Analysis

Virginia to Warn Local Governments of Early Signs of Fiscal Distress

Virginia will create a system to alert local governments when there are signs that they may be in fiscal distress under a state budget provision that Governor Terry McAuliffe (D) signed into law April 28.

The step puts Virginia on a path to joining 22 other states that have policies or procedures in place to monitor the fiscal health of local governments, including counties, cities, towns, and villages, according to research from The Pew Charitable Trusts.

Identifying fiscal distress early on, before problems escalate, gives state and local officials more time and flexibility to respond—and avoid more serious situations. Such early detection can also help states protect their credit ratings and those of local governments, helping to ensure access to the best borrowing rates. For example, if states learn that local governments are struggling, they can provide technical assistance and help local officials develop budgets.

Virginia lawmakers expressed alarm last summer when they learned of a severe fiscal crisis in the city of Petersburg, about 24 miles south of the state capital of Richmond. Virginia does not allow its localities to file for Chapter 9 bankruptcy protection and previously did not have any mechanisms in place to intervene.

Petersburg officials eventually requested the state’s help, and Secretary of Finance Richard “Ric” Brown sent a team to determine the extent of the city’s problems. It found unpaid bills totaling close to $19 million and an estimated $12 million budget gap for fiscal year 2017. The city is considering an operating budget of $77 million for the upcoming fiscal year.

With the assistance of a consultant hired last fall, Petersburg officials have taken steps to balance the budget, including widespread spending cuts and hikes in taxes and fees, although it’s clear that there will be more difficult choices as the city works to improve its fiscal health.

Since last summer, lawmakers have held several committee hearings on how the state can try to prevent and address such problems in the future. From the start, lawmakers have clearly expressed a desire to avoid “bailing out” localities.  

Under the recently adopted budget, the Virginia Auditor of Public Accounts will review data on a regular basis to determine whether local governments are in fiscal distress and alert them if they are found to be. The measure also allows the auditor to conduct a deeper probe into the local government’s finances, if one is requested by local officials, and then notify the governor and other state officials of actions they may need to take to address the situation. The law would also allow the governor to reappropriate up to $500,000 to establish a fund that may be used to assist local governments in fiscal distress. Separately, it calls for the creation of a legislative joint subcommittee to examine issues contributing to budget problems and identify ways to solve them.

With this budget, Virginia has taken an important step toward creating a system to identify and address early signs of local fiscal distress.

Mary Murphy is a manager and Adrienne Lu is a senior associate with The Pew Charitable Trusts’ state and local fiscal health project.

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