Cutback management theory explains the actions governments take in the face of fiscal stress. This theory grew out of observations of fiscal stress in U.S. localities in the 1970’s and early 1980’s (Levine 1978 and 1979; Levine et al 1981a). Scholars examined how state and local governments operate when there is no longer growth in revenues and fiscal stress sets in (Caiden 1980; Bahl 1984). At the time, Levine (1978) noted that most management theories available to public managers assumed a growth environment and available resources. Cutback management explains the political context and causes of fiscal stress as well as considers strategies and decision rules that public organizations can use to manage toward balance in periods of economic decline (Levine 1978; Levine et al 1981a). The theory draws from organizational change theory and relates it to the context of and actions taken in a resource-constrained environment (Levine 1978; Jick and Murray 1982).
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Cutback management is defined as “managing organizational change toward lower levels of resource consumption and organizational activity” (Levine 1978, XX). Levine (1978, 317) explains that “so great is our enthusiasm for growth that even when organizational decline seems inevitable and irreversible, it is nearly impossible to get elected officials, public managers, citizens, or management theorists to confront cutback and decremental planning situations as anything more than temporary slowdowns.” The fundamental question cutback management theory attempts to answer is how to manage public organizations given flat or reduced appropriations (Levine 1978)? The difficulty with answering this question is that public organizations have to “be smaller, do less, consume fewer resources, but still do something and do it well” (Behn 1980, 614). More recently, cutback management theory has also been applied to budgeting in the U.S. states.
Several typologies to explain the causes of fiscal stress have been put forward by researchers using cutback management theory. Levine (1978) categorized the causes of fiscal stress as internal and external, political and economic. Savage (1992) refined this typology by differentiating between structural and cyclical causes of fiscal stress. Grizzle and Trogen (1994) divide causes of fiscal stress into cyclical and structural and within state control and outside of state control. These typologies demonstrate that most all states will face fiscal stress at some point—either from forces outside of their control such as federal mandates or recessions or from forces within their control such as setting appropriate spending and taxation levels.
Cutback management theory also describes the paradoxes and unintended consequences that result from fiscal stress and cutbacks (Levine 1978; Levine et al 1981a). These paradoxes of organizational decline include the need for the development of planning and information systems as well as policy analysis to determine how to reduce spending; but while funds for these systems are available in times of growth they are rarely available in times of constrained resources. Without slack resources, it is
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difficult for public managers to smooth resistance to change and as such organizations will struggle to innovate or maintain flexibility. Fiscal stress also creates human capital problems due to the inability to reward or promote employees for being more efficient and not being able to attract younger workers with new ideas and lower salaries (Levine 1978). In addition, decision-makers may take short-term perspectives under conditions of fiscal stress (Levine et al 1981a). As a result, unintended and counterproductive consequences may result, making it even more difficult to get out of fiscal stress or avoid it in the future. Examples of these consequences are deferred maintenance resulting in deterioration of public buildings, bridges or roadways; reduced or deteriorating services that make investment in the community less likely, and personnel actions that may result in the best qualified and motivated employees leaving pubic service. Across-the-board cuts also tend to punish the most efficient departments and actually reward those
departments with inefficiencies. As Berne and Stiefel (1993) found reallocations of funds hastened by fiscal stress can become permanent. In terms of the most effective response to fiscal stress—the one that will reduce the level of fiscal stress—cutback management theory does not offer one best way (Levine 1980), although a comprehensive strategy is preferred to one with piecemeal solutions. Instead, the optimal strategy will depend on several factors including the severity of fiscal stress, the size and power of the
government unit, the power and alignment of interest groups, the power and
professionalism of public employees, and the informal and formal power of political leaders (Levine 1980).
2.4.2 Application of Theory to Situations of Fiscal Stress
Most research applying cutback management theory to the states attempts to find meaning in the order and types of responses used. Regarding responses to fiscal stress, the framework devised by Levine (1978; 1979) and Levine et al (1981a) has been used to test the relationship between fiscal stress, organizational characteristics and
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administrative responses (Bartle 1996; Pammer 1990). Levine (1978; 1979) lists the most common types of responses and categorizes them as efficiency or equity tradeoffs. In this context, equity means how cuts are distributed across the organization and efficiency means the extent to which cuts minimize the disruption to the organization (Levine 1978). Across-the-board cuts are equity based since they attempt to share the cuts across an organization with no single department or stakeholder group singled out. Targeted cuts are considered efficiency cuts because they involve determining the value of each
employee and department and determining who is worth more to the government’s operation.
Levine et al (1981a) presents a general model of local government responses to fiscal stress by using the experience of New York City as a guide. He tests resulting hypotheses on four localities, including: Baltimore, Cincinnati, Oakland, and Prince George’s County in Maryland. In this model, changes in resource levels are an independent variable whose impact is affected by two political variables – formal authority structure and interest group structures. The dependent variable is the
administrative responses of local governments. The model also considers short and long term effects of administrative responses. These effects may be felt at the micro level such as allocational effects (who benefits and loses), as well as at the macro level (effects felt by the whole community such as increased crime levels). The formal authority variable includes measures of the constraints placed on local governments such as borrowing, revenue raising and spending limitations. An interest group variable concerns the presence or absence of interest groups. This variable considers the activity level of interest groups both during growth and economic decline as well as their ability to form coalitions. Three strategies dealing with fiscal stress are outlined: (1) denial and delay strategies, (2) stretching and resisting strategies, and (3) cutting and smoothing strategies.
