clerk (this function is equivalent to the general manager where there is none) requesting information on the independent and mediator variables. The

participants were asked to name their local authorities to enable matching the survey data to the no-survey data (i.e., age, size, socioeconomic status, and financial data). The

survey was mailed from and returned to a university address using a self-addressed reply envelope. While 106

surveys were returned. Only 99 were usable since the others failed to provide a name and therefore could not be matched with specific local authorities.

The overall response rate was 37.6% and the internal distribution was as follows: 71.7% from the local authorities belong to the Jewish sector and 28.3% to the Arab- Druze sector. Further internal distribution indicated that 41.3% of the municipalities were from the Jewish sector and 22.2% from the Arab-Druze sector; 39.5% of the local councils were from the Jewish sector and 36.1% from the Arab-Druze sector; 36.5% of the regional councils were from the Jewish sector leaving none for the Arab-Druze sector. The average size of the local authorities was 29,217 residents and the average age was 36.89 years.

The financial variable data were gathered from a Minis-

try of the Interior (1999) report containing the annual financial reports of the local authorities from 1997 and 1998. The size, age, and sector variables were obtained from publication 1046 of the Israel Central Bureau of Statistics




(1997), from the Social Science Data (SSDA) of the Hebrew University of Jerusalem as well as from internal

reports of the Ministry of the Interior. The items of the socioeconomic status variable were obtained from the

publication of the Israel National Insurance Institute, authored by Jacques Bendelac of the Research and Plan-

ning Administration Unit (1999) as well as from the SSDA of the Hebrew University of Jerusalem.

Dependent Variable

Fiscal health. This dependent variable was developed to meet the unique financial system of the local authorities

(for a comprehensive discussion, see Hecht, 1997) and the

way their financial reports are presented. Further, the nominal definition of this variable is based on research that

explores such aspects as liquidity, budgetary balance, and financial efficiency (Razin, 1998a, 1998b, 1999). However, the present study adds other aspects which have not been tested and gives a more accurate picture of seven financial ratios which were assessed on a ratio scale of an average of two years, in order to create more stability and accuracy in the analysis, and which showed good internal consistency reliability (Cronbach alpha = .82). The following are the seven items:

1 . Self-Income Ratio: defined as the ratio between all the self-income and the overall income of the regular budget. Self-income consists of all the income (taxes, grants, and

fees) that the local authority directly collects from the inhabitants, businesses, and other assets within its jurisdiction (Hecht, 1997:21). Income of the regular budget consists of property taxes, fees, surcharges, general grants, finances from ministries, and single sources of income

{Ibid.). The closer the ratio is to one, the better the financial




state of the local authority. 2. Non-Regular Budget Income to Load (amount)

Ratio: defined as the ratio between the total amount of the income of the non-regular budget (excluding loans) and the total amount of loans. The non-regular budget income consists of all the income derived from fees related to

development and loan activities (Hecht, 1987:232-239). The loan load is defined as a non-final income which is

accepted from banks and the state budget for execution of investments in infrastructure and development. The loan load has to be confirmed by the Ministries of the Treasury and Interior and the interest should be paid following agreement between the parties (Hecht, 1997:42-43). The closer the ratio is to one, the better the financial state of the local authority.

3. Efficiency of Collection Ratio: defined as the ratio between the total amount of actual collection and the total amount for collection. The total amount of actual collection consists of property taxes, water and drainage fees. The total amount for collection consists of accumulated debt from earlier years and the current debt minus exemptions, discounts, and cancellation of self-income (Hecht, 1997:21- 27.

4. Per-Resident Collection Ratio: defined as the ratio between the total amount of actual collection (see definition above) in the current year and the total number of permanent residents at the end of the year. The total number of

permanent residents consists of all the permanent residents and immigrants in Israel as well as the permanent residents that are missing from Israel for less than a year while the

survey is in operation (Israel Central Bureau of Statistics, 1997:19).

