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Distressed Localities and the Growing Role of the States

Smart state leaders are recognizing that it costs a lot less to keep a struggling city, county or school district out of trouble in the first place.

The state of Michigan's finding last month that Royal Oak Township, a small suburb of Detroit, is in financial distress is indicative of the growing gap between the haves and the have-nots, a product of the phasing out of both federal and state revenue sharing and other programs intended to address the challenges of fiscal disparities at the local level.

The reduced federal and state roles can create a grinding cycle, in part because the combination of federal and state disinvestment can lower a city's, county's or school district's credit rating -- meaning the local entity will have to pay more to make urgent capital investments than its better-off neighbors despite having less ability to pay. This is particularly hard on the most-distressed localities: the greater the unemployment and poverty, the greater the loss of tax revenues, even as the demand for public safety and social services escalates.

As the combination of the new economy and federal policies have led to greater income disparities not only in but also between communities, some states have come to recognize that they can play an important role. Smart state leaders well understand that a city's failure will force an expensive state interjection of resources at far greater cost to the state and its economic well-being than if it had acted to prevent the problem in the first place.

Rhode Island, in the wake of Central Falls' bankruptcy, recognized both the human and fiscal costs -- not just to the citizens and public services in Central Falls but also to the state's economy -- of allowing a community to fail. Crafty state leaders fashioned innovative interventions, many of them involving volunteer teams of former city managers and state legislators, to help communities get back on their feet before they fell into steep distress.

Pennsylvania leaders are considering changes in state laws to more proactively address municipal fiscal stress. They are proposing changes to the state's 1985 Municipal Financial Recovery Act, better known as Act 47, in recognition that once a city is so designated it is unlikely to ever achieve recovery. Maryland has long recognized that cities with disproportionate levels of poverty and depleted tax bases confront much greater service demands. The state has stepped up to pay for -- and administer -- essential social services, accepting a human and fiscal cost far less than what would flow from any municipal bankruptcy.

Like Maryland, most states recognize that it can cost far less to act early rather than to wait until a city falls into distress or bankruptcy. Another way some smart state leaders are recognizing this is through state enhancement programs, similar to what countries like Canada and Germany use to ensure that all citizens in a state or province have access to affordable, essential services. In this country, states can, in effect, create innovative ways to back the borrowing credit of distressed local governments. In Rhode Island, for example, state Treasurer Gina Raimondo has proposed a municipal infrastructure bank to help cities and towns obtain funding for upgrades.

Approaches like these are key to making sure that taxpayers of distressed local governments will not have to pay disproportionately higher fees or taxes for public works and services than their wealthier neighboring communities. This can be especially important to smaller, rural communities like Oso, Wash., where events far beyond local control -- in this case, a mammoth mudslide -- have cost so many lives in recent days.

Americans strongly support helping communities like Oso that are devastated by catastrophic events. But there has been less recognition of the more silent attacks of poverty, the economy, drugs and violence that have left too many communities inadequately fiscally equipped to be able to get back on their feet on their own. So it's a sign of hope that many states are coming to recognize the critical role they have to play insuring that all of their communities have an equal chance to succeed.

VOICES is curated by the Governing Institute, which seeks out practitioners and observers whose perspective and insight add to the public conversation about state and local government. For more information or to submit an article to be considered for publication, please contact editor John Martin.

Director of the Center for State and Local Government Leadership at George Mason University
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