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Defeating Fiscal Distress: A State Responsibility

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Defeating Fiscal Distress: A State Responsibility

July 8, 2013

Across the nation, municipal budgets are tight, as annual cost increases in many spending categories continue to exceed revenue growth. Default will likely remain rare among the 90,000 local governments in America, but states should expect it to become more common than it has been in the past. Though the causes of distress can be difficult to isolate, it always commands significant public attention, even in the case of small communities. States cannot stand idly by. New policy solutions at the state level will be necessary to anticipate, prevent, and manage distress. While some mandate relief is important, in general the solution is neither more local autonomy nor municipal bankruptcy. States should develop new oversight, intervention, and takeover policies.

State and local governments cannot count on economic growth to alleviate distress, nor would it be wise for them to try to engineer growth by adopting more aggressive economic policies. Better fiscal policymaking is what cities need, particularly with regard to personnel spending, since salaries and benefits dominate cities’ budgets.

There are four possible approaches to prevent and manage fiscal distress: mandate relief, oversight, intervention, and bankruptcy. Intervention and oversight should take the lead, while also allotting a role to mandate relief and bankruptcy. State governments should coordinate the four into a structured approach to preventing and managing fiscal distress.

  1. State governments, particularly those in states with strong public-sector unions, should grant mandate relief to local governments in matters of personnel spending.
  2. States should strengthen existing oversight policies toward local finances.
  3. States should develop strong and general intervention policies before cases of fiscal distress arise.
  4. States should allow local governments to file for Chapter 9 municipal bankruptcy only as a last resort. Additionally, a state-appointed authority should guide localities through bankruptcy.