No 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 governments. The staggered difference-in-differences analysis shows emergency managers improve budgetary solvency and increase fiscal reserves. These enhancements are achieved through significant reduction of general fund expenditures. 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 financial and economic indicators deteriorate. • In contrast with local elected officials, EFMs favor reducing general fund expenditures and liquidating assets to resolve local fiscal crises. • EFMs do not outperform the local elected officials that they replace across several indicators of financial health.

State-imposed limitations on local government taxation and expenditures (TELs) are a common part of American federalism. But the consequences of TELs are the subject of debate. Are TELs institutional constraints that harm local governments? Or are TELs institutionally irrelevant veils easily pierced by political actors? This research uses the removal of an assessment restriction in Minnesota to evaluate the effect of TELs on the financial health of local governments. It finds that TEL removal had no effect on the financial health of Minnesota cities. Additional tests demonstrate that the results are not driven by a lack of bindingness in the TEL, by increases in property tax rates, or by new non-property tax revenue. It concludes that TELs are closer to institutionally irrelevant than to meaningful constraints.