Leaving Us In a Good State: Responses to and Appreciation for Comments on In a Bad State: Responding to State and Local Budget Crises

Guest Blogger

First, I’d just like to thank everyone involved in this symposium.  Writing a book is a solitary experience, and it is just wonderful to have so many people I admire commenting on my work.  Special thanks to my wonderful colleague Jack Balkin for organizing it.  This blog is a wonder – I’ve been a fan for as long as it has existed -- and it’s an honor to get to have its pages devoted to comments on my book. 

Second, before I go through some specific responses, I want to note how excellent the responses are.  When writing the In a Bad State: Responding to State and Local Budget Crises, I had to make a number of choices about how to explain the ideas, what to include and what to exclude -- a book like this, which is on the shorter side for an academic work, has to make some pretty hard choices.  Further, the argument relies on some assumptions that I thought were reasonable but were certainly assumptions.   And then there are assumptions and choices that I didn’t quite realize I was making, but when pointed out and challenged, are clearly there. 

One of the great things about these responses is that they – to a post – find the soft spots in the argument, as well as (much too kindly!) noting the achievements of the book.  I hope that they are read alongside the book, a guide to understanding both how the book succeeds and its limitations.  I’ll respond to each in turn, but mostly just to appreciate how smart and well-done they all are.

On to the meat….

I’m going to assume anyone digging this deep into the posts has read both the responses and the book (or at least listened to a podcast about it) so I’m not going to do a lot of recapping of the claims of the book.

Vince Buccola has emerged as one of the leading legal experts on state finance (as well as being an important voice in corporate finance).  His response is so smart.  Like Vince, I don’t want to spend too much debating the question of how pro-bond holder and how out of step with prior law the 19^th Century Supreme Court railroad bond cases were (and indeed how out of step they were with the Court’s understanding of non-infrastructure related municipal bond cases like Loan Association v. Topeka).  Buccola’s work, with Alison Buccola, provides as convincing as argument – better than, say, James Bradley Thayer’s defense of Gelpcke v. Dubuque – that they were reasonable.  I’m still not convinced; it’s hard for me not to read cases like Gelpcke or the extraordinary mandamus remedy cases as they traditionally have been read, as aggressive and policy oriented opinions better understood as capturing the policy ideas of the dominant Republican coalition than following relatively neutral principles. But you should check out their contrary take, as it’s really well done. 

 But Buccola’s broad point that the trilemma framework I develop doesn’t provide answers to how to address specific crises, that while it establishes the likely directional effects of bailout, austerity, and default, both positive and negative, it doesn’t tell us the size of these effects.  And it is the size that will help answer how to respond to a specific crisis.  “To my mind, a different kind of empiricism is called for. I accept, or better said admire, the Schleicher Trilemma effectively a priori. The direction of the effects it posits have to be right. What is left open are what we might call the elasticities associated with each horn of the Trilemma.”  

 Buccola is right to focus on this.  I will note that I don’t think that it is possible to establish any type of historically-independent way of estimating the elasticities.  Whether a particular crisis happens during a recession or not (and how big a recession), the state of capital markets at the time of the crisis, and the quality of state politics will surely have an effect on the harms created by austerity, default or moral hazard.  This is one reason – in addition to leaving it to the reader to apply different weights to different harm based on, say, how much they value harms in the future to harms today -- why I don’t offer an “answer” to the trilemma for every and always.  But Buccola is 100% right to say that we need to do more empirical (and surely theoretical work too) to help politicians address specific crises.  I hope the book suggests to political figures the right questions to ask, but Buccola is pointing us forward, toward the answers they should give in particular cases.

Like Buccola, Clay Gillette – the dean of the field of the municipal finance and law as well as a huge figure in local government law more broadly – questions whether it is reasonable to treat courts as being policymakers like executive branch officials and legislators responding to the challenge of the trilemma (among several other, well-made arguments).  “So while I am confident that David is correct in including courts, especially federal courts, in the litany of players who address and resolve the trilemma, I am reluctant to attribute much intentionality to judicial decisions, and I am less confident that courts consider the global implications of their decisions.  That does not dilute David’s main point about the effects of judicial intervention, but it does tell us something about the extent to which we can rely on courts to strike the balance that David sees as the objective of federal actors generally.” 

