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