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

Noah Kazis 

As a matter of both craft and substance, David Schleicher’s In a Bad State pulls off a remarkable high-wire act. It makes municipal finance—always important, but rarely enthralling—downright dramatic. It zooms from seemingly-dusty 19th century railroad cases to the heated fights over COVID relief, stopping at famous and forgotten fiscal crises of the 20th century alike. And it synthesizes these disparate examples without once slowing. At each of those points, Schleicher speaks in multiple registers: here a point for the legislative aide about their options for refinancing municipal debt, there a point for the lawyers and historians about municipal debt’s role in the origins of the Erie doctrine or the unraveling of Reconstruction. This is a book approachable enough for policymakers, while rich enough for scholars to draw from for years. It’s no mean feat to keep this all together.
 
And the book plainly succeeds at what I take to be its two main goals. The first (and stated) goal is to better explain federal policymakers’ aims and options when faced with subnational fiscal distress (page 6). The existing literature, as Schleicher describes it, has emphasized a binary tradeoff between the macroeconomic relief provided by bailouts (or more general federal spending) and the avoidance of moral hazard, in the form of future states and cities spending profligately or investing with undue risk. Schleicher shows the centrality of a third value: promoting state and local borrowing to fund the development of infrastructure.
 
Schleicher shows persuasively that this goal not only appears implicitly in the structure of multiple federal statutes, but, in fact, has motivated federal policymakers (the Supreme Court included) and, in fact, has mattered considerably for the health and wealth of the nation over the course of our history. Schleicher’s tracing of how mid-19th century judicial decisions about the legality of local debt connect, by way of intergovernmental fiscal relations that let cities borrow and invest quickly and unilaterally, to the infrastructural miracles of American urbanization is eye-opening. At the turn of the 20th century, cities from Cleveland to New York had five times more flush toilets per capita than London, ten times more electric streetlights than Berlin, and more streetcar riders than anywhere in the world (page 55). Schleicher clearly shows this to be a function of urbanist initiative and innovation, enabled by localities’ independent access to credit markets.
 
Organizing federal officials’ motivations into this “trilemma” of avoiding both austerity and moral hazard while still encouraging debt-financed investment allows Schleicher to tell a clearer, fuller story about state and local borrowing. Better yet, this is a story that can partially sidestep unhelpful blame games about struggling localities.

I take Schleicher’s second goal to be implicit in how he tells that story of subnational borrowing. Specifically, he is recentering local debt as at the heart of fiscal federalism, not its margins. Questions of debt and distress, in this telling, aren’t something relevant to a few outlier states and cities when things go really sideways, to be dealt with through ad hoc political and fiscal interventions or obscure statutory provisions like municipal bankruptcy (which was used sparingly until the Great Recession). Schleicher shows how for decades in the 19th century, questions of subnational debt were the most common issue before the Supreme Court (page 44) and how, in the 21st century, local fiscal distress has taken on macroeconomic significance (and earned Congressional attention) during two successive economic crises. Indeed, the centrality of distress to policymaking is a central implication of Schleicher’s insight that the federal government encourages state and local indebtedness: substantial subnational debt loads aren’t only something going wrong, they’re also something going basically as planned—and which all parties, therefore, must prepare for in policymaking.
 
Schleicher’s challenge, though, is that he’s right. And the second goal, to some extent, inherently undermines the first. Having shown that debt, and the anticipation of potential problems with that debt, has always been central to the operation of state and local government—and to their interactions with each other and the national government—the book is forced to take on, well, everything.
 
Schleicher’s theories implicate matters of high Constitutional law, unresolved details of municipal bankruptcy, and pretty much the full sweep of local government law, and he gamely takes them all on. Likewise, he has to survey broad swaths of everything the federal government does. Billion-dollar federal programs appear, but can get only a few paragraphs, if that. Schleicher touches briefly but consistently on the importance of Medicaid throughout (Medicaid absolutely drives states’ fiscal circumstances, representing over 28 percent of state budgets, more than any other single program), but the complicated intergovernmental schemes governing K-12 education, transit operations, and subsidized housing (just to name a few) also peek out from the wings, visible just off-stage.
 
