Association for Public Policy Analysis & Management

The Great Recession of 2007-2008 had a significant influence on the fiscal health of cities across America. The mortgage crisis and decline in property values directly impacted the financial condition of city governments. Cities in California were among the worst affected, some witnessing erosion in property values by as much as ten percent or more (Chernick et. al., 2011). Research on city fiscal health in the wake of the 1980s recession identify two broad financial decision making strategies adopted by cities. Seminal work by Levine (1978, 1980) finds that cities respond to crises in a considered, planned, strategic manner described as decrementalism. However, Pammer (1988) finds that the garbage can model best describes the chaotic and adhoc manner of financial decision making by city governments in the wake of a financial crisis. These antithetical findings point to the need for deeper investigation of underlying characteristics that could potentially explain differences in financial decision making approaches adopted by city governments. In this paper we seek to investigate these underlying factors of cities, specifically antecedent financial condition and fiscal capacity on financial decisions in the post-recession period. We use a longitudinal panel data set of California cities over the period of 2001-2013. We explore the financial condition of cities before the onset of the recession, during the recession and in the post-recession period. We test three hypotheses: (a) cities with weak antecedent financial conditions and weak fiscal capacity are more likely to adopt a chaotic or garbage can approach than stronger cities; (b) cities with weak fiscal capacity but strong antecedent financial conditions are likely to adopt a considered or decrementalist approach; and (c) cities with strong fiscal capacity but weak antecedent financial condition are likely to adopt a chaotic or garbage can approach. This study seeks to contribute to emerging literature on fiscal health of cities in the post great recession period and specifically to knowledge on financial decision making of city governments in California.