Local Government Fiscal Health: Understanding the Linkages Between Macro-Economic Conditions and Local Administrative Choices

A central puzzle in the public finance literature on fiscal stress is the anecdotal observation that national-level economic booms and busts impact local governments differently. Existing research suggests that this phenomenon is variously attributable to different local economic conditions or to different local administrative choices. We present a novel theoretical model in which national economic conditions filter through administrative structures to impact what might be commonly considered the fiscal health of a jurisdiction. Specifically, we argue that some cities are better able to weather the impact of economic cycles because of the choice of fiscal institutions implemented. In this sense, local fiscal institutions filter the effects of national economic trends. In other words, both national economic trends and local fiscal institutions matter, and the interaction of these two factors can tell us much about the fiscal health of a specific jurisdiction. In this study, the fiscal institutions we are most interested in are revenue diversity and the size of the fund balance. We propose to test this theory on a sample of cities over several decades using data from the Census of Governments.