This is how it has to be. As Abbe Gluck has argued, federalism today (and this book is a major contribution to the federalism literature—though it’s not always pitched that way) overwhelmingly plays out within statutory schemes that organize their own, bespoke relationships between levels of government. Health, education, transportation, and all the other cooperative programs are the forces that push and pull on state and local budgets, and the conduits through which the feds provide most intergovernmental transfers. It’s no longer possible to describe an overall system of fiscal federalism apart from the multiple fiscal federalisms embedded in each of these statutory domains. Surveying the complex, and ever-changing federalist dynamics of any one of these issue areas would be a career’s work. In a Bad State doesn’t and shouldn’t try to do them all justice.
 
But as a result, the book fractures, especially as it reaches the 20th century. Schleicher’s story explores more policy issues’ interconnectedness with debt and distress, introduces more types of indebted local government, and sweeps across more decades. But as it does so, it seems that the unified framework of the trilemma necessarily can do less and less actual work guiding policymakers.
 
Take the changes over time. As Schleicher compellingly shows, what was in the 19th century a stark tradeoff between the three prongs of the trilemma has been softened dramatically over the 20th century. The strengthening of the national welfare state, for example, makes local austerity somewhat more tolerable by providing general relief when unemployment rises and incomes fall. Further, it does so without inducing substantial moral hazard for localities. The New Deal may not have produced a “radical change in how the federal government responded to specific local fiscal crises” (page 68), but it (and the Great Society) certainly recalibrated the stakes of choices about local budget cuts. Indeed, Schleicher ultimately calls for redoubling this federalization of the welfare state. Likewise, Schleicher shows how the invention of new legal techniques to politically discipline cities in distress—tools like the imposition of emergency managers that penalize politicians while still bailing out citizens—have dramtically mitigated the moral hazard leg of the trilemma (pages 74-77). Presumably, the creation of ratings agencies and the easier spread of financial information have transformed the dynamics of contagion and moral hazard alike. (Schleicher gives the delightful example of Nicholas Biddle using his status as former president of the national bank to imply a federal guarantee for Pennsylvania state debt (page 38), but it’s hard to see the same move working today).
 
Today’s trilemma isn’t yesterday’s. As Schleicher clearly acknowledges, in some instances (like the bailout of Washington, D.C. in the 1990s, which didn’t create moral hazard) it can even be tamed into something that is barely a trilemma at all.
 
Even today, it’s not the same trilemma across jurisdictions, either. Schleicher points out that the two governments who availed themselves of the Federal Reserve’s Municipal Liquidity Facility during the early depths of the COVID-19 crisis—i.e., the entities that came closest to being “bailed out”—were the state of Illinois and the New York region’s Metropolitan Transportation Authority. These are very different governments! The MTA, among other things, relies less on taxes and more on revenues from user fees (tolls and fares) uniquely affected by a pandemic that crushed commuting: a COVID-related bailout has very different moral hazard calculations for the MTA than for Illinois, assuming the next recession is expected to be an “ordinary” downturn. The MTA also relies on the federal government for operating and capital support—as the country’s largest transit agency (by an order of magnitude), it surely has a special, active relationship with the Federal Transit Administration. It isn’t nearly as independent from the federal government as Illinois, offering a different set of mechanisms to reduce moral hazard. This is a different trilemma than Illinois’, not just in degree, but in kind.
 
At a high level of abstraction, the trilemma is a powerful organized framework. It works very well for the 18^th and 19^th century world where In a Bad State begins, when the national government was less interconnected with state and local governments, and when those connections operated relatively more through basic structural relationships than complicated cooperative statutes. It may work better for states than for specialized local governments. The trilemma seems more relevant for economic officials whose brief is especially trans-substantive—the Federal Reserve lenders mentioned above, for example—not to mention us more generalist observers: scholars, students, and the like. For most policymakers today, though, the particular seems like it might swamp the general: figuring out how to apply the trilemma will often take a level of subject-matter expertise that obviates the need for using the trilemma in general terms.
 
And—in what I suspect is the inevitable result of trying to synthesize across time, space, and countless institutions—this fracturing continues all the way down. The more Schleicher (rightly, and impressively) draws out the diversity of situations encompassed within the broad heading of “responding to state and local budget crises,” the more difficult it becomes to say anything definitively.
 
