Uncovering Municipal Fiscal Distress in the United States

Abstract

This paper builds on the literature examining the circumstances surrounding municipal fiscal distress by constructing a broader picture of the factors related to distress and why some cities file for bankruptcy or seek state intervention while others do not. Drawing on previous work, we identified a set of eight possible factors that may serve as predictors of municipal insolvency in the United States. In this article, we examine how prevalent these factors are across 42 fiscally distressed cities and identify significant associations between these factors. We then analyze how these eight factors vary between fiscally distressed cities that have filed for bankruptcy and those cities that are distressed but have not filed for bankruptcy. We found that high percentages of public union density and unfunded pension liabilities were most prevalent risk factors among cities and that significant associations exist between unfunded pension liabilities and three other factors: fiscal home rule authority, intergovernmental aid, and tax and expenditure limits. We also found that both low levels of state aid and evidence of financial mismanagement were more common among distressed cities that filed for bankruptcy than those that did not. Lastly, we identify areas where future research is needed.