A looming fiscal crisis raises another fear for US cities: State oversight and financial control boards

A pedestrian in downtown Detroit during the Great Recession (Photo by Spencer Platt/Getty Images)

It’s a tough time to be a mayor in America. Tax revenues have fallen off a cliff. Public sector layoffs have begun – a staggering 1.5 million jobs lost already – and there is no end in sight. The Upjohn Institute estimates that by the end of 2021, state and local governments will face a $1 trillion shortfall. 

To make matters worse, it is unclear if the federal government will do enough, or anything at all, to aid state or local governments.

“This is an unprecedented crisis and it could get quite ugly,” says Bruce Katz, co-founder and director of the Nowak Metro Finance Lab. “We stopped the economy. You don't need to be a rocket scientist to figure out that even well managed cities and counties are being affected.” 

It’s hard to comprehend the magnitude of the austerity crisis facing local governments in the US. That’s why Katz and many other municipal finance experts believe there may be a resurgence of some fraught methods for aggressively cutting spending and ending or privatising local government services.

In the past half century, states have employed a variety of interventions to confront distressed local budgets. One model is the state oversight panel: New York City in the 1970s, for example, lost much of its agency to the unelected Emergency Financial Control Board. A more recent model features direct state control: Detroit and many other cities in Michigan were ruled for a time by state-appointed emergency managers in the aftermath of the Great Recession.

Cities that have operated under these systems – also including Detroit, Philadelphia, DC, and Camden, New Jersey – tend to remember them as dark times. With a primary focus on balancing budgets, oversight boards have made creditors whole while cutting back the social programs and public union contracts that comprise large chunks of municipal spending. The consequences can be frustrating or even devastating for residents, ranging from reduced garbage collection to tragedies like the Flint water crisis, which began with a disastrous decision by a state-appointed emergency manager.

Now, suddenly, American cities again face a looming fiscal reckoning of apocalyptic proportions. A recent report from Arizona State and Old Dominion universities shows states facing an average tax revenue decline of 20%, and 10 states facing declines of over 30%.

Most states also have laws that require balanced budgets, meaning they’re in no position to dole out cash to keep their cities afloat. But even in the absence of massive federal intervention, which experts like Katz would greatly prefer, state leaders are still in a position to impose austerity on local governments.

That’s because American cities are creatures of their state governments, which can exercise an extraordinary amount of power over basic governance at the local level. They can and do block city legislation – a dynamic that’s inflamed when conservative state leaders interfere with governance in more progressive cities, as happened in recent years with preemption of plastic bag bans and soda taxes

State governments can even strip local elected leaders of their governing powers. The Emergency Financial Control Board created by the New York legislature in 1975 could force spending reductions, audit municipal records, and reject public union contracts. In Michigan, when emergency managers are installed, local politicians cannot enact new laws without the approval of the state-appointed bureaucrat. Critics of these interventions say they are often used to advance particular interests and ideologies, like bondholders and small-government conservatives, over those of actual city residents and interest groups like public sector unions.

As national Republican leaders including Senate Majority Leader Mitch McConnell have expressed a desire to minimise aid to states and cities, the possibility of a super-charged austerity campaign looms over the coronavirus crisis. In some areas, where conservatives have control of the levers of power at the state level, they may even welcome the opportunity. 

“We're seeing serious municipal financial crunches that are going to lead to all these techniques being used threats of bankruptcy, oversight boards, emergency managers,” said Samuel Bagenstos, professor of law at the University of Michigan Law School. “We saw a lot of that in the Great Recession. If anything, it looks like the hit on municipal finances will be much worse this time. It's something we have to be very worried about.”

State takeovers of local governments have usually been spurred by fiscal crises years in the making, with an impetus beyond local control. In 1975, New York City faced a financial reckoning as a result of white flight and deindustrialisation, which hollowed out its tax base while social service costs grew along with the low-income population. New York papered over this political challenge by borrowing to pay for its operating expenses which worked until the city’s financial institutions decided to stop lending.

