What is a local governmentfiscal crisis?

• “an unstable or crucial time or state of affairs in which a decisive change is impending; esp: one with the distinct possibly of a highly undesirable outcome.“

• “The turning point for better or worse in an acute disease or fever.”

• When there is reasonable concern over a unit’s ability to pay wages and salaries or other outstanding bills, revenues and expenditures are consistently out of balance and/or there is significant concern about the validity of budgeted and projected revenues and expenditures.

Storm Analogy• Storm Outbreak: evidence of disturbance

are undeniable and impacts are widely felt– Declaration of emergency accompanied by

takeover by state or courts

• Storm Warning: severe weather is imminent, i.e. has been spotted with the human eye or radar. – Public recognition of a serious problem in the

finances of the organization

Storm Analogy

• Storm Watch: conditions are favorable for severe weather to develop – Still to be defined in that conditions for crisis

may exist and be escalating but not yet recognized by the public, the organization, or the regulatory agencies.

• Crisis comes between Watch and Warning.

How States respond

• Review audits for deficits, defaulted bond payments, outstanding payables, inadequate fund balances, or inability to collect and transfer taxes.

• Approve bonds

• Withhold state-shared revenue or other funds

• Takeover financial operations

How States respond

• Ohio- two tier system with Fiscal Watch requiring plan and Financial Emergency requiring appointed financial planning and supervision commission.

• North Carolina- three-tier program including two levels of review and assistance before enacting financial emergency.

State of Michigan

• Local Government Fiscal Responsibility Act (1990, amended 2003)– Hamtramck, $2.5 million deficit– Highland Park, $19 million deficit– Flint, $34 million deficit

Michigan Act 72

• Strengths:– Broad scope of powers given to appointed

manager– More efficient decision making

– Preserve public process– Manager accountable to state- locally

apolitical position

Michigan Act 72

• Weaknesses:– Politically driven process– Waits for severe conditions before taking

action; no intermediate step

– EFM is political appointee rather than experienced local government manager

– Does not address underlying structural imbalances; strictly to address mismanagement

Similarities between Crises

• Early warning signs– Symptoms of financial distress before audit

• Susceptibility Factors– Characteristics that indicate a greater

likelihood of developing fiscal distress similar to that of medical risk factors

Susceptibility Factors• Existence of property tax reform or other

artificial cap on resources• Influence or constraint of legislation such as

mandatory bargaining or cost of service calculation requirements

• Economic distress such as loss of major employer or taxpayer, natural disaster, etc

• Urban, suburban or rural identity and economy• Age of community and infrastructure

Susceptibility Factors

• Relative wealth and percentage of LMI residences

• Economic base: industrial, commercial/retail, technology, collegiate,…

• Degree of racial, ethnic, socioeconomic diversity and political relationships

• Political structure

Susceptibility Factors

• Maturity of retirement system; scope of retirement compensation

• Degree of government employee unionization and relative influence

• Relative ratio of employee to population, cost per capita, etc. over time and compared to same-sized communities

Early Warning Signs

• Inability to adopt and amend the budget on a timely basis

• Inability to amend ordinances and policies to comply with federal and state regulations on a timely basis

Early Warning Signs

• Expenditure Side:– Long-term liabilities increasing as a

percentage of budget over CPI– Large increases in on-controllable expenses

including pension contributions, litigation settlements, healthcare premiums, …

– Significant increase in length of time to pay bills

Early Warning Signs• Revenue Side

– Major revenues or total revenues increasing less than rate of inflation

– Repeated substantial cuts in major revenues such as state-shared, grants, or abated taxes

– Recovery of significant funds by granting agencies

– Revenues increasing slower than major categories of expenses

– Repeated need for revenue anticipation bonds of increasing amounts

Making it work…• Commonalities between cities known to be

in fiscal distress provide the key for earlier detection and action as well as identification of risk factors for financial crisis.

• Understanding the relationship and nuances between operations, management, and finances will increase the ability of legislators and local officials to take action appropriately to mitigate fiscal stress before it deteriorates into financial emergency.