Even setting aside the possibility of insolvency, the coming years could put to the test the historical American assumption that local government is the best form of government.
Unlike their federal and state colleagues, local officials don't have the luxury of passing the buck to someone below them. When the dollars run short, they must raise taxes, cut services or consider filing for bankruptcy protection. State and local governments cannot run deficits.
"I think a number of years ago, prematurely, the metaphor of 'perfect storm' was used to describe what was happening to state and community finances," said Geoffrey Beckwith, president of the Massachusetts Municipal Association and a board member of the National League of Cities. "But that was really just a warm-up, sort of a tropical storm, compared to what communities and the states and the federal government are all going through now."
The figures are bleak:
— More than half the 335 counties and 646 cities analyzed by McDonnell Investment had deficits in their general funds in 2009, a trend that appeared to hold true in 2010. Audits showed 12 percent of counties, 16 percent of cities and 22 percent of school districts had less than a month's worth of money in their general funds, a precariously low level.
— For eight consecutive quarters, downgrades of municipal bond ratings have exceeded upgrades, according to Moody's Investors Service. And that trend is likely to continue in 2011 as local governments face "unprecedented financial strain," said Anne Van Praagh, Moody's vice president and senior credit officer.
— 87 percent of cities were less able to meet their fiscal needs in 2010 than in the previous year, according to a survey by the National League of Cities. And nearly two-thirds of surveyed counties said they anticipated revenue shortfalls this fiscal year, according to the National Association of Counties.