Gillette argues that while the main focus of the analysis – the effect of federal decisions, including judicial decisions – basically works, treating their decision-making as driven by similar forces as Presidential and Congressional policy considerations may not make sense, as they are unlikely to be considering the full set of policy implications, and may instead adopt easier to deploy decision-making heuristics. 

I attempt to justify my approach in the extremely exciting Appendix to Chapter 2 of the book, but Gillette is right to question it.   (He is similarly right to note that judicial decisions on the enforceability of debt create nodes to negotiate around).  In response, I will note that courts usually, although not always, share a worldview with the dominant political coalition of which they are a part, and that it is often therefore it makes sense to think of them as contributing to the elaboration of that broadly-shared ideological view of how to respond to particular crises.  For instance, the Supreme Court’s shift in its sovereign immunity doctrine before and after 1876 is pretty hard to understand except as part of the broader shift in policy across the federal government in its approach to Reconstruction (and therefore to the debts incurred by Reconstruction era mixed race governments).  And indeed sometimes we directly assign to courts the power make policy along the trilemma, as I, following Gillette’s work, suggest in its method for determining “service delivery insolvency” in bankruptcy cases.  But, that said, Gillette’s alternate descriptions of how courts operate in these cases is powerfully made. 

A few of the responses challenge on one of the big assumptions in the work, that federal officials responding to a state and local crisis have a pretty limited frame of policy options, and are unlikely to seek massive structural changes in other policy areas.  (I make this argument in a number of places, but particularly in the introduction).  But it is totally fair to note that where this line is drawn is questionable.  After all, federalizing Medicaid is a pretty big structural change, as are federal encouragement of land use policy changes to permit greater mobility, and I advocate for those.  So maybe we can think of other structural changes to make governments more resilient against future crises.  

Sheila Foster, a leading voice in both local government law and land use policy, smartly notes that one can imagine a much broader set of policies that would create resilience against future crises than the book suggests.  Perhaps federal or state responses to fiscal crises in big cities could encourage greater regionalization, if one of the sources of urban fiscal crises is “municipal under-bounding” or cities not being able to draw on the resources of suburbs.  Foster then discusses all sorts of interesting ways this could be done.   I don’t have too much to say in response, other than to be a little jealous that I didn’t think of including some of these in the book and to encourage people to read Foster’s post.  It's really smart and well done.  

Foster explicitly draws on Christopher Tyson’s work, and Tyson – who is both a great scholar and policymaker in these areas – hits some similar themes.  He argues that bankruptcy courts (in addition to Congress) might attempt to encourage changes to municipal boundaries in Chapter 9 cases, particularly to address racial disparities in who bears costs in cases like the Detroit bankruptcy.  Other scholars – Michael McConnell and Randy Picker and David Skeel and Gillette – have argued Chapter 9 bankruptcy courts should consider using their discretion in these cases to encourage or force pretty substantial reforms in municipal policy, from tax increases to moving to at-large from districted methods of electing city councilmembers. Tyson asks us to think even more broadly and makes a really powerful case (if you’re at all interested in Chapter 9, I recommend you check out his article laying the case out in full.) 

Other responses specifically question particular policy responses I suggest in the boook.  Miriam Seifter and Dan Rodriguez, two of my favorite scholars in this and indeed in any field, discuss the speculative conclusion of the book, which argues that reforming state democracy is necessary to address state fiscal problems fully.  

Seifter notes that both she and I have been beating the drum about the deep problems of state democracy for years now, that voters simply follow federal party preference in state elections and that state institutions, particularly legislatures, distort even those preferences through their methods of aggregating votes.  (Seifter’s series of papers on the failures of state legislatures and the role of courts in state democracy is just outstanding.) She notes optimistically that there has been some greater attention to statehouses recently (I wish I could join her in her optimism, but am skeptical this will mean much at the ballot box or in the medium term.). But her powerful point is that maybe greater attention wouldn’t help states fiscal problems.  First, state fiscal issues are really complicated, so public knowledge would have to get a lot – not a little – better.  Second, maybe greater voter attention will lead politicians to be less responsible, or at least will not necessarily make them more so.  

