Causes and consequences of fiscal stress in Michigan cities

As the world economy emerges from the real estate and financial crises, economists and policymakers are considering the implications for government finance. One facet of the recession is the precipitous fall in housing values that is expected to have long-lasting effects on local government finance. Throughout the United States and Europe, local officials have not experienced challenges of this magnitude in generations. How might we expect local government finances to respond/evolve in the wake of the crisis? We gain insight on this question by studying city finance in a state that has struggled for years. In particular, many Michigan cities have experienced significant and ongoing fiscal challenges for at least a decade and acute crisis over the last several years. We examine how expenditure patterns have changed in response to these challenges. Using data for most cities in Michigan for years 2005 through 2009, we find that expenditures in the General Government, Public Works, and Parks and Recreation categories were responsive to fiscal stress, and Capital Expenditures have been particularly vulnerable. However, expenditures in essential services such as Public Safety were generally not adversely affected. Our research offers insights regarding the likely implications of the real estate crisis for cities in the United States as well as in Europe that have, until very recently, enjoyed relative economic prosperity and limited fiscal challenges.