Linking Government Capacity to Strategic Municipal Responses: A Multidimensional Framework for Fiscal Resilience

The COVID-19 pandemic inflicted a sudden, severe fiscal shock on local governments, forcing them to navigate complex tradeoffs between retrenchment and adaptation strategies. Drawing on the Government Performance Framework, we examine how five dimensions of capacity—financial management, human resources, strategic planning, communication, and IT—influenced municipal response strategies during a period of fiscal distress. Using original survey data from municipalities in Nebraska and Texas and applying Partial Least Squares Structural Equation Modeling (PLS-SEM), we find that capacity shapes crisis response in distinct ways. Local governments with higher administrative capacities (i.e., IT, HR, strategic planning) were better able to implement proactive revenue expansion and adaptation management measures. At the same time, municipalities with stronger financial management capacity were less likely to resort to cutbacks and short-term fixes such as deferring maintenance. These findings offer theoretical contributions for understanding the nuances of local government capacity and response strategies, and practical insights for building resilient local governments. To navigate crises effectively, local government policymakers should strengthen financial health to buffer against retrenchment while fostering administrative capacities to drive adaptative management practices.