As part of the solution, the state created the Emergency Financial Control Board, an unelected body that took ultimate power over the city’s finances away from locally elected leaders. When policymakers made a decision, like signing a new union contract with the teachers, the board could reject it and force them back into bargaining. In effect, the mayor and city council no longer had ultimate power over the resources allocated to municipal programs ranging from law enforcement to public education.  

The state-appointed body – which comprised four public officials and three corporate representatives, but no one from labour or community groups – forced substantial budget cuts on New York. They pushed for the elimination of more than 15,000 city jobs, the closure of public hospitals, and the imposition of tuition costs on the City University of New York for the first time in its history. 

The Financial Control Board stopped having final say over New York City’s budget in 1986. But it still exists and exerts nominal oversight over municipal finances to this day. There are even triggers in its 45-year-old enabling legislation that would allow it to again have approval powers over the city budget: The state legislature can legally re-empower the board if the city does not service its debt obligations or runs a deficit of $100 million in a fiscal year. (For context, Mayor Bill DeBlasio’s pandemic-era budget is over $89 billion, and he’s considering borrowing to pay for operating expenses for the first time since the lead up to the 1975 fiscal crisis.)  

“The mechanisms, the institutions, and the approach is there and I'm sure that could be activated,” says Kim Phillips-Fein, professor of American history at New York University and author of Fear City, a book about the 1975 fiscal crisis. “We could see a similar type of distribution of power upwards in the hands of people who are less immediately and democratically accountable, which is how institutions like the control board work.”

New York’s Financial Control Board was only the beginning. A less aggressive version was implemented in Pennsylvania after Philadelphia’s fiscal crisis in the early 1990s, in the form of the Pennsylvania Intergovernmental Cooperation Authority. Smaller cities in Pennsylvania, with far worse financial situations, faced far more ferocious state oversight. In 2011 Harrisburg was taken over by the state. In New Jersey, similar dynamics led to an eight-year state takeover of Camden, when local politicians were stripped of all power and a state-appointed chief operating officer was installed in exchange for $175 million in state investment.     

Deeper into the Rust Belt, Michigan saw unelected, state-appointed power brokers placed in charge of many of its cities following the Great Recession. When Republicans took total control in the state capitol after the 2010 elections, they passed a law giving state-appointed “emergency managers” sweeping powers over the finances, contracts, and policymaking of cash-strapped cities and school districts. Although they could not raise taxes, these state appointees held unilateral power over labour contracts, local budgets, and public assets. 

Even in the state’s largest city, Detroit, an emergency manager was appointed and steered the city into bankruptcy to settle its debts. The optics of the policy were terrible when overlaid with racialised political polarisation: Republicans who appointed the emergency managers from the state capitol were mostly white, while the cities being placed under their control were often ruled by Democrats and had majority Black populations. At one point in 2013, roughly half of Michigan’s Black population was under emergency management. Only 1.3 percent of white residents were similarly affected. 

“Michigan has been sort of a bellwether for the rest of the country with this,” Bagenstos says. “We have tended to have a response to municipal fiscal crises that relies on state governments and the financial sector essentially displacing local democracy.”

The results of these state interventions have, at times, been tragic. In Flint, Michigan, the emergency manager made the decision to use the Flint River as part of a cost savings proposal, then did not treat the water properly to prevent corrosion of the aged pipes. That sent lead levels soaring throughout the city. The human toll was devastating, as hundreds of children were poisoned.

(Chip Somodevilla/Getty Images)

"All too prevalent in this Flint Water Investigation was a priority on balance sheets and finances rather than health and safety of the citizens of Flint," state Attorney General Bill Schuette said after the emergency manager was criminally charged for the crisis.

In Camden, meanwhile, the state takeover accomplished few (if any) measurable improvements for city residents. Unelected appointees could make cuts, but they couldn’t affect any of the structural economic and societal forces crushing the small New Jersey city.  

Bagenstos argues that even in situations like New York in 1975 or Detroit in 2013, the core issue usually isn’t that local politicians in these cities are more irresponsible or craven than their suburban counterparts. Instead they face structural issues, chief among them white flight and capital flight that aggravate municipal finance structures that allow people who live in suburbs to get the benefits of cities without actually contributing their fair share to city revenues.

