Experts: States Should Have More Active Role Aiding Distressed Municipalities

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Experts say that states should take a more active role in municipal finances even with an improved outlook for city finances in 2013.

Too often, whatever actions states do take when it comes to distressed cities within their borders is just a cursory one, said Carol O’Cleireacain, an economic advisor and member of the State Budget Task Force. She said that for some places, more drastic– albeit politically unpopular – mvoes were needed.

“Part of what needs to happen with some of these states is to say there’s not a reason for some of these places to be here,” O’Cleireacain said Tuesday during a panel discussion at Governing’s Outlook in the States and Localities conference in Washington, D.C.. She noted that Flint, Mich., now under an emergency financial manager, fell into complete disarray after two General Motors plants there closed.

“What was Flint, Michigan? At some point you have to say that,” O’Cleireacain said. “That’s what leadership is about and we’re not seeing it.”

Frank Shafroth, director of George Mason University’s Center for State and Local Government Leadership, added that the concept of states interfering with city finances is an unpopular one on both sides. He said cities don’t want the states butting in and states generally don’t seem concerned that municipal distress could have an effect on the state level.

Paying attention to and monitoring municipal health would be a start, he said.

“If you have a radar screen that says so-and-so’s in trouble, you always have the option of saying, ‘Well gee. Bye bye!’” Shafroth said. “But you may want to help out.”

New York is taking steps in that direction. The state already has a history of stepping in with cash when needed. In 1975, it helped New York City avoid bankruptcy by advancing it money and setting up an independent corporation to sell bonds backed by the state. New York has also set up oversight boards for the cities of Buffalo and Troy, and Erie and Nassau counties.

And on Monday, State Comptroller Thomas DiNapoli announced his launch of a new monitoring system that would score cities based on their financial strain. But O’Cleireacain said the same old fix may not work this time.

“I don’t see anybody thinking creatively,” she said. “It is a lot easier to … bring in a control board. What does a control board do, unless it has the ability to get some resources from someplace else?”

The panelists acknowledged, though, that some states may not be able to pull of the roll of fiscal enforcer when the state’s own finances are in trouble. Illinois, for example has failed to pass pension reform for a retiree program that is now 40 percent funded. Earlier this week, Standard & Poor’s downgraded the state’s bonds to an A- because of the inaction.

“You don’t like to use the phrase failed state and I don’t want to use the word loosely but it is as close as we could see to a phenomenon like that,” O’Cleireacain said.

On the whole, however, city finances are in recovery mode, noted S&P Director of U.S. Public Finance Lisa Schroeer.

“We have seen more upgrades in municipal finance than downgrades,” she said, adding that many jurisdictions are trending flat or up in their spending this year.