These points are well-taken.  But one of the goals of reforms in this area is not merely to shock people into short-run bursts of attention, but to develop institutions that help voters aggregate and form their state-specific policy preferences.  Efforts to develop state-specific party brands, or “quasi-parties,” in the form of group or executive branch on-ballot endorsements, as Chris Elemendorf and I argue, are designed to create entities that voters can attach “running tallies” to in Morris Fiorina’s apt term.  Local media can inform voters about budgets more than simply directing them to budget data – as the CT Mirror’s great budget report Keith Pfaneuf does regularly.  And it needs to be judged against the alternative.  The absence of mass popular democracy doesn’t mean the absence of any method of pluralistic influence, but in low-turnout primary elections and backrooms intense policy-demanders have greater influence, something that is quite bad for fiscal rectitude.  But Seifter is surely right that the methods of improving state democracy matter as much as simply bringing greater attention to the issue. 

Rodriguez complements Seifter’s post by focusing on state institutions and how they might be redesigned to help avoid fiscal crises.  He notes the role of direct democracy, allocations of power across the executive, legislative and judicial branches, and state home rule provisions.  The effect of these reforms on fiscal policy are great areas for future work.  Although some attention was paid to some these issues in the book – particularly the districted nature of legislatures and its effect on spending and state fiscal constitutional rules like balanced budget and debt limits – there is much, much more to say.  Scholars working in this area would do well to follow Rodriguez’s suggestions.  

Indeed, a forthcoming paper I wrote with Rick Hills takes a small step in this direction, arguing that courts applying the non-delegation doctrine to local legislative delegations of power to mayors is both bad law and likely to lead to worse policy outcomes, including less responsible budgeting.  Strong mayors, we argue, are more democratically responsive and less likely to be captured by strong policy demanders than unknown city councilors.  So maybe that’s a start! 

Amy Monahan, our nation’s leading scholar of the law of public pensions, asks questions of my proposals for shoring up public employee pension funds.  Monahan view of pensions shares much with mine (which is no suprise, as my views draw on her work extensively).  She generally endorses my idea of treating pensions as debt for the purpose of state constitutional debt limits (Gillette, it should be noted, has another critique, that debt limits may be too low or set in ways that are not responsive to need, making the inclusion of pension underfunding less useful – a good point!).  But Monahan notes that including pension underfunding in state debt limits would be complicated, as it would require constitutionalizing the rules of pension accounting, which are more technical than most provisions of even our famously long state constitutions. I think this could be partially overcome by delegating accounting standards to independent state officers, like state comptrollers, or even to courts.   Even if some chicanery was still allowed, including pension underfunding in debt limits would be an improvement on the status quo.  But Monahan is right – it’s definitely a problem.  

Instead, Monahan argues that we should consider including public pensions in the ERISA system we use for private defined benefit pensions.  This is a very promising idea, although one with some substantial difficulties of its own, which Monahan notes.  Either way, doing something to make states treat underfunded pensions as debt, rather than as a form of quasi-debt that does not count against balanced budget or debt limits, would be very attractive.  Our current legal system encourages pension underfunding, and discourages debt issuances to build things, the exact opposite of what we should want. 

A final group of responses addresses one of the biggest assumptions of the argument and choices in the form of the book -- the decision to study the issue through the lens of American history, searching for lessons for today from the American past, rather than, say, emulating what the existing leading book on the subject, Jonathan Rodden’s great book Hamilton’s Paradox: The Promise and Peril of Fiscal Federalism did, looking at the issue comparatively across countries. 

Noah Kazis is a great local government law scholar, the future of the field, and his response is so typical of his work – sharp, insightful, modest in tone but sweeping in its impact.  His central critique of the book is that the trilemma works less well as a heuristic in the modern era, as the relationship between the federal government and state and local governments has gotten deeper and more differentiated.  Does it make sense to understand the politics of infrastructure today the same way we did in the 19^th century? To talk about the state of Illinois and the MTA using the same tools? 

It is surely true that changes in time and differences the types of subnational governments means that analyzing the merits of a response to a particular fiscal crises can’t pull directly from historical examples.  Kazis’s point here is really powerful and profound.  It is why I argue that the trilemma provides us with the right questions to ask, but that the weights one applies in any given instance will depend mightly on all sorts of specific factors.  Whether an intervention will create a lot or a little austerity, moral hazard or harm to the municipal bond market will depend on differences case-to-case.  Kazis is right to note that general theoretical approaches to questions of federalism will often not be powerful enough to help us in specific cases.  

