Predicting Municipal Fiscal Distress

Cities are where people come together to work, live, and thrive. Cities also face a host of fiscal challenges, many of which were laid bare in the Great Recession. Given these challenges, stakeholders of many kinds have sought more and better indicators of city fiscal health. This paper provides an overview of such measures grounded in economic, fiscal or financial, and comprehensive approaches. It further explores lessons from past federal and state programs to distribute local aid and monitor local fiscal conditions. The paper notes a fundamental challenge in evaluating fiscal health measures: the relative infrequency of adverse events such as defaults and bankruptcy. It presents one approach to addressing this challenge: observing how cities with alternative starting conditions weather a housing price shock. Results presented here will help state and federal policymakers concerned with responding to municipal fiscal distress as well as voters wishing to make informed choices about their fiscal futures.