Scholar argues states should regulate city and county financial structures in similar ways.
Taking public transit. Checking a book out of the library. Going to school. These activities all depend on services provided by local governments in the United States.
When these governments run out of money, ordinary citizens feel the effects. In a recent article, Michael Francus of the University of Virginia argues that states should design a regulatory framework for city government finances that relies on stable revenue and minimizing debt to keep them from running out of money. States should then enforce regulations that ensure that local governments follow this framework. When all else fails, bankruptcy and fiscal interventions can curb the damage that results when local governments experience fiscal crises, argues Francus.
Francus argues that counties’ success in handling fiscal problems offers lessons cities can use to prevent or address their own fiscal crises. Because counties provide essential services, and counties cannot easily turn to other government bodies to bail them out when their finances fail, states have structured county finances with safeguards to avoid fiscal crises, explains Francus.
Counties avoid fiscal crises by relying on stable sources of revenue, Francus explains. To bolster their finances, states regulate the debt that counties take on. Francus then argues that, if those measures fail, counties can turn to failsafe measures such as insurance or rainy day funds.
Francus argues that counties’ reliance on stable revenue sources, such as property taxes and revenue from state governments, ensures that they can reliably cover their expenditures. He points out that state regulation also has a role to play in ensuring that counties maintain stable finances. States can use regulation to prevent counties and cities from relying on risky sources of revenue such as investments in private corporations.
Francus argues that state regulation can also contribute to financial stability for county governments through limits on debt. He explains that these limits can take the form of hard debt limits, taxation limits, or limits on the debt that states can assume from counties.
Francus suggests that limits on taxation function as warnings to investors. Investors know that counties pay their debts with taxes, so if they know that taxing power is limited they will exercise caution before they lend to the county. To apply this lesson to the case of cities, states would also need to put limits on the debt the states assume from municipalities.
Counties also rely on several failsafes to help them deal with the consequences when their finances do not add up, Francus explains. These measures include insurance, rainy day funds, anti-attachment laws, and payment plans.
Francus argues that counties’ overall fiscal framework reveals how to regulate city government finances. But he notes that counties can still experience fiscal crises. Studying the causes of these crises and the methods that counties employ for dealing with them can provide valuable lessons for city fiscal crises.
Francus contends that county fiscal crises occur for two reasons. He points out that sometimes local governments do not follow the rules that states impose on their budgets. In one instance, a county failed to balance its budget several times and depended on the state to pay the difference between the counties expenditures and revenue. Eventually, the state got so fed up that it began to provide the services the county had previously provided itself and got rid of the county. Francus argues that this example shows that aggressive enforcement of state regulations can go a long way toward preventing fiscal crises in local governments. For example, in Greene County, Alabama, the county fell three years behind on the audits that Alabama law required it to perform. He suggests that state governments are the best enforcers of these rules because they have both the resources and the knowledge necessary.
Francus argues that county governments can also experience fiscal crisis due to large and unpredictable shocks. Scioto County, Ohio, for example, constructed a jail and incurred debt in the process. When the county completed the jail, the state decided not to use it. Francus argues that this example shows that states should consider how their decisions may affect local governments. He also points out that states can require failsafe mechanisms, such as insurance and rainy day funds, which can help to protect counties when big shocks hit.
When a county government does financially fail, it has two ways for getting back on its feet. Counties have had success with either filing for bankruptcy or with state intervention. Francus explains that a county should use bankruptcies when it needs to eliminate debt. On the other hand, he suggests that counties that need to fix structural problems should turn to state intervention.
Ultimately, Francus argues that state regulation of local finances can reduce the risk of a fiscal crises. State regulations should prioritize stable sources of revenue for local governments and limit the debt these governments can take on. Enforcing this regulation helps to keep finances stable, Francus concludes.