Local Fiscal Distress: Measurement and Prediction

Abstract

During and after the Great Recession, many local governments were compelled to declare fiscal emergencies, lay off workers, and cut services while others weathered the recession without needing to take such actions. In this paper, we construct an action‐based measure of fiscal distress using comprehensive annual financial reports, budgets, and media coverage and then use it as a dependent variable to model fiscal distress as a function of past financial performance and socio‐economic environment. The empirical models show the relative importance of fiscal reserves, debt, and revenue composition in predicting local fiscal distress.