Household Debt and Local Public Finances

Abstract

In the wake of the Great Recession, steep declines in state and local government expenditures and employment were a large and persistent source of economic weakness. The business cycle was also characterized by large increases and decreases in household debt. We estimate the extent to which variation in local government revenues and expenditures can be explained by variation in the expansion of household debt from 2002 to 2007, and the contraction thereafter. We merge individual credit balance data with municipal financial data from the Census of Governments. Using Census block indicators, we are able to place approximately 12 million credit bureau records into over 6,000 cities and 4,500 school districts. Our results indicate that a one percent additional increase in mortgage debt caused a 0.15 percent increase in local governments’ own revenue and a 0.17 to 0.21 percent increase in expenditures. These relationships were evident during the expansion and contraction of mortgage debt. We also find evidence linking nonmortgage debt to municipal finances.