As the coronavirus pandemic persists, rising costs and revenue shortfalls will challenge local officials’ ability to balance budgets while meeting residents’ needs. States can play a vital role in stabilizing the fiscal health of cities and counties by helping their officials identify growing problems and sound solutions. Small localities in particular may lack the capacity and resources to withstand and respond to the extraordinary budgetary challenges ahead. Timely assistance from state government at this critical time can mean the difference between fiscal stability and fiscal emergency. Three steps that states can take are:
To identify and address fiscal problems before they escalate into crises, states can implement a regular process to assess and track local fiscal conditions. A sound approach to local monitoring can help states detect fiscal
distress early on so that both the state and locality can avoid more costly interventions. While the exact design will need to be adapted for each state, a high-quality system:
Having procedures like these in place increases rigor and consistency. For example, Nevada examines local government audits, budgets, and other financial statements annually for 27 indicators of fiscal distress.1 When a local government meets the criteria for any indicator, Nevada can place it under fiscal watch, which means the state will monitor it more closely and potentially offer technical assistance to head off a financial emergency.2
A strong monitoring system also improves transparency and helps local governments and residents take proactive steps to address problems. For example, New York implemented a system in 2013 that places localities into four categories: significant fiscal stress, moderate fiscal stress, susceptible to fiscal stress, or no designation.3 The state releases the results annually to inform the public of the challenges facing their local governments.
A monitoring system’s success depends on state and local cooperation. Establishing good relationships with local governments can enhance communication, collaboration, and outcomes. Some states have modified their approaches to account for local feedback. In 2018, Virginia refined its 1-year-old system, in part to respond to local governments’ concerns that the state was evaluating their financial health relative to other localities rather than on an individual basis.4
States can also give local officials technical assistance and other resources to help them resolve fiscal problems before those problems become unmanageable. States can make resources available to local governments showing signs of fiscal distress or to all local governments regardless of fiscal conditions. Even during periods of economic growth, states can help strengthen local fiscal foundations for the long term.
Many states provide support in the form of technical assistance. Common types of this assistance include:5
Each state should be flexible and creative in meeting the needs of its local governments while building trust with local officials. For example:
Although the dynamic between each state and its localities is unique, states should consider regularly communicating with and providing critical resources and expertise to their local governments to bolster sound fiscal management.
When a local government falls into fiscal crisis, states may choose to help it recover. State intervention may require exerting some authority over the city or county’s finances to mitigate the damage to its economy and both the state’s and locality’s financial standing. For example, a fiscal crisis may harm a city’s credit rating and hurt its ability to borrow money for infrastructure and other public amenities that attract residents and businesses. States can take actions to address those challenges. They can also minimize interruptions to local services that are critical to public safety and health.
The entities commonly responsible for carrying out the intervention are a financial manager hired from the outside, a state agency, and a state-appointed commission.10 Typically, the designated authority has a hands-on role in supervising the locality’s financial management and planning. Although intervention practices vary widely, some common types include approving bond sales or renegotiating the terms of existing bonds; increasing existing taxes and fees or levying new ones; and renegotiating labor contracts.
State policymakers should assess the costs and benefits of different types of interventions before acting. Regardless of the approach, states should consider three key steps:
Taking these steps builds trust, minimizes tension, and promotes better cooperation between all parties as a local government recovers from a crisis.
A locality’s road to recovery is often painful and costly once its finances decline enough to warrant state intervention. States can best avoid this outcome by taking a proactive rather than reactive approach to local fiscal distress.
There are a range of measures that states can take to support the fiscal health of their local governments. Policymakers should keep in mind that timing can be critical. While state intervention in response to a fiscal emergency can be successful, it can also be costly and sometimes not welcomed by local officials and residents. By monitoring local fiscal conditions and acting early, states can help local governments address problems at the outset and try to avert more severe fiscal challenges.