Report

The State Role in Local Government Financial Distress

As cities confront financial challenges, states weigh whether to help them pull through

The State Role in Local Government Financial Distress
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Quick Summary

What role, if any, should states play in helping cities, towns, and counties recover from serious financial trouble, what officials generically call “intervention?”

The Pew Charitable Trusts conducted a study examining the range of state involvement in local government finances that drew on current literature, statutes, a survey of state officials, and interviews with government finance analysts.

"The State Role in Local Government Financial Distress" examines various intervention practices, identifies challenges, and elaborates on three key policy guidelines.

The analysis and state profiles can help inform state decision making about whether, when, and how to assist municipalities facing fiscal stress, the likely outcomes of various approaches, and the implications for cities, counties, states, and taxpayers. 

Overview

The Pew Charitable Trusts conducted a study examining the range of state involvement in local government finances. The research identified the characteristics of local financial distress, how difficulties can escalate to state intervention or in extreme cases, bankruptcy, and the relevant laws states have in place. The study also considered the history of state intervention in the financial practices of embattled cities, why it matters to states, and how practices differ.

The findings are explored in detail in the report, but briefly Pew's research shows:

  • Fewer than half of the states have laws allowing them to intervene in municipal finances.
  • Practices vary among the 19 states that have intervention programs.
  • In most cases, states react to local government financial crises instead of trying to prevent them.
  • States intervene to protect their own financial standing and that of their other municipalities, to enhance economic growth, and to maintain public safety and health.
  • Among states that intervene, some are more aggressive than others about stepping in to help.
  • Local officials often resent state officials infringing on their right to govern their own affairs.

the infographic[x]
 

State Interventions Map

Northeastern states are most likely to have intervention laws, which may reflect the distress in many older cities that is aggravated by the decline of manufacturing
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See the infographic.
 
 

Not every state may find it needs to set up programs to intervene in local government finances. Of those that do, differences in economic structures and political traditions underscore that there is no single model to follow in designing an intervention program.

Whatever approach state policymakers consider, it is important to design the intervention so state officials turn the day-to-day management of city finances back to local officials as quickly as practical. In this way, states can reduce the tension that often accompanies interventions.

This report captures the findings of Pew’s analysis and also profiles seven states with and without oversight programs. By examining these individual states, Pew researchers were able to understand the patterns of state and local experiences with financial distress, including what motivates states to intervene or not, how political and economic conditions can affect a state’s decision to get involved, and what results state efforts have yielded.

Those states were:

  • Alabama, home of the largest county bankruptcy in U.S. history, and California, where Stockton’s bankruptcy generated recent attention, were chosen as examples of states that historically do not assist local governments. New Jersey pared back financial aid to troubled cities, including its capital of Trenton, and is trying to figure out the state’s role going forward. 
  • North Carolina has the country’s oldest intervention program, emphasizing state-level monitoring. 
  • Michigan, where Detroit filed for bankruptcy in July 2013 and five other cities are under emergency managers, and Pennsylvania, where Harrisburg is run by a receiver, are deeply involved in local government finances but are affected by changing economic conditions out of their control that make it harder for cities to rebound.
  • Rhode Island strengthened a weak program after the budget emergency in Central Falls, adding a first-of-its-kind provision protecting investors in city bonds.

State differences aside, Pew’s research did find a set of principles for states considering intervention programs:

  1. States and cities should be proactive in detecting and tackling local government financial challenges through oversight of local finances and offering technical advice. Monitoring local government finances can result in early warnings, avoid crises, and send a positive signal to bond markets, as has been seen in New York and North Carolina. Pew also suggests that states and cities adopt multiyear financial plans.
  2. Creating intervention programs can come with costs when states are facing limited funds and staffing, which tests their ability to monitor local government fiscal trends or offer direct aid to struggling cities. As a result, state policymakers must understand the trade-offs within their own budgets and determine whether to intervene and at what level of support.
  3. States, when possible, should design interventions to involve all stakeholders in discussions, to be transparent with financial information, and to return control to local officials quickly. This promotes better cooperation between all parties as a local government recovers from a crisis. 

This paper examines various intervention practices, identifies challenges, and elaborates on these three key policy guidelines. The analysis and state profiles can help inform state decision-making about whether, when, and how to assist municipalities facing fiscal stress, the likely outcomes of various approaches, and the implications for cities, counties, states, and taxpayers.

 

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