Strengthening Local Fiscal Health

Strengthening Local Fiscal Health
Last Updated March 22, 2021

Local governments are essential to the nation’s prosperity—central to the quality of life, jobs, and long-term prospects of most Americans. However, research from Pew finds that even as many cities and towns struggle to recover from the Great Recession, new challenges are emerging. Local governments face costly infrastructure needs, reduced state and federal aid, and growing long-term liabilities.

Both state and local policymakers have a critical stake in ensuring that localities remain fiscally sound. Strong local economies, in turn, generate revenue for governments at all levels.

By working together, state and local decision-makers can strengthen cities’ long-term fiscal and economic well-being and generate opportunities for economic development. To inform these critical conversations, Pew conducts research on the fiscal landscape of cities, best practices for proactively assessing local governments’ financial condition, and promising policy options that can improve localities’ fiscal outcomes. 

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Local Communities Need State Help to Recover

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States benefit from the well-being of their localities, but also feel the pain when their communities struggle. When that happens, state governments can pay a price both fiscally and economically—because of reduced tax collections, lost jobs, diminished services, and, in extreme cases, costly state bailouts.

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Early Warning Systems Help Identify Signs of Fiscal Distress

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States have a pivotal interest in the fiscal health of their localities so that they can continue providing vital services to their citizens. Local government budgets have begun to feel the impacts of the recession, which probably will continue for some time.

State and local governments relied in part on debt for budgetary help in 2020
State and local governments relied in part on debt for budgetary help in 2020
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State and Local Governments Relied on Debt for Help In 2020

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State and local governments have sought a variety of ways to cope with the fiscal fallout of the COVID-19 pandemic and recession, including borrowing on the municipal bond market. But municipal bonds are commonly used to pay for major, long-lasting projects, so whether—and how—to use them to borrow for immediate budgetary relief can be a challenging question for government officials.

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Virginia System Helps Prevent Fiscal Emergencies

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In 2017, Virginia’s independent state auditor designated Bristol—a 17,000-person city in the far southwest corner of the state—as “fiscally distressed,” meaning that its ability to provide basic public services was at risk. In addition to facing cuts to essential services, localities with deep and persistent fiscal problems may require costly state assistance or even long and painful bankruptcy processes.

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A collection of resources to help federal, state, and local decision-makers set an achievable agenda for all Americans

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Data-driven policymaking is not just a tool for finding new solutions for emerging challenges, it makes government more effective and better able to serve the public interest. In the coming months, President Joe Biden and the 117th Congress will tackle a number of environmental, health, public safety, and fiscal and economic issues—nearly all of them complicated by the COVID-19 pandemic. To help solve specific, systemic problems in a nonpartisan fashion, Pew has compiled a series of briefings and recommendations based on our research, technical assistance, and advocacy work across America.

State Strategies to Detect Local Fiscal Distress
State Strategies to Detect Local Fiscal Distress
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State Strategies to Detect Local Fiscal Distress

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As local governments across the country struggle to resolve budgetary challenges, some states are exploring ways to help their counties, cities, towns, and villages avoid defaulting on loans or filing for bankruptcy.

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The State Role in Local Government Financial Distress

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iStock Note: In April 2016, this report was updated to include revised information about Louisiana’s intervention practices and to improve the clarity of citations. 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.