Using Fiscal Ratios to Predict Local Fiscal Distress

Municipal fiscal distress experienced by cities such as Detroit, Michigan; San Bernardino,California; and Harrisburg, Pennsylvania, has generated an impressive body of work by researchers seeking to understand underlying factors in an effort to prevent future distress. Recent research has been informative and appears to be coalescing around a handful of predictive factors such as reserves and debt; however, the generalizability of the findings is limited because the research has focused on case studies or within-state analyses. This study draws from a large national sample of local governments in the United States over a 10-year period and incorporates robust methodology for rare events analysis. Consistent with previous research on local fiscal distress, we find evidence that unreserved general fund balances, unrestricted net assets, long-term obligations, and local unemployment are statistically associated with municipal defaults and bankruptcies.