Local Government Finances During and After the Great Recession

The 2007-2009 recession had a large and long-lasting impact on local government finances in the United States. This paper describes these impacts using existing research and a variety of data sources. Through 2011, the latest year with comprehensive data, real per capita revenues had declined 3.3 percent from 2007 levels. However, more recent data suggest that revenues hit bottom in 2012, when they were 5 to 6 percent below pre-recession levels. Revenue declines lagged economic changes by about three years, largely because federal stimulus funds postponed large cuts in state aid and property taxes did not start declining until 2010. Falling interest earnings were a major cause of revenue declines, partially due to localities tapping their reserves, but very low interest rates also played a big role. The paper also looks at local government spending, which had fallen more than revenues relative to pre-recession highs by 2011, with the cuts disproportionately affecting K-12 education. The effects of the Great Recession varied widely across cities. An analysis of revenue changes between 2008-2011 for 112 Fiscally Standardized Cities finds that differences in the local economic impact of the recession were about six times more important than differences in revenue structure for explaining variations in revenue declines. The paper also discusses future challenges facing local governments.