State Intervention and Struggling Municipalities: A look at New York and Indiana

More and more municipalities are filing for bankruptcy because they are unable to provide core governmental services to their community due to a financial crisis and corruption.  Most recently,  Jefferson County Mississippi filed for the largest municipal bankruptcy proving that the current financial crisis is hurting local governments.  To stop these municipal failures states are intervening in the financial affairs of their local governments.  This is not a new concept, but one that may save many localities.

New York has used financial control boards, which allow the state to take control of a municipality’s finances to ensure it does not go bankrupt.  This notion started in 1975 when the New York State legislature passed the Financial Emergency Act of 1975 to help New York City avoid bankruptcy.  This bill created the Financial Control Board of New York City and gave it the power to control the City’s finances and made it a priority to pay the City’s debt.  Other municipalities in New York are controlled by state control boards including the Nassau County Interim Finance Authority, the Buffalo Fiscal Stability Authority, and the Erie County Fiscal Stability Authority.

The Indiana Senate is now attempting to push legislation that will help municipalities  facing bankruptcy.  Senate bill 0355 would allow political subdivisions (including school districts) to seek the help of the Distressed Unit Appeal Board when they cannot meet their financial obligations.  The board would appoint an emergency manager to work with the municipality.  The manager would have broad powers to rehabilitate the municipality’s finances.  Some of the manger’s powers would include the ability to renegotiate labor contracts and control salaries.

The Indiana bill has been amended to take out a provision that precluded a municipality from seeking help without first filing for bankruptcy.  States are trying to help their local governments before the problem is so severe that municipal bankruptcy is the only answer.  Currently local governments are feeling the fiscal stress and are looking for avenues that will help them keep their heads above water.  State intervention is a route that could provide the assistance local governments need.