But proponents of such interventions, like Clayton Gillette, say these measures are only enacted in the most extreme circumstances. They are a consequence, he argues, of local leaders failing their constituents and not bearing up to the reality of their situation. Gillette says that too often, powerful local interest groups – chiefly public sector labour unions – are able to pressure local politicians into fiscal irresponsibility. 

“That’s the premise, you’ve got some rogue elected officials so the state's going to come in and the state's going to do a better job of serving your local constituents,” says Gillette, who is a professor at NYU's School of Law and author of a defense of state takeovers entitled "Dictatorships for Democracy." 

But Gillette argues that the fiscal crises faced by New York in 1975 or Detroit after the Great Recession are fundamentally different from the economic impact of the Covid-19 pandemic. 

“This is not a consequence of municipal incompetence or municipal leaders giving in to local interests,” says Gillette, who advocates massive federal aid for states and cities. “This is a function of an exogenous shock. What we're seeing is not amenable to a more professional state body coming in and taking over the city finances.”

Bagenstos and other experts, including the University of Pennsylvania’s Robert Inman, say that institutions like emergency managers and financial control boards could be installed in the wake of the pandemic, rather than amidst its throes. The recovery from this depression is likely to be unequal, like the aftershocks of the Great Recession, which hit areas like Detroit harder and longer than America’s superstar cities like San Francisco and Boston.

For cities that weren't seeing the benefits of the 21st century’s narrow urban revival, especially smaller municipalities that were teetering on the edge before the pandemic took hold, states could well move in to make decisions for beleaguered local leaders in the medium term. That’s what happened in Michigan, after all. The emergency managers weren’t appointed until four to five years after the Great Recession itself. 

“It wouldn't surprise me for the cities that are on the fence right now to fall off in two or three years,” says Inman, Mellon professor emeritus of finance, economics, and public policy at the Wharton School of the University of Pennsylvania. “Then PICA arrangements are very likely to be put in place.” 

Inman says that if this kind of oversight does come back, he hopes it looks more like Philadelphia’s PICA model than what occurred in New York or Detroit. In those latter cases, the state-appointed authorities could wade into the city budget and insist that, say, sanitation workers had to be cut, a particular asset sold, or a specific union contract rejected. In PICA’s case, the authority only looks at the final budget and ensures that the city isn’t running a deficit. They don’t make choices or pronouncements about individual budgetary line items or taxes. 

Instead, PICA sets out basic requirements: Philadelphia must map out a five-year plan for itself and it can’t run a budget deficit. In addition to these basic competency requirements, the state-empowered board also has power to reject the final budget, at which point hundreds of millions in state funding could be pulled. But that threat is so huge that it's never realistically been considered. 

Still, Inman says PICA’s existence gives Philadelphia politicians the understanding that they cannot govern outside their means. The current mayor, Jim Kenney, even argued for the authority’s continued existence before the pandemic because its backstop gives creditors more confidence and, relatedly, the city gets lower interest rates.

For Bruce Katz, all of these policy interventions are possible in the post-pandemic future. He says the current crisis will place enormous pressure on local governments to change their ways, probably at the prompting of a higher authority. He foresees municipal consolidations, service sharing across borders, and various forms of state oversight. 

“We're in the early stages here,” Katz says. “But the fact of the matter is, I think oversight, like the one we saw in New York and elsewhere, is just one of many possible outcomes here.”

Jake Blumgart is a staff writer for CityMetric.


How the rise of anti-crime politics caused lasting harm to Black Americans

"I see an awareness that has developed in the Black community in the last 10 years or so about how deeply racist the criminal justice system has become," James Forman Jr. says. (David McNew/Getty Images)

The police killing of George Floyd, and the protest movement that emerged from it, has reinvigorated a national conversation around reinventing criminal justice policy in the United States.

