Were Fourth District Local Governments Ready for a Recession? How the Great Recession Influenced How Much They Save

While almost no one anticipated the pandemic-induced shutdown of economic activity experienced this year, local government officials know that the business cycle will sooner or later pull down tax revenues. During years of expansion, cities and counties should be setting aside resources that will enable them to lessen the cuts necessary to balance their budgets during a recession. How prepared were the local governments of the Cleveland Fed’s Fourth District for the COVID-19 crisis?1 Looking at the most recent data available for a sample of the District’s largest cities and counties, we find that major local governments in the Fourth District were holding fund balances that were similar to or greater than their reserves in 2007, the year the Great Recession began. Some of the cities that had to slash their spending in 2009 and 2010 appear to have learned from that experience and have built up a deeper financial cushion since then. Likewise, some of the cities and counties that have lower balances now are those that had sufficient reserves in 2007 and were not forced to make deep cuts during the Great Recession.