Association for Public Policy Analysis & Management

Manita Rao and Juliet Ann Musso

Abstract

This paper uses the Great Recession of 2007 to 2009 as a quasi-natural-experiment to assess the factors that influenced the impact of economic disruption on local government finance and the features of revenue portfolios that proved most resilient to this disruption. The Great Recession of 2007 to 2009 had a significant influence on the fiscal health of municipal governments as recessionary pressures in property markets reduced property taxes while also impacting consumption and auxiliary sectors (Alm & Sjoquist, 2014). This paper considers the factors influencing recovery of municipal finances in the post-recession phase, using a longitudinal panel dataset of CAFR data for 480 municipal governments in California over a 13 year period (2003 to 2016). The study advances the conceptual framework of fiscal resilience, defined as the ability of a municipality to return to fiscal health in the wake of an external recessionary shock. Fiscal resilience borrows theoretically from ecological notions of resilience as the stability of a system that encounters an external perturbation or shock (C. S. Holling, 2001; Martin & Sunley, 2015). The study considers the extent to which differing revenue profiles (conceptualized as portfolios) were more resistant to the recession and/or recovered more quickly. The paper further considers the extent to which revenue instability and revenue slack affect fiscal resilience among municipalities.

The study characterizes cities with respect to their relative reliance on revenue sources within four revenue categories: general tax revenue, general non-tax revenue, functional tax revenue and functional non-tax revenue. It employs interrupted time series analysis to investigate the resilience of varying revenue portfolios to recession and to consider other economic or institutional factors that contribute to resilience. Initial findings suggest high levels of inter and intra-revenue instability during recessionary years. We also find that revenue instability and fiscal slack are significant in predicting fiscal resilience.

This interdisciplinary approach adopted by this paper contributes to emerging literature in the areas of resilience and recessionary response. The focus of the study on the empirical measurement of fiscal resilience for municipal finance addresses an important gap in the literature, suggesting that the understanding of fiscal stress and recovery can be informed by the construct of resilience, a framework that heretofore has been applied to economic resilience at the state or regional levels. Understanding the fiscal resilience of differing revenue portfolios is policy relevant during an era in which economic markets are volatile, and state and local fiscal characteristics highly constrained (Kiewiet & McCubbins, 2014).