This article examines the relative impact of internal and external factors on the financial decline of local Arab municipalities in Israel. We employ a unique case study to demonstrate that the negative relationship between local management policies and local financial crises is stronger than any other relationship; in addition, this relationship is expected to hold for other local authorities in Israel and for local authorities in Western countries. The new theoretical approach developed in this study indicates that, with respect to local authorities, the "local management approach" more often explains a financial crisis than other approaches.