4 things everyone should know about state financial takeovers

When states intervene in local finances, it tends to stir up a lot of old wounds.

Photo credit: Liz Farmer

Happy Finance Friday! The other week, I wrote my final installment for my series on Chester, Pennsylvania’s bankruptcy for Route Fifty. It was about state oversight of fiscally distressed cities and the main point was that state oversight works best when local officials and state officials can find a way to work together. Of course, early warning systems are even better and on the other end, there’s not much you can do when city officials don’t want to cooperate (as was the case in Chester for a long time). 

The story was tough to write because I had plenty of information and side points to selectively weed through and there’s a lot that didn’t make the cut. (Like the fact that the city receiver’s chief of staff made a whole batch of buttons like the one in the photo and passes them out around the city.) But, hey, that’s what a Substack is for! This week, I’ll share some of the main political, financial and historical lessons around states’ oversight of cities.

Oversight programs are born during a crisis

States tend to think it’s a good idea to start monitoring their localities’ finances only after things go south. During the Great Depression almost a century ago, North Carolina and New Jersey had an enormous number of local governments default on debt. Following that, both states developed requirements for local governments to meet before they issued debt. In fact, North Carolina's Local Government Commission actually sells the bonds on behalf of the local government.

In the 1980s and ‘90s Pennsylvania and Michigan enacted their oversight programs after many of their localities fell into decline due to the loss of steel, coal and auto industries. Following the Great Recession, New York established a fiscal stress monitoring program designed to be an early warning system for local government distress. More recently, California, which has long monitored and intervened in school district finances, launched a  “local government high-risk dashboard,” a system that is designed to provide a snapshot of how 471 cities around the state are doing financially.

The cause of fiscal distress isn’t really about money

Yes, cities don’t become fiscally distressed unless they have chronic revenue and spending imbalance. But the root cause goes beyond that. “We are not here to simply solve a math problem,” Chester Receiver Michael Doweary told me recently. “We’re here to fix a city. Balancing a budget is necessary, but not sufficient to fix Chester. Bankruptcy is one tool to get us closer to fixing the city, and we understand both its powers and its limitations.”

With nearly every city that falls into distress, there’s an economic event that happens first. It could be sudden—like a subprime mortgage crisis—or gradual like the loss of a major industry. The distress happens when local (and sometimes state) leaders fail to devise a sustainable economic solution in a way that fits with the city’s identity.

All that said, fixing the problem is like backing out of the situation. It’s the insolvency that gets everyone’s attention and that has to be addressed first. As my friend and colleague Mark Funkhouser likes to say, you can’t take care of the people without taking care of the money.

Small to mid-sized cities get ignored until it’s too late

Think of Flint, Michigan compared with Detroit. When Detroit declared bankruptcy in 2013, it was the largest ever municipal bankruptcy and it seemed like everybody rose out of the woodworks to philosophize about globalism, the decline of U.S. manufacturing and how it was imperative that Detroit rise again. Emergency manager Kevin Orr’s every move was scrutinized. Meanwhile, Flint had been placed under emergency management two years prior. Studies later showed that the wide-ranging authority of the emergency manager law and the resulting lack of accountability of the manager in place in 2014 contributed directly to Flint’s devastating water crisis.

These same issues are on display in Chester, which is a 30-minute drive from Philadelphia. The city’s director of finance, Councilmember William Morgan, was five years old when Chester was first placed under state oversight. The casino that opened there in 2010 changed its name affiliation after two years from Chester to become Harrah’s Philadelphia Casino and Racetrack. Chester is where the region’s water treatment plant and trash incinerator were placed.

And with the exception of the area around Widener University, which seems to have an invisible wall around its campus, the city’s streets are strewn with trash because people use Chester as a dumping ground. Mayor Thaddeus Kirkland’s administration just launched an anti-dumping initiative but it’s been a huge problem for years. “These folks actually come into our community, they’ll load up their trucks, they’ll load up a U-haul and come in here at night time to dump them,” Kirkland told me. 

That certainly sends a message.

Still, you can’t help those who don’t want it

Unsurprisingly, city officials don’t like state officials telling them what to do and might choose to instead ignore advice, not provide documents, return phone calls, etc. Plenty of Pennsylvania cities have lingered in the municipal distress program, begrudgingly plodding slowly along. But Chester’s lack of any action went on for the first 20 years of oversight until about 2017 when Kirkland became mayor. (That mild cooperation lasted until 2020 when the state appointed a receiver and the walls went back up.)

When officials first visited Chester in 1995, they “started opening up desk drawers and filing cabinets and there were piles and piles of bills that hadn’t been paid,” Fred Reddig, a retired state official who has coordinated recovery plans for a number of distressed municipalities, told me. He described Chester’s financial state back then as a “fiscal morass” made up of a “significant” amount of unpaid bills, legacy costs and pension plan liabilities. 

Nearly three decades later, all of these problems are worse. 

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