SSRI Manager for Special Projects Jason Shumberger co-authored this article on state government takeovers.
Local governments provide most of the day-to-day public services—police and fire protection, schools, trash collection, utilities, sewers—that Americans rely upon. US local governments also operate under strict balanced budget requirements, which means that they must raise sufficient revenue each year to meet their expenses. These governments usually walk this fiscal tightrope successfully, but, sometimes, they slip. Worse, in rare cases they fall off the rope entirely. When that happens, state governments may intervene to mitigate the resulting damage from a local financial crisis. The most extreme state intervention is an outright takeover of a distressed local government, such as what occurred in Flint, Michigan from 2011 to 2015. When this occurs, the decision-making authority over a locality is surrendered by local officials to state-appointed emergency financial managers (EFMs). In new research, we find that EFMs are no better at resolving fiscal crises than the local elected officials they replace.
Can State Takeovers Solve Fiscal Crises?
Periodically, local governments fail to raise sufficient revenue to meet their financial obligations. Governments typically weather these periods of fiscal stress by tapping into accrued reserves, increasing taxes or fees, or cutting expenses. Local officials have incentive to delay the actions as they are usually unpopular with voters. In some rare cases, failure to act can cause ongoing budgetary challenges to metastasize into a full-blown crisis.
States regularly intervene in such local fiscal crises. While the specific provisions vary across states, the most severe of these interventions is a state takeover. Takeover laws enable a state’s government to remove decision-making authority from local elected officials and transfer it to state-appointed emergency financial managers. Twenty US states possess the legal authority to engage in a takeover of a financially distressed local government. The logic behind a state takeover is simple: if local officials cannot resolve a financial crisis, new management is needed.
The central appeal of emergency financial managers (EFMs) is that they can enact the necessary but politically unpopular reforms to resolve a financial crisis. After all, EFMs need not fear electoral consequences for their decisions. But critics argue that the unilateral authority and unelected nature of EFMs violate the central tenets of American democracy. They also question whether EFMs possess sufficient local knowledge and expertise to resolve the complex challenges facing distressed local governments.
The water contamination crisis in Flint, Michigan is one notable example of EFM decision-making that resulted in real harm to thousands of people. This raises the important and previously unanswered question: are EFMs better at resolving local financial crises compared to the local officials they replace?
Do Takeovers Actually Improve Local Financial Outcomes?
The major challenge of assessing the performance of EFMs is that we cannot know what would have happened in the absence of state intervention. This problem is compounded by the fact that few states that possess the legal authority to engage in a state takeover have acted on it. Further, most local governments are financially sound and are therefore at no real risk of a state takeover.
We resolved these challenges using statistical matching techniques. First, we identified eight state takeovers that occurred in Michigan and Pennsylvania between 2009 and 2014. Then we identified a set of 40 municipalities that 1) were in states without takeover laws, and 2) experienced financial crises at the same time with the eight municipalities that received a state appointed EFM (Table 1). We then evaluated the performance of both sets of municipalities along several financial health indicators prepared from audited financial reports spanning 10 years.
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