5. Per-Resident Surplus (deficit) Ratio: defined as the ratio between the surplus (deficit) in the regular budget




(i.e., the difference between the total amount of income in the regular budget and its expenditure) and the total number of permanent residents at the end of the year. The total amount of income in the regular budget has been defined in the first ratio above. The total amount of expenditure in the

regular budget consists of general administration, local services, state services, enterprises, and other expenditures (Hecht, 1987:184).

6. Current Ratio: nominally defined as the ratio between the total amount of current assets and the total amount of current obligations in the balance sheet. Since the author needed to be in line with the financial report structure of the local authorities, the ratio was redefined as the ratio between the total amount of current assets

(excluding investments, investments for covering budgeted funds, accumulated deficit in the regular budget, and tem-

porary net deficit in the non-regular budget) and the total amount of current obligations (excluding development funds, budgeted funds, accumulated surplus in the regular budget, and temporary net surplus in the non-regular bud-

get). The total amount of current assets consists of all the current properties for the short run (until one year) such as customers, bank remainders, investments, and other debtors. The total amount of current obligations consists of all the current debts for the short run (until one year) such as suppliers and budgeted funds.

7. Income-to-Expenditure Ratio in the Regular Budget: defined as the ration between the total amount of income and the total amount of expenditure in the regular budget. Both have been defined in ratio number 5 above.

Independent Variable

Perceived organizational reputation. This measure is



(448) AQ WINTER 2003

a partial integration of two measures established by Fortune magazine. The author adapted the measure to match the unique function of the local authorities in Israel. The first measure is derived from items in a survey among 600 managers and experts regarding the reputation of U.S. cities. The measure consists of items such as flexible and

high-quality manpower; accessibility to markets; favorable attitude toward businesses; fine public education system; comfortable flying service to major cities; low cost of

housing; jobs; facilities; taxes; and quality of life (Bromley, 1993).

The other measure is the annual corporate reputation survey among 8000 high-ranking executives, outside direc- tors, and financial analysts who were asked to rate the 10

largest companies in their own industry on eight attributes, using a scale of 0 (poor) to 10 (excellent). The attributes were: quality of management; quality of products or

services; innovativeness; long-term investment valeu; financial soundness; ability to attract, develop, and keep talented people; community and environmental responsibility; and use of corporate assets (see, for instance, Smith, 1990). This measure has been used by numerous scholars, including Fombrum and Stanley (1990); Fryxell and Wang' 1994; Gatewood, Go wan, and Lautenschlager, 1993; McGuire, Sundgren, and Schneeweiss, 1988).

However, to the author's knowledge, no one has yet examined the perceived organizational reputation of the local authorities in Israel. This was a major reason guiding the author to adapt a partial integration of established measures. The measures used consisted of nine items with the first four based on the corporate reputation survey and the others based on the city reputation survey, both of Fortune magazine. The items were assessed on a

seven-point scale, ranging from 1 = "Strongly disagree" to




1 = "Strongly agree." The measure showed good internal

consistency reliability (Cronbach alpha = .82). The nine statements were? "The quality of management

of my local authority is credited with a very favorable reputation"; "The ability of my local authority to attract, develop and keep talented people is credited with a very favorable reputation"; "The quality of services my local authority supplies is credited with a very favorable reputation"; "The financial soundness of my local authority is credited with a very favorable reputation"; "In my local authority, the education system is credited with a very favorable reputation"; "In my local authority, the municipal facilities are credited with a very favorable reputation"; :In my local authority, the tax system is credited with a very favorable reputation"; "In my local authority, the transpor- tation system is credited with a very favorable reputation"; and finally, "The quality of life in my local authority's jurisdiction is credited with a very favorable reputation."

Demographic characteristics. Three demographic variables will be discussed: size, age, and sector. Size and age are considered as the most common demographic variables (Hannan and Freeman, 1989; Morgan, 1986p Pfeffer, 1982) and as important factors in explaining organizational survival (Baum and Oliver, 1991; Hager et al., 1999; Levin- thai, 1991). Razin (1998b:65) found that population size has a major influence on the fiscal strength of local authorities. Age has not yet been found to explain variance in the financial performance of local authorities in Israel, yet it is expected that young local authorities will display more financial strength as they do not carry former obligations. The final measure in this group is the sector to which a local authority belongs. Razin (1998b) showed that Arab local authorities have been in a weak financial position relative to their Jewish counterparts.




Age. There are local authorities which were established as settlements prior to 1948 (the year of the establishment of the State of Israel) but 1948 was used as the baseline in

calculating the age. This is a ratio scale measure assessed as the age in years.

Size. Size of the local authority was measured by the number of permanent residents. This is the most acceptable criterion as the number of permanent residents should better reflect their scope of activities (Razin, 1998a, 1998b). This is a ratio scale measure.

Sector. Basically, this refers to two sectors: the Arab- Druze sector (with a majority of Arab-Druze residents) and the Jewish sector (with a majority of Jewish residents). This is a nominal scale measure. A score of 0 was assigned to the Jewish sector and 1 to the Arab-Druze sector

Socioeconomic status. This measure consists of five items defining the socioeconomic level of the local authorities' residents:

1. percentage of the hired workers that earn up to the maximum of the minimum wage. This ratio is defined as the ratio between the total sum of hired workers that earn

up to the maximum of the minimum wage in relation to the total sum of hired workers. Mini-mum wage is the minimum wage as defined by law that can be paid to a hired worker by and employer (Israel Central Bureau of Statistics, 1997:27). A hired worker is defined as one who

gets paid by an employer and is registered in the income tax bureau of Israel and the National Insurance Institute;

2. Average wage per working month in practice ratio. This ratio is defined as the total sum of the gross wages that have been paid to the hired worker during the calendar year in relation to the number of working months in practice in the calendar year. The average wage per working month in

practice is defined as the level of earnings that a hired




worker makes per month (Israel Central Bureau of Statis- tics, 1997:27).

3. Percentage of private vehicles per 1000 residents. This ratio is defined as the total sum of the private vehicles at the end of the year in relation to the total number of

permanent residents at the end of the year. A private vehicle is a motorized vehicle such as: motor, tractor, taxi, special motor, bus or motorcycle {Ibid., 26).

4. Percentage of visits by the social service units per 1000 residents. This ratio is defined as the total sum of visits (monthly average) by the social welfare units in relation to the total number of permanent residents.

5. Percentage per 1000 residents who get paid supplementary income. This ratio is defined as the total sum of residents that are paid supplementary income in relation to the total number of permanent residents. Residents who are paid supplementary income belong to weak income and work incompetence populations who were formerly entitled for welfare assistance as well as elderly residents and widows.

DATA ANALYSIS

To test hypotheses 1 to 3, multiple and hierarchical regressions were performed. To test hypothesis 4, the author used the regression model performed for hypotheses 1 to 3 as well as an additional regression model which contains only the demographic variable (in the first step) and the organizational reputation variable (in the second step).

RESULTS

Table 1 shows the means, standard deviations as well as




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TABLE 2. Multiple and hierarchical regression results for the effects of demographic variables, socioeconomic status, and organizational reputation on fiscal health

Independent variables Model 1 p (t) Model 2 p (t) Model 3 p (t) Age -.147 (-.1504) -.038 (-.420) -.044 (-.514) Size .059 (.611) .055 (.629) .097(1.166) Sector -.449 (-.4705***) -.306 (-3.350**) -.242 (-2.756**) Socioeconomic status .425 (4.733***) .343 (3.913***) Perceived organizational .304 (3.560**) reputation

