Beyond State Takeovers: Reconsidering the Role of State Governments in Local Financial Distress, with Important Lessons for Michigan and its Embattled Cities

Abstract

This report, completed with the generous support of the C.S. Mott Foundation and Michigan State University, uses a multi-pronged, multi-method research program to assess the crucial but often overlooked role of state governments in shaping the ways in which cities respond to financial difficulties. Based on our analysis of a unique, nearly half-century-long dataset of state and local financial and policy information and correspondence with state officials, analysts and legal experts involved in state-local fiscal affairs, we elaborate several key findings, notably that fiscal distress is not simply a local problem and that some states incubate local financial distress by simultaneously driving up spending pressures on cities whle curtaility the capacity to raise critical revenue. This report recommends creating a state agency that coordinates services to local governments and offers technical support and fiscal monitoring along with raising awareness among citizens and state decision makers that the causes of fiscal distress are not solely at the local level.

Publication
Michigan State University Extension
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One provocative pattern to emerge from the Great Recession is that instances of acute local fiscal distress have clustered in certain states and not others. As recently as last year in Michigan, a state appointed Emergency Manager was operating in each of 17 local governments and school districts. A recent California Policy Center report suggests that more than a dozen cities and counties in California – a state that has already experienced three recent, high-profile municipal bankruptcies and a near-bankruptcy in San Jose, the `capital of Silicon Valley’ – are on the cusp of defaulting on general obligation bonds.

With the generous support of the C.S. Mott Foundation and Michigan State University, we have engaged in a multi-pronged, multi-method research program to assess the crucial but often overlooked role of state governments in shaping the ways in which cities respond to financial difficulties. This report, based on our analysis of a unique, nearly half-century-long dataset of state and local financial and policy information and correspondence with state officials, analysts and legal experts involved in state-local fiscal affairs, elaborates several key findings:

This report’s practical recommendations are aimed at assisting the C.S. Mott Foundation, state and local officials, and Michigan residents in identifying a more effective policy and legal approach to local fiscal crises. These are not overly startling recommendations, yet they are easy to neglect because policymakers tend to focus more on shortterm political gain rather than the histories and unintended consequences of policies that, over time, become increasingly difficult to alter. Some key recommendations: