The Impact of Fiscal Stress on Local Government Fiscal Structures: An Event Study of the Orange County Bankruptcy

Abstract

I analyze the effect of fiscal stress on local government fiscal structures. In 1994, sudden investment losses of nearly $1.7 billion led to Orange County's default on debt obligations and bankruptcy. This event study provides a descriptive analysis of one of the most extreme fiscal crises in recent decades. I use a synthetic control methodology to measure the impact of the investment losses and find the investment losses resulted in Orange County total revenue falling by 12 percent, cash and securities by 66 percent, and total expenditure by 11 percent, while total debt increased by 17 percent.