R2 .200 .355 .434 Adjusted R2 .175 .328 .403 Std. Error of estimate .54825 .49480 .46639 F equation 7.845*** 12.824*** 14.082*** AR2 .155 .078 F for AR2 22.404*** 12.674** ***/>< 0.001 ;**/>< .01 ; * P< .05.




the correlations among the dependent and independent variables. Results show acceptability of the measures of the

study and good reliability of the variable scales with .79, .92, and .82 alphas for socioeconomic status, perceived organizational reputation, and fiscal health, respectively. Further, the results imply preliminary support for some of the research hypotheses. Sector was found to be highly negatively correlated with fiscal health (r = -.440, p < .001) and also negatively correlated with socioeconomic status (r = -.285, p < .01), and perceived organizational reputation (r = -.265, p < .01). This means that Arab-Druze local authorities are in a weak position. They have the lowest socioeconomic status, have failed to build a favorable

reputation, and suffer from fiscal stress in comparison to the Jewish local authorities.

Perceived organizational reputation was positively associated with socioeconomic status ( r = .325, p < .01) and fiscal health (r = .471, p < .001). Socioeconomic status was also associated with fiscal health (r = .519, p < .001).

Table 2 presents the regression models for hypotheses 1 to 3. The results show, that from the demographic group, a

significant and negative correlation was found between sector and fiscal health ( B = .449, p < .001), namely that Arab-Druze local authorities display inferior financial

performance. The demographic group explained 20% of the variance in financial performance. The results of the first model support hypothesis 1, according to which demo-

graphic variables are associated with financial performance. However, age and size did not make any significant contribution to explaining the variance.

The results of the second model, when the variable of socioeconomic status was added to the first equation, show that socioeconomic status was highly correlated with fiscal health ( B = .425, p < .001). The demographic group in the




first model explained 20% of the variance and, when the variables of socioeconomic status was added into the equation, both contributed 35.5% of the variance in fiscal health. In other words, socioeconomic status added 15.5% to the power of explanation. The results thus support the second hypothesis, according to which socioeconomic status will affect the fiscal health of the local authorities.

The results of the third model, when the variable of perceived organizational reputation was added to the second

equation, show that it was significantly associated with fiscal health. This finding provides strong support for hypothesis 3, according to which the more favorable the

perceived organizational reputation, the more healthy the state of finance of local authorities. Moreover, where all three factors - demographic, socioeconomic status, and

perceived organizational reputation - were entered into the

regression equation, they were all significantly associated with fiscal health and contributed 52.2% of the explanation of variance in the state of finance.

To evaluate the support or non-support of hypothesis 4, another multiple hierarchical regression was performed. The results in Tables 2 and 3 showed that socioeconomic status and perceived organizational reputation, , contributed an additional 15% and 13.9%, respectively, to the power of explanation in relation to the demographic variable.

Furthermore, perceived organizational reputation and socioeconomic status have a common power of explanation of 6% as perceived organizational reputation has a power of explanation of 13.9% above the demographic variables and contributes a power of explanation of 7.9% above both the demographic variables and socioeconomic status variables. The study thus proposes an explanation of the fiscal health of local authorities in Israel.




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DISCUSSION

This study aims to explore the fiscal health and stress of local authorities in Israel by adopting an approach accor-

ding to which a local authority is considered as an

organizational unit aimed to fulfill defined municipal purposes. As such, the Israeli local authorities have a space to operate in order to attain their goals. Achieving financial

strength enables a local authority to stay in line with itss

municipal policies. Many of the Israeli local authorities have displayed severe fiscal stress while others have

managed to display fiscal soundness. The study examined the variance in fiscal health of

Israeli local authorities in accordance with three factors: the demographic characteristics of age, size, and sector; residents' socioeconomic status; and perceived organizational reputation of the local authorities. While the first two factors are structural and only the size and socioeconomic status variables may be changed over a long period through an integrated action of both the central and local governments, the third factor is completely dependent on the local authority itself.

