The Symptoms and Consequences of Fiscal Distress in Municipalities: An Investigation of Reductions in Public Services

ABSTRACT: This paper uses survival analysis to investigate financial indicators of impending reductions of public services provided by U.S. municipalities. We hypothesize that reductions in public services are positively correlated with revenue risk and debt usage, and negatively correlated with organizational slack and entity resources. We develop and test a model to predict whether a municipality will significantly reduce public services. The model correctly classifies up to 83 percent of the sampled municipalities. The results show that the most important signal of an impending reduction in public services is a high level of intergovernmental revenues relative to total revenues. These results provide important information to citizens, policy-makers, and stakeholders interested in preventing, detecting, and mitigating fiscal conditions that could lead to a reduction in public services. JEL Classifications: H72, H83, M48 Data Availability: Data are available from public sources identified in this study.