January 3, 2017

Broke Cities

Evgenia Gorina

Assistant Professor, University of Texas at Dallas

Craig Maher

Director of the Nebraska State & Local Finance Lab, University of Nebraska at Omaha

With the new year upon us and a contentious election well behind us, it's time to turn our attention to governance. This past fall's bombastic headlines made it easy to forget that local governance often affects our lives more than federal policy. The fiscal condition of our cities and counties, many of which have been in crisis for years, greatly affects the types and quality of public services we receive as residents. And while federal debt and deficits drive news headlines, many of us remain in the dark when it comes to our own municipality's finances.

But how bad is it? And how do you separate manageable financial pressure from a true crisis?

In new Mercatus Center at George Mason University research on "Measuring and Modeling Determinants of Fiscal Stress in U.S. Municipalities," we examine the fiscal behaviors of 300 city and county governments in California, Michigan and Pennsylvania between 2007 and 2012. This study has very real implications for local governments nationwide. Annual financial reports and news coverage reveals that nearly a third of our sample – 32 percent – experienced fiscal distress during that time.

Fiscal distress can mean different things to different people. We examined publicly available comprehensive annual financial reports and news coverage, and deemed a government as distressed if it laid off or furloughed workers, failed to meet service obligations, defaulted on debt, declared bankruptcy, deferred pension payments or increased taxes and fees to cover budget shortfalls in a given year.

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