At the same time, reports that violent crime is rising in many US cities have resurrected talk of the much-disputed “Ferguson effect,” a theory put forward by law enforcement professionals, and some researchers, who argued that police slowdowns in the wake of the first wave of Black Lives Matter protests resulted in elevated rates of violent crime. President Donald Trump is trying to weaponise this narrative, paired with images of federal officers clashing with protesters in the streets of Portland, to wage a 1968-style backlash election campaign.

“People who want to mobilise a lock-them-up style of either policing or prosecution have tried to weaponise those short-term increases,” says James Forman Jr., professor of law at Yale Law School. “Criminologists will say you have to be very, very cautious about short-term movement [in crime statistics]. We don't know whether or not what we're seeing right now [with violent crime increasing] is going to sustain itself. But the fact is, it's here and people are talking about it.”

In 2018, Forman won the Pulitzer Prize in nonfiction for his book Locking Up Our Own: Crime and Punishment in Black America. Drawing on his experience as a public defender in Washington, DC, he traced the emergence of anti-crime politics in late 20th century Black communities. Forman showed how newly empowered Black politicians fought for policies they believed would protect and uplift Black Americans, but inadvertently contributed to mass incarceration. 

CityMetric recently caught up with Forman to discuss crime trends, where he sees reason for hope in this moment and how the Black political class’s attitude toward crime and punishment has shifted since the latter part of the 20th century. 

This interview has been edited and condensed. 

There is talk right now about a resurgence of crime and violence in American cities. We saw similar, more localised concerns after the initial 2015 Black Lives Matter protests in Ferguson and Baltimore. Do you fear this could reinvigorate the kind of politics you describe in your book among segments of the Black community and political class?

I fear that it could be reinvigorated nationally and also in the Black political class. Look at the political conversations that are happening in Atlanta right now, for example, a city that also has seen a short-term uptick in crime as it is a site of a lot of protests about George Floyd and Breonna Taylor on the national level, as well as Rayshard Brooks and Ahmaud Arbery more locally in Georgia.

I think that you can already see in some of the language of the local elected officials this idea that we have to be very careful about pulling back. [They are saying] “while the protesters may make some valid points, we can't risk returning to the ‘80s and ‘90s.” Those decades really traumatised the United States, and particularly traumatised Black communities. There's a deep fear about returning to the levels of the violence that we saw in the crack years.

You write a lot about class divides among Black Americans, where middle income and elite Black people don't suffer as much from extremely punitive policies. They also have closer ties to the politicians who are creating these policies. There are very specific groups of people, even in marginalised communities, whose voices are heard.  As a result of these dynamics, you write about Black politicians fighting for things like mandatory minimum prison sentences or against decriminalising marijuana. Is there still that disconnect between those who suffer the most from criminal justice policies and those who are actually heard in political discourse?  

Let me just say a caveat, that when we talk about class divisions in the Black community it's important to hold two truths in our head at the same time. Bruce Western and others have shown the way in which class, educational status, income can dramatically reduce the likelihood of being hardest hit by the criminal system – namely incarcerated. Middle class and upper middle class Black people get some measure of protection. It's also true at the same time that Black people of all classes are worse off relative to their class counterparts in the white community. 

One area where class is least protective is policing and police stops. The police do not know how many degrees you have. They don't know how much money you have in your bank account. I want to be very clear that in making this point about class, I'm not making the argument that race or racism don't matter in this context. 

In terms of how it plays out now, I see an awareness that has developed in the Black community in the last 10 years or so about how deeply racist the criminal justice system has become. Twenty or 30 years ago they had a consciousness, but there's levels of understanding. Many of the people I write about in the book wanted to promote the interests of the Black community. They weren't motivated by indifference or callousness. When presented with mounting evidence of how awful this system has been in Black lives, they're reconsidering and recalibrating. 

Lots of former elected officials have said to me some version of “I didn't know at the time and I appreciate that you showed us in our full complexity. I appreciate that you showed the pressures we were under. If I had known then what I know now, maybe I would have been less quick to go along with some of these harsh measures.” 

The second thing that has affected the Black political class has been the emerging movements, led by Black people in particular and led by young people. They not only educated leaders, but pressured them and made them understand that there is a political cost. If you're not moved by the moral argument, then you'll be moved by the political argument. You'll be moved by the people protesting outside the office of District Attorney Jackie Lacey in Los Angeles, for example, where Black Lives Matter LA has held, I believe, a year of consecutive protests against a Black district attorney who has had really some of the worst practices.

