Municipality Bankruptcies Signal Fiscal Health

Bankruptcies among municipalities aren’t something you hear about every day. But since January 1, 2010, more than 60 cities and other U.S. municipalities have filed for bankruptcy according to Governing.com. Among the largest of these bankruptcies is Detroit, which filed bankruptcy in 2013. Historically, other major cities and counties have filed bankruptcy as well, including Jefferson County in Alabama and Orange County in California. However, just because it’s not uncommon doesn’t make it any less surprising, or significant. These bankruptcies signal fiscal health.

Whenever a municipality files bankruptcy, it’s an important learning opportunity—not only in terms of how to prevent this from happening again, but how to respond to signs of fiscal health. Monitoring the fiscal health of local governments could be a good way for states to prevent such filings and ensure that it is not a surprise when local governments face a fiscal crunch.

According to The Pew Charitable Trusts, only 23 states currently take proactive steps to monitor and track the financial health of the municipalities located within them. Pew suggests the following steps can help states evaluate fiscal health of localities:

    • Identify what qualifies as “financial distress” within a municipality or state.

    • Pinpoint the departments or agencies responsible for analyzing and classifying financial distress.

    • Determine what type of data will be used to detect financial distress (audits, budgets, financial statements, etc.).

    • Classify the indicators or metrics that will signal financial distress using the selected data types.

    • After setting the above conditions, monitor them on a regular basis and take action at the first sign of financial distress.

Weak tax revenue growth, coupled with rising healthcare, education, and infrastructure costs, are already placing pressures on state budgets. Counties or cities facing fiscal distress can only add to these challenges for state budgets.

And while the above policies and recommendations seem easy enough, fewer than half of the country’s states engage in proactive steps to prevent a larger crisis. It becomes apparent that additional oversight is needed among various levels of government to ensure financial health.

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