Balkinization: Planning for Fiscal Resiliency in a Fragmented World

Planning for Fiscal Resiliency in a Fragmented World

Guest Blogger

For the Balkinization symposium on David Schleicher, In a Bad State: Responding to State and Local Budget Crises (Oxford University Press, 2023).

Sheila R. Foster

Scheichler’s In a Bad State is a wonderful account of the legal and economic history of state and local budget crises. In describing the “trilemma” that confronts policymakers and courts when faced with how to respond to these crises, Schleicher is deft in telling a story that presents only bad and worse choices, and terrible tradeoffs, necessary to stem the harm from economic decline and fiscal mismanagement. When local governments like Stockton and Detroit have poorly managed their debt obligations, policymakers can choose bailouts, austerity, or default but not all three (he says at most two). While policymakers and scholars are keen to focus on the events, circumstances, decisions, and forces that lead to financial trouble, Schleicher’s book holds important lessons for federal interventions when responding to future fiscal crises.

What most intrigued me about the book has less to with the book’s main subject, how federal policymakers should respond after local governments are in fiscal trouble and marching towards bankruptcy. Rather, I am interested in the kinds of lessons we might learn that can shape federal interventions to help avoid fiscal meltdowns in the future. One of Schleicher’s suggestions for policy reform is that the federal government adopt policies that help state and local governments be more resilient in the face of inevitable economic shocks. I love the idea of focusing on resilience even as his ideas for fiscal resilience fall short given what we know and suspect are likely to be some of the causes of future crises.

Setting aside the kind of endogenous drivers of municipal fiscal crises, such as debt mismanagement and dysfunctional governance, we have seen how various exogenous events or macroeconomic shocks can portend a fiscal meltdown. For example, both the COVID-19 pandemic and climate change threaten(ed) catastrophic economic consequences to cities and states. As Schleicher notes, the pandemic brought states and cities to an economic halt with vast revenue declines, high unemployment, exploding expenses. Some commentators predict that the acute shocks of climate events and infrastructure pressures likewise could be financially devastating to many cities and states, causing severe drops in revenue and increased expenses. Although the time horizon for these looming crises are unclear, past events in places like Puerto Rico suggest that the long-term costs of climate adaptation will add to already high debt burden and an increasing risk of default in many places.

The potentially sever fiscal consequences of exogenous shocks stem in no small part from the kinds of mobility patterns that these events trigger, or can potentially trigger, and which affect the tax-bases and fiscal solvency of these places. The pandemic sparked fears of a mass exodus from densely populated cities to suburban and non-metro counties, with potentially devastating fiscal consequences for large cities like New York and Chicago. However, while those fears did not fully materialize, the loss of commercial office lease renewals have left cities like New York, Boston, Atlanta, and San Francisco with a looming commercial real estate crisis which threatens their fiscal health. A commercial real estate crisis alone is unlikely to drive cities to the brink of fiscal insolvency in the immediate future. However, together with an exodus of affluent households, declining public transit revenues, increasing homelessness and street safety concerns, some scholars and commentators are predicting an “urban doom loop” that mirrors what happened to cities like Detroit. If the people who leave cities are richer and whiter than those who stay, as some argue could be one likely scenario, then it will amplify once again the ways that metropolitan segregation and fragmentation could become a facilitating force of fiscal crisis.

As he has done in previous work, Schleicher argues that one way to increase resiliency in the face of fiscal crises is federal government policy interventions to incentivize states to reform their laws making it easier for poor people to leave economically declining cities and regions for thriving ones. Such reforms would include reducing the regulatory barriers that make it difficult for people to transfer occupational licenses across state borders and zoning and other regulations that make it difficult to build new housing in growing cities and regions. He argues that the economic harm of fiscal crises would be smaller if unemployed people could leave places like Detroit and migrate to more opportunity-rich areas like Houston.

I wonder whether Schleicher would be open to similar interventions aimed less at mobility out of declining cities and towns and more at stemming the population (and tax-base) loss during times of fiscal crisis brought on by macroeconomic or exogenous shocks. In some cases, we could imagine federal interventions that incentivize or facilitate states to bolster regional economic cooperation so as to more evenly distribute the pain of an exogenous economic, health, or climate events or shock affecting the region. While we might otherwise want to leave localities to manage their own crises in most cases of municipal fiscal trouble, there are some scenarios in which the price of allowing these exogenous shocks to fall disproportionately hard on one city is too high. Detroit might prove to be an example of that.

