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Subnational governments can create sizable fiscal risks for central governments. In addition to impacting service delivery at the grassroots level, unsustainable subnational finances can be a continuous drain on central resources. The need for stronger public financial management systems and capacities to analyze and manage risks at the subnational government level cannot be overemphasized. Central governments need to develop sound institutional mechanisms to systematically monitor the health of subnational finances to be able to proactively manage associated risks. This How to Note provides a framework for central governments that seek to assess and manage fiscal risks stemming from weak subnational finances. It analyzes the sources of subnational finance vulnerabilities and argues that central governments would benefit from putting in place the following: (1) a stronger regulatory framework, (2) improved fiscal reporting, and (3) enhanced central oversight. The lessons distilled from the international experience are particularly useful for developing economies where the management of risks can be improved.

Economics: General --- Macroeconomics --- Public Finance --- Budgeting --- Fiscal Policies and Behavior of Economic Agents: Other --- National Budget, Deficit, and Debt: Other --- State and Local Borrowing --- Governmental Loans, Loan Guarantees, Credits, and Grants --- Public Administration --- Public Sector Accounting and Audits --- National Government Expenditures and Related Policies: General --- Debt --- Debt Management --- Sovereign Debt --- National Budget --- Budget Systems --- Economics of specific sectors --- Economic & financial crises & disasters --- Public finance & taxation --- Budgeting & financial management --- Economic sectors --- Financial crises --- Fiscal risks --- Public financial management (PFM) --- Public debt --- Budget planning and preparation --- Expenditure --- Informal sector --- Economics --- Currency crises --- Fiscal policy --- Debts, Public --- Finance, Public --- Budget --- Expenditures, Public --- New Zealand