The study revealed three interesting findings: (1) Arab- Druze local authorities display severe fiscal stress compared to Jewish local authorities; (2) residents' socioeconomic status has an effect on fiscal health, namely, the higher the socioeconomic status of the local authority's residents, the better the local authority's state of finance; and (3) perceived organizational reputation is positively associated with fiscal health, namely, the favorable the perceived organizational reputation, the better the state of finance of a local authority.

The results urge scholars and practitioners to consider the variance in the fiscal health of local authorities in Israel




through both structural and organizational factors. This

study does not call for omitting the political aspects but rather emphasizes the importance of the management of local authority, in particular the creation of a solid and favorable perceived organizational reputation in order to achieve a fiscal soundness. Furthermore, previous studies addressed the fiscal stress of many local authorities in somewhat declarative terms instead of taking an empirical approach to this phenomenon. The present study suggests a

platform for studies in this direction. With respect to the differences between Arab-Druze and

Jewish local authorities, the findings of this study provide strong empirical support for those of previous studies which also indicates such disparities (Al-Haj and Rosen- feld, 1990; Razin, 1998b; 1990). The accumulated evidence about the fiscal stress of Arab-Druze local author-ities should be considered separately in a more focused study. In

general, the sources of this phenomenon are divided

according to external-related factors such as discrimination in government grants between the two sectors (Al-Haj and Rosenfeld, 1990) as well as internal-related factors such as

mismanagement, lack of appropriate managerial compe- tence, ethical and moral values.

As for the effect of the residents' socioeconomic status on the state of finance of local authorities, the results

support earlier studies conduced by the Israeli Ministry of Interior in the second half of the 1980s (Ben-Tuvia, Diechev, and Dor, 1988; Dor, 1986) as well as the more recent studies (Razin, 1986b). Enhancing the socioeconomic status of weak local authorities is one of the biggest challenges of the central and local governments. Low socioeconomic status begets serious obstacles to the

development of the local authorities. Without integrating strategic policy on this issue, the gap will only get wider.




This study also contributes by applying a construct, perceived organizational reputation, from the business liter- ature and adapting it as needed to research on public-sector organizations. The results of this study strengthen the well- established assumption in the business sector, according to which organizational reputation is a strategic asset that

yields superior performance (Fombrun, 1996; Fombrun and

Shanley, 1990; Hall, 1992, 1993; Shrum and Wuthrow, 1998). This conclusion is clearly applicable to then public sector as well.

Although this study is concentrated on the local authorities in Israel, it also suggests a generalization to local authorities in Western countries. Two factors should be studied among local authorities in Western countries in relation to their effect on municipal performance: residents' socioeconomic status and organizational reputation. The variance in the state of finance is a more comprehensive phenomenon rather than being specific to a certain country. The study also suggests exploring the function of local government in organization- and management-based terms.

Several suggestions for future research should be mentioned. It is essential to validate the relationship between perceived organizational reputation and fiscal health of local authorities by conducting follow-up studies as well as cross-cultural research. Further effort should also be given to extending the research to other public-sector organizations. Additional research should explore the relationship between residents' perceptions of organizational reputation and actual fiscal health. Finally, more should be done on the level of comparative analysis in order to reach a high level of generalization.

Finally, the reader is cautioned to recognize the limita- tions of this study. First, although studies have shown medium to high correlations between self-report data and




factual data, this study uses self-report data only for

perceived organizational reputation. Therefore, it is important to maintain caution in interpreting the data. Second, the structure and the unique characteristics of the Israeli local authorities may not resemble those of other local authorities in Western countries, again indicating the need for caution when generalizing the results of the present study.

NOTE

An earlier version of this study was presented in the research colloquium, Faculty of Architecture and Town Planning, Technion- Israel Institute of Technology. The author wishes to thank the participants in the research colloquium and an anonymous reviewer for their helpful comments and suggestions.

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