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Causes and consequences of fiscal stress in Michigan cities

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  • Skidmore, Mark
  • Scorsone, Eric

Abstract

As the world economy emerges from the real estate and financial crises, economists and policymakers are considering the implications for government finance. One facet of the recession is the precipitous fall in housing values that is expected to have long-lasting effects on local government finance. Throughout the United States and Europe, local officials have not experienced challenges of this magnitude in generations. How might we expect local government finances to respond/evolve in the wake of the crisis? We gain insight on this question by studying city finance in a state that has struggled for years. In particular, many Michigan cities have experienced significant and ongoing fiscal challenges for at least a decade and acute crisis over the last several years. We examine how expenditure patterns have changed in response to these challenges. Using data for most cities in Michigan for years 2005 through 2009, we find that expenditures in the General Government, Public Works, and Parks and Recreation categories were responsive to fiscal stress, and Capital Expenditures have been particularly vulnerable. However, expenditures in essential services such as Public Safety were generally not adversely affected. Our research offers insights regarding the likely implications of the real estate crisis for cities in the United States as well as in Europe that have, until very recently, enjoyed relative economic prosperity and limited fiscal challenges.

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Bibliographic Info

Article provided by Elsevier in its journal Regional Science and Urban Economics.

Volume (Year): 41 (2011)
Issue (Month): 4 (July)
Pages: 360-371

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Handle: RePEc:eee:regeco:v:41:y:2011:i:4:p:360-371

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Web page: http://www.elsevier.com/locate/regec

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Keywords: Local government Fiscal stress Michigan Real estate crisis;

References

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  1. Bergstrom, Theodore C & Goodman, Robert P, 1973. "Private Demands for Public Goods," American Economic Review, American Economic Association, vol. 63(3), pages 280-96, June.
  2. Poterba, James M, 1994. "State Responses to Fiscal Crises: The Effects of Budgetary Institutions and Politics," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 799-821, August.
  3. Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2004. "How Much Should We Trust Differences-in-Differences Estimates?," The Quarterly Journal of Economics, MIT Press, vol. 119(1), pages 249-275, February.
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Cited by:
  1. Albert Solé-Ollé & Elisabet Viladecans-Marsal, 2011. "Local spending and the housing boom," Working Papers 2011/27, Institut d'Economia de Barcelona (IEB).
  2. Bo Zhao & David Coyne, 2011. "Designing formulas for distributing reductions in state aid," New England Public Policy Center Working Paper 11-2, Federal Reserve Bank of Boston.
  3. Chernick, Howard & Langley, Adam & Reschovsky, Andrew, 2011. "The impact of the Great Recession and the housing crisis on the financing of America's largest cities," Regional Science and Urban Economics, Elsevier, vol. 41(4), pages 372-381, July.
  4. James Alm & Robert D. Buschman & David L. Sjoquist, 2012. "Rethinking Local Government Reliance on the Property Tax," Working Papers 1215, Tulane University, Department of Economics.
  5. Razvan Vlaicu & Alexander Whalley, 2011. "Do housing bubbles generate fiscal bubbles?," Public Choice, Springer, vol. 149(1), pages 89-108, October.

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