Causes of Fiscal Crises in State and Local Governments

Financial insolvency is a rare occurrence in American state and local governments. However, when it does happen, as in the case of Detroit’s historical bankruptcy filing in 2013, the consequences for vital city services, public employees, and taxpayers can be devastating. This essay reviews existing and emerging research on the causes of government fiscal crises, paying particular attention to how social, economic, and legal constraints interact with the electoral incentives faced by public officials to create financial distress. It concludes by identifying a number of open questions that should guide future research, to help identify potential institutional and political reforms that can help avert future problems before they occur. When the city of Detroit filed for bankruptcy protection in mid-July 2013, it became the largest municipal bankruptcy in US history, with outstanding debt of nearly $20 billion. Although Detroit was by far the biggest city to go broke, it was far from alone. In the two years leading up to of its filing, two other major cities—Stockton and San Bernardino, both in California—filed for protection under the same section, Chapter 9, of the federal bankruptcy code. A few years earlier, another California city, Vallejo, announced that it could no longer pay its bills as they became due and sought protection of its creditors. Although it had emerged from the bankruptcy process in 2011, Vallejo again seemed poised on the precipice of a financial abyss at the time of Detroit’s filing. At first glance, the proximate causes of these high profile financial crises appear to be quite varied. Detroit succumbed to insolvency after decades of declining population, deindustrialization, and poor fiscal management. Stockton had bet heavily on the “infrastructure of play” (Judd, 2002), taking out substantial debt to finance the construction of minor league sports venues, revitalize its marina, refurbish its historic theater, and upgrade its Emerging Trends in the Social and Behavioral Sciences. Edited by Robert Scott and Kosslyn. © 2015 John Wiley & Sons, Inc. ISBN 978-1-118-90077-2.