The model posits several hypotheses about the relationship between
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relevant to our analysis. The model predicts that administrative responses will vary (1) depending on the level of fiscal stress, (2) that responses to fiscal stress will follow a predictable pattern, (2a) lower levels of fiscal stress will be associated with denial of the problem and a delayed response, (2b) moderate fiscal stress will result in responses that affect all parties equally such as across the board cuts and adoption of hiring and purchasing freezes, and (2c) severe fiscal stress will result in cuts aimed at preserving efficient programs and eliminating lower performing programs or those outside the core mission through targeted cuts, reorganization of departments and reduction in force measures, and the reduction in employee benefits or pensions.
After testing these hypotheses against the experiences of four localities, Levine et al (1981a) found that responses do vary depending on the severity of fiscal stress but that responses happen over time. In other words, the response to fiscal stress may occur one or more years after the experience of severe fiscal stress. The findings also suggest that localities prefer responses that are perceived as more easily reversed (e.g., attrition rather than layoffs, reducing service levels rather than terminating programs). These scholars did not observe local governments adopting tactics in a systematic pattern. They found that localities use many tactics in response to fiscal stress and may even use all tactics at once. Localities did not overtly deny or delay responses to fiscal stress; moderate fiscal stress fostered equity cuts with a bias toward across-the-board cuts. The final hypothesis concerning severe fiscal stress was not tested, as the four case studies did not experience this level of stress in the study.
Much of the research on cutback management focuses on the question of “how do governments react when faced with fiscal stress?” Bartle (1996) summarizes the extant literature as: (1) governments practice incrementalism in reverse, decrementalism – in which the focus is on incremental changes to the budget, not the budget base (Lewis 1984; Schick 1983), (2) governments’ responses are systematic and depend on resource levels and administrative shifts in budgetary priorities (Levine et al 1981a; Rickards
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1984; Behn 1985; Berne and Stiefel 1993; Dougherty and Klase 2009) and (3)
government responses are mostly unstructured due to ambiguous goals and ill-defined preferences (Pammer 1990; Downs and Rocke 1984; Bartle 1996). Based on the predictions of how localities react in periods of fiscal stress and given various
organizational characteristics, Bartle (1996) tests these frameworks against practices in cities in New York. His findings support an unstructured framework, finding that
government responses to fiscal stress are varied and dependent upon government-specific factors.
Research applying cutback management theory to the state level supports cutback management theory, but is relatively sparse. In examinations of Florida and Georgia, researchers found tactics to resist and delay (mainly in Florida) and to smooth changes (mainly in Georgia) with relatively few instances of major programmatic shifts or eliminations (Willoughby and Lauth 2003; Grizzle and Trogen 1994). Other research focusing on personnel actions point to many of the unintended consequences of hiring, pay and promotion freezes (Druker and Robinson 1993; Greenhalgh and McKersie 1980). In an effort to apply the cutback management model to states, Dougherty and Klase (2009) assessed the responses of eight states to budget deficits between 2002 and 2005. They found that the pattern of responses largely followed that predicted by Levine et al (1981a). States initially used across-the-board cuts and hiring freezes; however, as
deficits increased or fiscal stress persisted they tended to use targeted cuts. In a few cases, as a response to severe and prolonged budget deficits, states laid off employees and eliminated programs.
2.4.3 Theoretical Implications for State Responses to Fiscal Stress
Cutback management theory provides a relatively comprehensive description of how states will act under fiscal stress. The type of responses—across-the-board cuts, hiring freezes, targeted cuts, tax increases, or layoffs—will differ depending on the
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severity of fiscal stress as well as the persistence of fiscal stress. Cutback management theory is also helpful in determining the temporal order of administrative responses to fiscal stress. The theory posits that fiscal stress, in the form of revenue declines, determines the extent of the administrative response. Since the measure of fiscal stress developed in this paper encompasses long-term and service level solvency along with the more directly relevant to cutback management theory budgetary and cash solvency, we expect to see different relationships between responses and these types of solvencies. It also suggests that we should not expect to see an effect on fiscal stress levels by
administrative responses within the same fiscal year. Rather it is more likely that
administrative responses in the previous fiscal year have an impact on the current year’s fiscal stress level. The theory also offers reasons why certain responses – layoffs, for instance – may be less effective at improving the fiscal situation than anticipated by decision-makers.
2.4.4 Criticism and Limitations of Theory
Cutback management theory applies organizational change to resource-
constrained environments, directly relevant to our current investigation. An element that is missing from the theory is direct application of theories of budgetary decision-making to explain why decision- makers use specific tactics. Perhaps the limitation most relevant to this analysis is the lack of discussion or empirical testing of the effectiveness of
strategies in alleviating and preventing fiscal stress (Levine 1979; Scorsone and Plerhoples 2010).
Another criticism of the theory, although not unique to this theory, is that several researchers have not found the pattern of predicted responses or a difference in responses based on the severity of fiscal stress, as mentioned (Pammer 1990; Bartle 1996). Indeed, relatively little research attempts to apply the cutback management framework to a cross section of governments, at the state or local levels. While this is a limitation of the theory,
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it is also a reason to explore the theory further and see where its merits and weaknesses lie.