Decree or democracy? State takeovers and local government financial outcomes

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.

The Revenue Productivity of India’s Subnational VAT

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