Tag Archives: Michigan State University

Municipalities in fiscal distress: state-based laws and remedies

The Great Recession of 2008 “stress tested” many policies and institutions including the effectiveness of laws meant to handle municipal fiscal crises. In new Mercatus research professor Eric Scorsone of Michigan State University assess the range and type of legal remedies offered by states to help local governments in financial trouble.

“Municipal Fiscal Emergency Laws: Background and Guide to State-Based Approaches,” begins with some brief context. Most municipal fiscal laws trace their lineage through the 1975 New York City fiscal crisis, the Great Depression and the 19th century railroad bankruptcies. Writing in 1935, attorney Edward Dimock articulated three pieces to addressing municipal insolvency:  1) oversight of the municipality’s financial management 2) stop individual creditors from undermining the distressed entity and 3) put together a plan of adjustment for meeting the creditor’s needs.

These general parameters are at work in state laws today. The details vary. Some states are passive and others much more “hands-on” in dealing with local financial troubles. Scorsone documents these approach with a focus on the “triggers” states use to identify a crisis, the remedies permitted (e.g. can a municipality amend a collective bargaining agreement?), and the exit strategies offered. Maine has the most “Spartan” of fiscal triggers. A Maine municipality that fails to redistribute state taxes, or misses a bond payment triggers the state government’s attention. Michigan also has very strong municipal distress laws which create, “almost a form of quasi-bankruptcy” allowing the state emergency manager to break existing contracts. Texas and Tennessee, by contrast, are relatively hands-off.

How well these laws work is a live issue in many places, including Pennsylvania. In 1987 the state passed Act 47 to identify distressed municipalities. While Act 47 appears to have diagnosed dozens of faltering local governments, the law has proven ineffective in helping municipalities right course. Many cities have remained on the distressed list for 20 years. Recent legislation proposes to allow a municipality that can’t “exit Act 47” the option of disincorporating. Is there a middle ground? As the PA State Association of Town Supervisors put it, “If we can’t address the labor issues, if we can’t address the mandates, if we can’t address the tax exempt properties, we go nowhere.”

Municipalities end up in distress for a complex set of reasons: self-inflicted policy and governance failures, uncontrollable social and economic shifts, and external shocks. Unwinding the effects of decades of interlocking problems isn’t a neat and easy undertaking. The purpose of the paper isn’t to evaluate the effectiveness various approaches to helping municipalities out of distress, it is instead a much-needed guide to help navigate and compare the states’ legal frameworks in which municipal leaders make decisions.

 

 

 

Would a Biennial Federal Budget Save Money?

According to news reports, a number of members of Congress are urging the “Super Committee” to recommend that the Federal Government move to a two-year budget cycle. The advocates of biennial budgeting span the political spectrum and include Democrats Jeanne Shaheen and Kent Conrad as well as Republicans Paul Ryan and Johnny Isakson.

The idea has long been championed by fiscal conservatives who hope that it will reduce spending. But does it? According to Paula Kearns of Michigan State University, the theoretical impact of a biennial budget process is ambiguous. It might decrease spending if it shifts power from the legislature to the executive, but it might increase spending if it makes the spoils of lobbying that much more durable and encourages special interest groups to lobby for largesse. In a 1994 study, Professor Kearns examined the impact of biennial budgeting at the state level. After controlling for other factors, she found that states with a biennial budget process actually spend more per-capita than states with an annual budget process.

This result was confirmed in a 2003 study by Mark Crain (now of Lafayette College, though he was at GMU when he conducted this research). Crain found that, other factors being equal, states with a biennial budget process spend about $120 more than states with an annual budget process (I’ve converted this figure into 2008 dollars).

Of course, per-capita spending isn’t everything. Maybe biennial budgeting leads to more spending, but it is better spending?

For a review of this and other institutions that affect spending, see my new working paper with Mercatus Center Masters Fellow, Nick Tuszynski.