Decree or democracy? State takeovers and local government financial outcomes

• Published date: 01 July 2023
• Author: Akheil Singla,Thomas Luke Spreen,Jason Shumberger
• Date: 01 July 2023
• DOI: http://doi.org/10.1111/puar.13609

RESEARCH ARTICLE

Decree or democracy? State takeovers and local government

financial outcomes

Akheil Singla

1

|Thomas Luke Spreen

2

|Jason Shumberger

3

1

School of Public Affairs, Arizona State

University, Phoenix, Arizona, USA

2

School of Public Policy, University of Maryland,

College Park, Maryland, USA

3

Social Science Research Institute, Pennsylvania

State University, University Park,

Pennsylvania, USA

Correspondence

Thomas Luke Spreen, School of Public Policy,

University of Maryland, 7805 Regents Drive,

College Park, MD 20742, USA.

Email: tlspreen@umd.edu

Abstract

Many states possess the authority to intervene in local fiscal emergencies, in some

cases curtailing decision-making powers of local officials through the appointment

of an emergency financial manager. Previous research has recognized that these

managers can push through unpopular reforms that may improve financial health

but come at the expense of local control and democratic accountability. We assess

the financial outcomes after eight recent state takeovers relative to a matched

counterfactual comprised of similarly distressed general purpose local govern-

ments. The staggered difference-in-differences analysis shows emergency man-

agers improve budgetary solvency and increase fiscal reserves. These

enhancements are achieved through significant reduction of general fund expen-

ditures. Several long-term indicators show deterioration in financial health after

state intervention reflecting a significant decline in long-term assets. Overall,

municipalities subjected to a state takeover did not realize significant long-run

improvements in financial health indicators relative to counterfactual

governments.

Evidence for practice

•States exercise their power to appoint emergency financial managers (EFMs)

that assume decision-making authority of a municipal government when finan-

cial and economic indicators deteriorate.

•In contrast with local elected officials, EFMs favor reducing general fund expen-

ditures and liquidating assets to resolve local fiscal crises.

•EFMs do not outperform the local elected officials that they replace across sev-

eral indicators of financial health.

INTRODUCTION

A defining feature of American federalism is that local

governments are creatures of their respective states. The

10th Amendment of the U.S. Constitution permits states

to impose their will on local governments through a wide

variety of policy actions (Riverstone-Newell, 2017). The

strongest of these actions, state takeover, replaces the

normal structures of local governance with a state-

appointed official. The goal of this intervention is to

return distressed municipalities to fiscal sustainability.

Although numerous states have completed takeovers,

empirical evidence about the success of these interven-

tions is limited. The current dialogue about state take-

overs largely focuses on the detrimental effects of

takeovers on democracy (Nickels et al., 2020). Answering

the question of whether takeovers improve the fiscal

standing of distressed local governments enables a more

nuanced discussion of the tradeoff between the demo-

cratic principles of local control and effective financial

management.

Proponents of state takeover argue that state-

appointed emergency financial managers (EFMs) can pur-

sue tough, unpopular decisions such as cutting

Received: 10 June 2021Revised: 18 January 2023Accepted: 26 January 2023

DOI: 10.1111/puar.13609

This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs License, which permitsuse and distribution in any medium,

provided the original work is properly cited, the use is non-commercial and no modifications or adaptationsare made.

© 2023 The Authors. Public Administration Review published by Wiley Periodicals LLC on behalf of American Society for Public Administration.

Public Admin Rev. 2023;83:911–929. wileyonlinelibrary.com/journal/puar 911

expenditures, raising revenues, and renegotiating public

union contracts that local elected officials and city man-

agers cannot—or will not—achieve on their own. That is,

an EFM can accelerate fiscal recovery through unilateral

decision-making that cannot be achieved through a

deliberative democratic process (Clark & Gorina, 2017;

Wang & Crosby, 2019). From this standpoint, the political

downsides of takeovers are offset by the benefit of a

rapid financial recovery. However, this perspective relies

on numerous untested assumptions. First, it presumes

that local fiscal distress is primarily a function of financial

management that can be remedied by changing the

manager. Second, state-appointed technocrats

will uniformly act in the best interest of local govern-

ments. Finally, the decisions made by

EFMs will meaningfully differ from local elected officials.

Each of these assumptions points to the same question:

Can distressed local governments achieve the same—or

better—financial outcomes through decisions made by

their own duly-elected officials rather than state-

appointed EFMs?

