The detailed diagnosis explores the deeper causes of financial distress. Understanding root causes is needed for creating lasting solutions.

There are two dimensions to consider in the detailed diagnosis*:

• Internal vs. external: Does the cause arise from forces inside or outside the organization?
• Economic/technical vs. political: Are political or technical issues behind distress?

These two dimensions translate into four categories of potential causes. Examples of deeper causes are available in each category, including symptoms to look out for in your government and key questions to ask. Step 8 of the recovery process suggests possible solutions to causes we discuss here in Step 6.

Category 1: Political / Internal Causes of Financial Distress

• Governance Crisis
• Excessive Personnel Costs
• Past Awards of Unsustainable Retirement Benefits
• Poor Morale and Commitment
• Overexpansion
• Economic Development Incentives
• Implicit Development Subsidies

Category 2: Internal, Economic/Technical Causes of Financial Distress

• Management Challenges
• Weak Budget Development Practices
• Lack of Innovation and Adaptability
• Poor Performance
• Ineffective Information Technology Systems
• Failure to Fund and Manage Retirement Benefits Prudently
• Deteriorating Infrastructure
• Overbuilding Infrastructure
• Low Bang-for-the-Buck Development Decisions

Category 3: External, Political Causes of Financial Distress

• Poor Communication With the Public
• Interest Groups
• Decline in Local Fiscal Autonomy

Category 4: External, Economic/Technical

• Economic Stagnation
• Shifting Demographics