State intervention in local government fiscal distress

A challenge in fiscal decentralization is the horizontally unequal capacity among local governments. The industrial decline in parts of the United States in the second half of the 20th century has led to population loss and economic stagnation, which contributed to local government fiscal problems. Eight of the thirteen states enacting legislation to intervene in distressed localities are in such regions. This chapter starts with a general framework of state responses to local fiscal distress and then focuses on state intervention laws. The majority of the states adopt a state-centric approach, where the state is in charge of designating local fiscal distress or designing recovery plans. Empirical analyses test whether the prospect of local autonomy loss brought by state intervention laws induces localities to avoid intervention-triggering conditions. Local governments do not improve fiscal conditions post-legislation, nor are state intervention laws associated with better local financial management. However, early warning systems that aim at monitoring local fiscal conditions are associated with improved local internal control.