Part of the fiscal fallout of Detroit was the ease of flight out of the city to adjacent suburban towns enabled by Michigan’s policies on municipal incorporation and annexation. As legal scholar Chris Tyson and sociologists Richard Farley and Mathieu Hikaru Desan have noted, Michigan’s Home Rule law facilitated Detroit’s fiscal decline in part by making annexation and mergers extremely difficult, leading to one of the most fragmented, racially segregated and economically stratified. metropolises in the nation. State law also incentivized regional property tax regressivity that has imposed a severe austerity on the city of Detroit and other high tax cities where the region’s Black working class remain segregated. It is not at all clear that Detroit’s current economic trajectory will be enough to overcome these persistent regional structural forces as it continues is decades long population decline, surrounded by economically prosperous suburbs.

Comparing Pittsburgh, another Rust Belt city hit hard by deindustrialization, to Detroit, Dean notes that one key structural difference between them is their relative level of metro job sprawl. Pittsburgh had one of the most centralized distributions of employment in the country among large metropolitan centers. The Detroit metro area, by contrast, had by far one of the most decentralized employment landscapes in the country. Any plan to turn Detroit around fiscally that does not rethink the city’s relationship to its wealthy neighbors, Desan argues, is not likely to solve much in the long-run.

Similarly, as Laura Napoli Coordes has argued, regional coordination mechanisms could play a role in Chapter 9 municipal bankruptcies like Detroit given regional fiscal externalities. A regional fiscal monitoring mechanism, she argues, could address inequalities and incentivize regional coordination. She cites as one example the city of Detroit's creation of a regional water authority during its bankruptcy which is credited with smoothing over relations between Detroit and its suburbs and for its ability to generate more revenue — “as a bond sale from the authority would likely fetch higher rates than a bond sale from the city by itself.”

Schleicher rightly challenges federal policymakers to help make the country more resilient against the economic shocks that are likely to lead to fiscal crises in the future. He is right to focus on inter-regional mobility and to want to encourage poor workers to move to opportunity and to lessen the fiscal stress on cities from populations who require services but cannot add to the local tax base because of declining employment opportunities. However, before we leave these places behind, federal policy might incentivize states to plan for resilience on a regional level particularly in the face of predicted massive economic and demographic shifts that are certain to bring some cities to a fiscal breaking point as a result of exogenous shocks. Some of these shocks, like future pandemics, may not be predictable. But others certainly are, such as climate change.

Cities and counties as diverse as New Orleans, LA and Norfolk, VA are vulnerable to these massive economic and demographic shifts but can also avoid them through smart regional adaptation strategies which likely require incentives for cooperation between localities. Such strategies might involve planned buyouts and relocation throughout a region, something that few localities can afford or plan on their own. As one recent study of vulnerable U.S. cities predicts, “the patchwork fallout of buyout programs or abandoned post-disaster neighborhoods show striking similarities to the tradeoffs and challenges faced by the industrial rust belt cities of North America… Following massive economic and demographic shifts, once booming cities became nearly empty, filled with delinquent and foreclosed properties, declining tax revenues and increasing infrastructure costs burdens.”

Perhaps like the COVID-19 disaster, the federal government will continue to come to the rescue of cities and regions struck by wildfires, hurricanes, droughts, and floods. However, more likely what is required is for the federal government to play a role in inducing states to create region-wide strategies to prepare for and avoid the coming costs associated with adapting to climate change and the transition in a new energy economy. This may be the only way to avoid worse consequences and costs down the road. The Inflation Reduction Act contains some of the promise of this as it is poised to deliver over seven billion dollars in direct grants to states and municipalities. Federal agencies can condition some of this funding on regional scale planning and strategies and fiscal mechanisms. These strategies can not only help localities adapt to climate change but also reduce the chances that the associated costs will not be born overwhelmingly by a few jurisdictions.

Sheila R. Foster is the Scott K. Ginsburg Professor of Law and Policy and Professor of Public Policy at Georgetown University. She can be reached at srf42@georgetown.edu

Posted 9:30 AM by Guest Blogger [link]