Abstract: We construct a novel data set on the fiscal position of municipalities in the United States and document a secular decline in their financial health. Our data combines financial data from the Annual Comprehensive Financial Reports (ACFRs) of municipalities along with Census data of their revenue and expenditure cash flows. We find that 61% of municipalities operate with a negative net position---akin to a negative book equity position in the corporate context. We find that most of the decline originates from the accumulation of legacy obligations, i.e., pensions and other post-employment benefits (OPEBs); this is recognized by municipal bond markets through higher credit spreads. Since accounting values are backward looking, we turn to the market valuation of local governments' equity by estimating an SDF that matches the valuation of a wide range of assets in the economy to price untraded future tax and expenditure claims. We find that the market values of equity are highly correlated with the book values. The negative equity position---in terms of book and market values---for some local governments suggests the presence of implicit insurance by state and federal governments. Our results suggest that as many as half the municipalities with negative market value of equity would need 10 years of higher government intervention.


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