For example, as one of his many policy suggestions, Schleicher proposes increasing the amount of information states and cities disclose when issuing bonds (page 132). But who needs help monitoring whom seems highly contingent. An ordinary municipal bond is awfully different than the customized financial engineering whose implosion helped trigger the bankruptcies of Detroit and Jefferson County (page 89, 94). There, the local governments’ counterparties have their own important informational advantages. This isn’t a book about the full diversity of local financing schemes. But not being one, it’s hard for the reader to meaningfully evaluate the merits of any given claim, much less to develop a policy proposal.
 
The difficulty of engaging this many topics at this level of generality keeps destabilizing the overall framework and the policy prescriptions alike. To give one last example, in laying some basic groundwork setting up the trilemma, Schleicher winds up laying out a new theory of federalism in infrastructure policy (pages 25-26). To explain why the federal government enlists states and cities to borrow and build infrastructure—i.e., why the third leg of the trilemma exists at all—Schleicher argues that it’s a function of Congress’s districted structure. Each representative wants pork for their district, so Congress can’t effectively fund place-based projects that aren’t evenly spread across the entire country. Instead, it delegates to states and local governments. According to Schleicher, the feds so consistently encourage subnational borrowing because they can’t do build infrastructure properly themselves. It’s an interesting theory, and one that speaks to the many issue areas potentially illuminated by In a Bad State.
 
But is it true? I’m skeptical. Schleicher would be the first to point out that the problem of pork-oriented “distributional politics,” unorganized by clear ideological factions, is usually worse at the subnational level (where partisan competition is weaker). And there is no shortage of state-level transportation policy designed to check every geographic box, rather than serve the core ends of mobility and accessibility—California’s meandering route for high-speed rail being perhaps the most high-profile of many examples. But more to the point, the book can’t reasonably provide what a reader would need to address their skepticism. To assess Schleicher’s claim—much less prove it—would require a deep dive into the history of federal infrastructure policy, including the intermittent Congressional efforts to redirect state and local transportation planning through the creation of mandatory regional planning bodies or performance-based metrics. This would be miles outside the scope of this book. But absent any such evidence, I couldn’t shake the concern: just why does Congress route borrowing for infrastructure through states and cities (and why does it sometimes briefly start and then stop doing more of that infrastructure funding itself, directly, whether for the interstates or the Clean Water Act)? This would be, after all, another way out of the trilemma.
 
I don’t offer these examples to nitpick, only to illustrate the impossibility of the task Schleicher has posed for himself. Indeed, I think Schleicher does a markedly better job of applying and adjusting his theory to the particularities of specific problems and contexts than many accounts of federalism, which are endemically susceptible to over-generalization. The book’s broad sweep speaks to Schleicher’s curiosity and keen eye for underappreciated connections across bodies of law. It speaks to how he’s shown these questions of debt and distress to be bedrock on which many other aspects of federalism are built. It’s what makes the book important and interesting—and it’s true to the substance. But that breadth simultaneously leaves much of the book on an unseen and perhaps unstable foundation.
 
Perhaps Schleicher faced his own trilemma. He could 1) write usefully for a broad and policy-oriented audience; 2) pull in all the issues he has shown local debt and distress to be connected with (from sovereign immunity to land use reform and the creation of a VAT system); and 3) cover them across disparate institutional contexts and eras of history. But he, too, faced an unavoidable trade-off between those goals.
 
Still, there is also virtue in going wide. Even if many of its specific claims are on shaky ground, In a Bad State can inform a hundred debt-conscious analyses of individual institutions that haven’t yet been written. I know if I were to rewrite my own examination of federalist dysfunction in subsidized housing, I would now pay far closer attention to how insolvency and indebtedness among subnational housing providers—most notably the collapse of New York’s U.D.C., one of Schleicher’s favorite case studies—shaped federal choices thereafter. Future inquiries into so many aspects of fiscal federalism and state and local government law will be asking Schleicher’s questions. And they will be all the better for it.
 
Noah Kazis is an Assistant Professor of Law at the University of Michigan Law School. You can reach him by e-mail at nkazis@umich.edu.