Our research investigates this question by examining

the financial health of general purpose local governments

subject to takeover in the aftermath of the 2007–2009

economic downtown. Many troubled local governments

experienced severe fiscal distress, reflecting deterioration

in their capacity to service outstanding debt and support

public services (Skidmore & Scorsone, 2011). Local gov-

ernments’default rates increased (Yang & Abbas, 2020),

and nine general purpose governments successfully peti-

tioned federal courts for Chapter 9 bankruptcy protection,

including Detroit. Some states responded to local fiscal

crises by using their intervention authority to appoint

EFMs or institute recovery plans with the goal of returning

their localities to a path of fiscal sustainability

(Chapman, 2008). To date, the efficacy of these actions is

very much an open question. Some EFMs successfully cir-

cumvented Chapter 9 bankruptcy, while others eventually

guided their municipalities through the bankruptcy pro-

cess. In one extreme case, criminal negligence and EFM

decision-making culminated in a water contamination cri-

sis in Flint, Michigan, that harmed thousands of city resi-

dents (Nickels, 2019). However, these cursory

observations do not answer what would have happened

in the absence of a state takeover.

Our study addresses this problem by evaluating the

financial outcomes of cities that received a state-

appointed EFM relative to a counterfactual where no

takeover occurred. We do this by matching eight munici-

palities in Michigan and Pennsylvania that experienced a

state takeover between 2009 and 2014 with municipali-

ties exhibiting comparable fiscal and economic distress in

states that lack local intervention authority. We apply a

staggered difference-in-differences model to evaluate

changes in several indicators of local financial health dur-

ing and after the takeover and obtain a few key findings.

First, EFMs acted to restore budgetary balance, which was

accomplished primarily through reductions in general

fund expenditures. Given that most local public services

are funded through the general fund, this result adds

context to previous research showing that EFMs focus on

balancing the budgets of troubled municipalities (Clark &

Gorina, 2017; Zabler, 2020). Second, the analysis shows

that long-run solvency materially declined following state

intervention. We demonstrate that these declines stem

from a reduction in assets, potentially due to the privati-

zation or sale of public assets. Together, the results sug-

gest municipalities subjected to takeover were not

significantly better off than counterfactual municipalities

across several dimensions of long-term financial health.

This article contributes to our understanding of sev-

eral important aspects of local public administration. First,

we add to the academic and political debate surrounding

state takeovers. The costs of EFMs, particularly as they

relate to democratic accountability, are well documented.

By contrast, the potential benefits to financial manage-

ment are unclear. Our study reveals that EFMs achieve

tangible financial benefits by improving budgetary bal-

ance and increasing fiscal reserves. We also find evidence

that long-term financial health deteriorates. This result

adds nuance to the discussion of the efficacy of state

intervention. It helps state policy makers evaluate the nor-

mative issue at hand: do the short-term financial benefits

of state intervention outweigh the interruption of local

democracy? These findings also offer useful guidance to

future emergency managers about how to mitigate the

deterioration in the long-term solvency of the municipali-

ties under their charge.

Second, we expand on the prior literature on state

interventions in local decision-making. This prior research

largely focuses on state intervention in local school dis-

tricts with the goal of improving academic achievement.

Harris and Larsen (2016), Zimmer et al. (2017), and

Schueler et al. (2017) study state takeovers of public school

districts in Louisiana, Tennessee, and Massachusetts,

respectively. They find that these takeover events resulted

in appreciable gains in student test scores and other mea-

sures of academic achievement. However, a more recent

comprehensive study by Schueler and Bleiberg (2022)

finds no evidence of academic improvement, on average,

across all state takeovers of school districts that occurred

between 2011 and 2016. Closer to this study, Guo (2019)

examines the fiscal impact of limited state interventions,

such as technical assistance, on financially distressed Illi-

nois school districts. Using regression discontinuity

methods, he finds limited evidence that these interven-

tions had any significant impact on financial outcomes on

average across the state. We expand on this prior work by

considering the impact of state takeovers on the finances

of general purpose governments where decision-making

authority was fully delegated to a state-appointed EFM.

Third, we improve understanding of local financial

health.

1

Our analysis identifies financial and economic

indicators that predict state intervention into local

912 STATE INTERVENTION AND LOCAL FINANCIAL OUTCOMES