States deal differently with local fiscal crises, national study finds

BOWLING GREEN, O.—If there’s one thing the 50 states have in common when dealing with local government fiscal crises, it’s that they tend to get involved after the fact.

Some states take a hands-off approach, believing in local control or lacking the human or financial resources to get involved, says Dr. Beth Walter Honadle, director of Bowling Green State University’s Center for Policy Analysis and Public Service. Other states, including Ohio, have clear definitions of a fiscal crisis—inability to pay employees or vendors, or to make debt payments, for instance—and an elaborate system for intervention when one occurs.

Still others tread a middle ground.

Regardless of the role they play, states can learn from each other’s experiences, says Honadle, a professor of political science at BGSU who recently completed a national study of the roles states take in dealing with local governments’ fiscal crises.

In a telephone survey conducted between April and August of this year, she talked to 61 members of the National Association of State Auditors, Comptrollers and Treasurers, a group of high-ranking financial officials in the best position to know their states’ roles. Her findings will appear in a forthcoming issue of the International Journal of Public Administration devoted to local government fiscal crises.

Officials surveyed were asked how their states predict, avert, mitigate and prevent the recurrence of a local fiscal crisis. States generally aren’t proactive, the responses indicated, but they do commonly provide technical assistance to local jurisdictions.

Recent local-government fiscal crises were reported by 36 states—a higher number than she had expected, Honadle said. One notable exception was Oklahoma, whose state auditor told her that the question wasn’t applicable because his state doesn’t have local government fiscal crises. In Oklahoma it’s a felony to have a budget out of balance, so any elected local officials whose budget goes into the red would go to jail.

While states don’t have enough staff to work directly with all the jurisdictions within their borders, they generally do feel obligated to help local governments—especially the small, rural ones—and make sure the locals follow the rules, Honadle said. The states try to provide technical advice, training and education, sometimes through statewide associations representing local governments, she added.

States tend to get more heavily involved to aid economic development; to protect their bond rating, if necessary, or if “cleaning up” a situation after the fact is perceived to be more costly than preventing it. “The greater the financial stake the state has in it, the more likely they are to get involved,” Honadle noted.

Among the possible state responses to a crisis is legislative action, whether locality-specific special legislation or reform legislation to remedy a situation or conditions across the board. Calling legislative reform “a healthy thing,” Honadle said Arizona, California, Colorado and Minnesota have passed laws to prevent crisis-causing conditions from recurring.

“It’s often a last-ditch effort” when the state intervenes, she said, but Ohio is among the exceptions. Ohio’s system includes fiscal “watch” and “emergency” designations that are determined by various measures. The “emergency” category entails appointment of a seven-member oversight commission, which must approve a plan prepared by the jurisdiction for getting out of the emergency. The state provides fiscal supervision all along the way.

Ohio’s system is “one of the very best monitoring programs for local governments” not only in the United States, but in the world, Honadle said.

(Posted December 4, 2002)