But the trilemma has things to tell us these cases nonetheless.  To take one of Kazis’s examples, a fiscal crisis in a transit agency like New York’s Metropolitan Transit Authority (MTA) that gets a very substantial part of its revenue from the federal government would certainly pose different questions from a default in a 19^th century U.S. state.  But the federal government – and in particular the Federal Reserve -- still had to face the question of whether to extend its Municipal Liquidity Facility to special districts, which everyone knew meant making it available to the MTA (the MTA ended up being one of two entities to borrow from the MLF).  How should it have thought of this problem? The federal government surely had lots of tools for addressing the financial problems of transit agencies, and ended up giving them lots in direct aid.  But using an administrative like the MLF provided real benefits, as it helped target federal aid at a time when most fiscal aid to states, cities and districts was untargeted due to the difficulties of passing specific aid packages in a Congress with districts.  But doing so raised real questions of moral hazard, so the MLF required a high interest rate.  Other choices – default or austerity –were available and considered, but were understood under the conditions of COVID to be too costly.  The debate over what the MLF should do was very intense, but few voices – at least outside of the Fed itself – seemed to see the trade-offs involved.  Was the Fed’s decision informed by the particularities of the need for transit in an era of global warming, the influence of particular Senators, and the cost of default amid a broader financial panic? Of course, but the specifics of responses to, say, the Post-Reconstruction era defaults or the railroad bond cases had their own specific problems as well.  Kazis’s powerful argument is that history can only provide so much of a guide to policy making.  That’s right, but it also can help us see things we might otherwise miss. 

One last note on Kazis’s excellent post, he questions whether the story I tell for why states and cities build most infrastructure is right.  I argue – following Barry Weingast and John Ferejohn – that the districted nature of Congress and the informational difficulties of planning from Washington have meant that federal efforts to build infrastructure are doomed for failure, to being spread across too many districts due to “distributive politics.”  As a result, states and cities are left responsible for most infrastructure and always have been.  Kazis notes that I don’t really spend too much defending this argument. Further, as a normative argument, it is built on some shaky foundation – are the informational problems as bad today as they were in the past? Aren’t the problems of pork-barrel spending even worse at the state and local level? 

These are very good points! The book doesn’t attempt to normatively justify the federal government’s failure to build infrastructure, but does assume that it is a constant, for the reasons Ferejohn and Weingast lay out. Perhaps it could change? I doubt it – I think these forces have a lot more explanatory and normative force than Kazis suggests.  But should it? It’s certainly something that should be on the table. 

But it’s also right that the book doesn’t lay out a full throated argument in defense of that position.  It offers a less than full-throated one, but it’s a short book.  So I 100% agree that, like most authors of books of this sort, I faced some difficult tradeoffs. Kazis writes: “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.” I tried, following an argument in the book, for balance, to fail at each of these a little bit, rather than to fail at one dramatically.  Whether I succeed is for you to decide.  But abstracted away from the context of this project, figuring out where on this trilemma – the Kazis book trilemma? – one wants to land should be something any author of a book should consider. 

Finally, the legendary Rick Hills questions the other major choice, the domestic focus of the book.  He offers a bravura analysis applying some of the lessons of the book to the biggest problem in local governmental debt in the world – the debt crisis in Chinese local governments.  The book’s domestic focus helps us see things like the connection between Congress’s districted nature and state debt.  But it limits its scope.  

I can’t assess Hills’s argument, except that it sure seems compelling! I want to learn from it.  Also, despite having written nearly a dozen articles together (and more to come!), I’m still amazed Rick’s work.  Who else would have written sentences like these? 

At the end of the book, Schleicher offers sober, middle-aged, somewhat disillusioning advice that there are no easy answers. An inevitable trilemma of moral hazard, macroeconomic stagnation, or infrastructure disinvestment undermines confident prescriptions for hard budget constraints or Keynesian revenue sharing.  Balance, resilience, prudence — these maxims sound like the sort of deflating kind of advice a marriage counselor gives to a long-suffering and burnt-out couple who are better off together but just cannot re-kindle the True Romance of Big Theory.

David Schleicher is Professor of Law at Yale Law School. You can reach him by e-mail at david.schleicher@yale.edu.