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Causes and Consequences of Fiscal Stress in Michigan Municipal Governments

Mark Skidmore and Eric Scorsone

February 2010, English

Over the last several years Michigan municipalities have experienced significant and ongoing fiscal crises. The purposes of this study are to identify the underlying causes of fiscal hardship, and then systematically examine how municipal officials have responded to these difficult circumstances. Using data for nearly all municipalities in Michigan for years 2005, 2006 and 2007, we find that nearly all municipalities experienced some level of crises, but there is variation across the state both in the severity and the sources of fiscal stress. We also find that while nearly all functional categories are affected by fiscal stress, expenditures in the Public Works and especially Health and Welfare categories were most vulnerable. Expenditures in essential services such as Public Safety were least responsive to fiscal stress. Our research may offer critical insights regarding the likely implications of the real estate crises for communities in other parts of the country that have, until very recently, enjoyed relative economic prosperity and limited fiscal challenges.