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.
Within a two-week span in the summer of 2012, three California cities moved to file for bankruptcy protection. By the end of the year, nine others had declared financial emergencies. The state government offered no help, sticking to a long-standing tradition of leaving it up to local officials to fix their broken finances.
Rhode Island, by contrast, responded aggressively when Central Falls filed for bankruptcy protection in 2011. State officials appointed a financial manager, called a receiver, to make sure the city could pay its bills by cutting spending, raising taxes, slashing employee retirement benefits, and paying investors on the bonds they bought. The state’s action was a reason for Central Falls’ exit from bankruptcy last year after only 13 months, the shortest of several recent, high-profile municipal bankruptcies.
The difference between hands-off California and hands-on Rhode Island illustrates two sides of a discussion that is increasingly taking place in statehouses and city halls around the country because of cities’ particularly slow recovery from the Great Recession of 2007-09. The question comes down to what role, if any, states should play in helping cities, towns, and counties recover from serious financial trouble—what officials generically call intervention.
Against this backdrop, The Pew Charitable Trusts conducted a study that examined the range of state involvement in local government finances, drawing on current literature, statutes, a survey of state officials, and interviews with government finance analysts. It focused on identifying the characteristics of local financial distress, how those difficulties can escalate to state intervention or, in extreme cases, bankruptcy, and the relevant laws that states have in place. The research also considered the history of state intervention in the financial practices of embattled cities, why it matters to states, and how their practices differ. The findings are explored in detail in this report, but, briefly, Pew’s research shows:
Not every state may find that it needs to set up programs to intervene in local government finances. Of those that do, differences such as economic structure and political traditions underscore that there is no single model to follow in designing an intervention program.
Some states claim success from interventions. Most recently, Rhode Island’s effort helped to bring a quick end to Central Falls’ bankruptcy. Pew’s analysis found other promising approaches as well. Most notable among them is monitoring the financial condition of cities to mitigate and contain local budget stress. When state and local officials are vigilant in identifying local budget trouble early, they can act decisively to prevent a crisis that could force the state to step in. For example, North Carolina, despite high unemployment, has managed to escape serious local government budget problems in part because of its strong centralized system of monitoring and oversight.
Whatever approach state policymakers consider, it is important to design the intervention so that state officials turn the day-to-day management of city finances back to local officials as quickly as practical. In this way, state officials can reduce the tension between the city and the state that often accompanies interventions. Despite Rhode Island’s relative success in Central Falls, for example, there was lingering resentment over how long the state overseers would stay in the city to monitor its actions. The dispute went to a mediator, and the state returned control to city officials in April 2013.
Pew researchers also conducted a series of quantitative analyses to determine whether state intervention programs are correlated with strong local government financial health in the aggregate and found no such relationship, highlighting the largely reactive nature of state policy.
This report presents the findings of Pew’s analysis and also profiles seven states with and without oversight programs. By examining these individual states, Pew researchers were able to understand the patterns of state and local experiences with financial distress, including what motivates states to intervene or not, how political and economic conditions can affect a state’s decision on whether to get involved, and what results the state efforts have yielded. The following cases were studied:
State differences aside, Pew’s research did find a set of principles for states considering intervention programs:
This paper examines various intervention practices, identifies challenges, and elaborates on these 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.