From what I can tell, she's been pressured by the movement to change some of her positions on important issues like prosecution of low-level drug offenders, for example, and the aggressiveness with which she prosecutes police officers for acts of violence.

What do you make of the calls to defend or even abolish the police?

What I find so compelling about abolition, initially in the prison context and extended to the police as well, is that it shifts the conversation and forces us to go through experiments in which we imagine what it would take to build that world. I think that exercise is very important, because it pushes us further than we are naturally inclined to go. Cultivating a broader imagination is an incredibly important part of this work, because as you know from my book, often it was lack of imagination that caused people to fall back on [punitive policies]. 

That's what caused D.C. Councilmember David Clarke to call the police rather than public health experts when he was overwhelmed with letters about heroin addicts in public space. He was anti-drug war, but he couldn't imagine responding to a call for help with heroin addicts with anything other than police. That's a very common move from even really good and progressive people. 

People who are for defunding, for abolition, are absolutely right about reinvesting that money into alternative structures that support communities. But the reinvestment part doesn't follow naturally from the terms. We might want to come up with a term that captures the new stuff we want to do. I think that's particularly important because one of the reasons Black communities have ended up supporting more police is that Black communities have always wanted their fair share of the resources.

Then, the evidence suggests the United States has too many police officers doing prophylactic, preventative, or stop-and-frisk style policing. The style of policing that leads to district level harassment, pulling people over for no reason. But we have too little investment in the parts of police departments that investigate unsolved crimes. I'm talking about the investigator or the detective who comes to your house after there's been a robbery, an assault, a rape, or homicide. 

As compared to European countries, in the United States we actually underinvest in those parts of our police departments. Jill Leovy’s book Ghettoside shows this in dramatic detail. She describes an LAPD that's stopping and frisking Black drivers wantonly and yet the homicide detectives are still relying on a fax machine and the fax machine is broken. They have to go with their own money to Staples to buy a printer. Meanwhile, other aspects of the department are kitted out in this ridiculous riot gear that makes them look like they're in Fallujah. 

That under investment is particularly damaging to Black communities because we're disproportionately victimised by crime. Because of racism and this allocation of resources, the police are less likely to respond in Black communities. The kids I used to work with in the charter schools in DC, we talk about no snitching, but one of the reasons they would never call the police after they'd been victimised by crime is they would say, “They're not even going to come. You're wasting time.” 

I did a Q&A with Jill Leovy too and her argument is one I've struggled to articulate in our present moment. She argues the state doesn't have a monopoly on violence in low-income Black neighbourhoods, because investigations of violence are deemphasised and crime victims or their loved ones often take retribution into their own hands.  But right now, establishing or preserving the state's monopoly on violence isn't an appealing talking point. 

Yes, this is another thing nobody's talking about. Whatever we're going to do instead of the police has to be accountable to the public. The best, most direct way to have accountability is to have the individuals be public employees. As long as we have 300 million guns in this country at least some of those state employees are going to themselves be armed. It's unreasonable to ask them to do the job without it. Not as many need to be armed as are armed now, but some of them need to be. But they can't be hiding behind union contracts or civil service protections which make it impossible to remove even the worst performing, most abusive officers. 

We can not call them police if we want to. That's semantic, but maybe symbolism matters. But those people have to be state employees. They can work with community-based nonprofits, but there are also communities that don't have as robust of a nonprofit network, and they deserve protection too. These [community] groups have to be accountable to the state and, when they don't exist, the state has to be there. 

Progressives get all the points I just made when it's applied to education. The notion that things be public and accountable to the state is understood when it comes to schools. It's exactly why so many people on the left are opposed to charter schools, because they say they don't have public accountability. They want these things to be a state function. But this point about the difficulty in removing this entirely from the hands of the state is, I think, one that liberals and progressives understand from other contexts.

Jake Blumgart is a staff writer at CityMetric.