Finance

All Fiscal Help Is Local

The list of cities in fiscal stress is growing. Will states intervene to help them work out their fiscal problems?
by | January 13, 2011

These are challenging times for localities: Cities and counties are reeling from devastatingly low tax and fee collections, extraordinarily high demand for services and a disheartening diminishment in state aid. There's a list of growing cities in fiscal stress, and the media is full of stories about imminent municipal bankruptcies.

What's sometimes forgotten in all the chatter about possible bankruptcies on the local level is that many states have a method of intervention to help a city or county work its way out of its fiscal problems. It's called a fiscal oversight board. New York City overcame its fiscal crisis in the 1970s with the help of such a board, as did Miami and the District of Columbia in the 1990s. More recently, Rhode Island put one in place in Central Falls.

Clearly, fiscal oversight boards are a tool many states use -- or can use. I talked with Beth Honadle, a professor of planning at the University of Cincinnati, and author of "The States' Role in U.S. Local Government Fiscal Crises," which ran in a 2003 edition of the International Journal of Public Administration. She is currently researching a follow-up report on state-local relationships, and spoke with me about the role of state-appointed fiscal oversight boards and what they can and cannot do to help localities. Here's an edited transcript of our conversation.

In your 2003 article, you cited New York City's 1976 fiscal crisis as "a wake up call for every other state." Many cities and counties are currently facing challenging times. Are we about to have a round of wake up calls?

You have to distinguish between crisis and stress. Crisis is when a city is in jeopardy of not functioning -- of defaulting on its debt, not meeting payrolls or something like that. Stress is less clear cut. A city can be strapped or facing a lot of obligations, and looking hard for ways to make ends meet. In 1976, New York City was going bankrupt, so it clearly was in crisis. When a city reaches that state, something has to be done.

Why would it be in a state's interest to do something?

Most would rather not do something unless they have to. The main reason a state would act is when it sees a stake in acting. It could be in a state's interest if it perceives its bond rating is in jeopardy. Or if the deterioration of services and quality of life in the city are so imperiled that, politically, the state has to step in and do something for its citizens. States also tend to get involved if the crisis in a particular local government has the potential to affect surrounding jurisdictions. They would want to address something so it doesn't lap over into other jurisdictions.

When they do intervene by setting up a fiscal oversight board, what can that board do?

There would have to be state statute or law that allowed for that in the first place. If a state appointed a board, sometimes there's collaboration between the state officials and local officials as they try to work out the mess. Here in Ohio, we have a fiscal watch and warning program through the state auditor's office. They have sometimes worked with local governments to help them through the problem. In other states, the state has gone in and taken over. We saw that in some cities in Michigan a few years back where the state moved in and was pretty controlling. The oversight board has a range of tools: They could require the city to cut expenditures, or submit a balanced budget for a certain period of time, say two years -- after which they would be allowed to operate on their own again. It's really a lot like receivership.

What do the boards bring to the table?

An independent perspective. A fresh point of view. Sometimes local officials have welcomed the help. It gives them independent support for making the hard choices they have to make. The board may help city officials identify different sources of revenue or areas where they can defer payments to keep things in balance. When I did research for my 2003 article, I was told that in New York state they had an ad hoc approach to dealing with each fiscal crisis. The state tailored the solution to a particular crisis.

You said earlier, intervention was costly to the state. In what ways?

If there's a transfer of resources, whether dollars or tax relief, it could cost the state treasury. There may be state personnel involved. The state may lend technical assistance. Those are costs. But there's also a cost of inaction. A state has to weigh the trade-offs of not resolving the crisis.

Your article talks about other ways a state can help a locality.

There are a lot of things a state can do before a city is in crisis. First, they can try to monitor fiscal health and try to anticipate that there may be problems on the horizon. By doing that, they can sometimes prevent the problem from happening. A state could help a locality restructure its debt, give advice, temporarily give technical assistance or budget help. If the locality does get into more of a problem, the state could try to mitigate it -- help the locality spread out payments or reorganize how it is doing things. Only as a last resort are we talking about financial control boards.

Right now, with states in fiscal stress, are they in any shape to help localities?

It's questionable how much they are going to be able to help at this time. The recent data suggests states are doing better, that revenues are up a little. One of the main points I want to make with respect to local finances is this: An ounce of prevention really is worth a pound of cure. If a state can help a locality avoid a situation where it cannot meet its obligations, it will be less costly and more orderly than if that city or county has to be taken over by the state.

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