Emergency Management 2.0

Abstract

There are more causes of fiscal distress than remedies. A nascent field is emerging built on the practices utilized to confront fiscal distress. The usual method follows a federal structure in that the state has ultimate responsibility when local governments fail, leaving communities to live in a “new normal” of austere oversight. As more urban areas contend with extended economic downturns, political paralysis, and social apathy in the face of unsustainable governance, there is a need for a strategic approach to the administrative side of fiscal distress management. Although cutbacks, consolidations, and service reductions are the tactical tools of the trade, emergency financial management also requires a guiding strategy that protects the fundamental purpose and character of the local government. This article uses ideas from disaster management and the fiscal crises in Michigan to develop four key elements in a strategic approach to emergency financial management.

Keywords

fiscal distress financial emergency strategic management

Introduction

Now that there has been the unfortunate opportunity to reflect on acute fiscal distress for several years, it is time to synthesize the various approaches to its study and attempt to formulate a strategic approach to emergency financial management. It is possible that fiscal distress will be a pernicious and persistent plague on local governments and urban regions in the new century, provoking a more institutionalized need for emergency financial management in the context of a “New Normal” (Ammons, Smith, and Stenberg 2012; Perlman and Benton 2012). The seeming inevitability of recessions, infrastructural decay, corruption, and other threats to urban areas’ stability requires more varied research into preventive measures. The past few cycles of fiscal distress have shown that these situations harbor a degree of mystery and local government responses are haphazard. Just as disaster management (heretofore referring to natural and man-made catastrophes of the phenomenological sort) has long lamented the absence of a sustained strategic approach (Britton 2001; Choi 2008; Mann 2014; Waugh and Streib 2006), so too must fiscal distress management move away from a reactionary approach and take the long view for the welfare of local governments. A strategic perspective allows for framing the issue to varied contexts, taking into consideration the regional economic, political, social, and environmental factors to form a coherent strategy for emergency financial management rather than just applying hit-or-miss tactics.

This research builds on the extant literature of fiscal distress management to provide a deeper understanding of the nature and need for emergency financial management. While the practice has existed in some form for decades, emergency financial management did not emerge through a theoretical development based on broad empirical analysis. Although research has provided some prescriptions and models for the prevention of fiscal distress, there is little discussion about how administrators can provide the rationales needed for the political and public citizen support to enact drastic reforms that cut to the bone of a community (C. Levine 1978). This shortfall may be addressed by drawing on an understanding of fiscal federalism (Bowman and Kearney 2012; Cigler 1993; Gere 1982; Saxton, Hoene, and Erie 2002), having a practical plan for better prevention and treatment of fiscal distress crises (Coe 2008; Kloha, Weissert, and Kleine 2005a; Trussel and Patrick 2009), and educating the citizens and administrators in urban areas about the need for a strategic approach to confronting fiscal distress (Jimenez 2013; Martin and Martin 2011). The objective of this research is making a theoretical argument to develop a strategic approach to emergency financial management. The approach borrows from disaster management to emphasize the value of mitigation and preparedness for the potential causes of fiscal distress in a local government, as opposed to just focusing on response and recovery tactics. The contribution to urban administrators is a reframing of emergency financial management as part of their continuous practice, rather than as an ad hoc reaction when circumstances have gone sour.

The State of Michigan—specifically the cities of Pontiac and Detroit—is used throughout this work to illustrate fiscal distress management in context, as well as to provide some evidence of the need for a strategic approach. The research seeks to take some hard-learned lessons from disaster management and extend them, where applicable, into fiscal distress management for more effective responses to the financial emergencies that threaten urban regions. The contributions from the Michigan examples and disaster management are interspersed in this article where appropriate. The literature review presented here begins by establishing the salient concerns of fiscal federalism, and then highlights several studies that introduce useful lessons learned during the Great Recession of the past decade, as well as introducing research that promotes the strategic approach. The section following that offers a typology of the factors of fiscal distress. The final section of this article is the concluding development of the strategic approach for improved outcomes in urban areas suffering from fiscal distress.

Literature Review of Research and Practices

Fiscal distress, as a trend and topic of concentrated research, is sporadic. The literature tends to concentrate in and around three periods: New York City’s financial crisis in the 1970s, the rustbelt declines from the late 1980s to early 1990s, and the recent circumstances following the Great Recession in the late 2000s. There is much discussion about the relationship between states and local governments in situations of fiscal distress, including the case of Michigan (Eisinger 2014; Kasdan 2014; Skidmore and Scorsone 2011). Some recent works (H. Levine, Justice, and Scorsone 2013; Luby 2013; Perlman and Benton 2012; Scorsone 2014) gather different perspectives and filter through the research to categorically surround the issue. There have been several excellent articles that offer histories of fiscal distress from varying perspectives on the causes and treatments (AlBassam 2011; Berman 1995; Cahill et al. 1994; Honadle 2003; Martin and Martin 2011). Other research addresses ideas at work and the predictive possibilities for public administration (Ammons, Smith, and Stenberg 2012; Cahill et al. 1994; Coe 2008; Kloha, Weissert, and Kleine 2005a) as well as newer research attempts to evaluate responses (Afonso 2013; Jimenez 2013; Luby 2013; Nelson 2012). This literature review focuses on the broader ideas of fiscal federalism and predictive approaches of fiscal distress to set up the analysis of causal factors for a strategic approach to emergency financial management.

Fiscal Federalism

The foundation for examining the history and tactics of fiscal distress management begins with fiscal federalism. The responsibility of a government at a particular level in the American federal system is constitutionally determined; however, this is not to say that every situation is clear-cut with no room for interpretation. Although many states face grim debt services due to economic shifts, investment losses, and mismanagement, the states are nevertheless bound to present a balanced budget to the national government. The local level of government is similarly beholden to the state, but there exists the option of filing bankruptcy under state government control for the majority of states (Scorsone 2014), with a multitude of levels of state government intercession. This alone might suggest that the greatest responsibility is at the lowest level of determinism, but the responsibility of the state to answer for its lower governments has prevailed in fiscal federalism (Bowman and Kearney 2012).

The theoretical debate around the locus of fiscal accountability is between the idea of home rule and the more constructivist view of the state–local relationship (Saxton, Hoene, and Erie 2002). The U.S. Constitution decrees that the sovereignty of the states is derived from the national government, with any powers shared with the lower governments within the individual state’s discretion. Yet this hierarchy of authority often runs against local rights of representation and a local government’s ability to determine its own needs (Gere 1982). The Cooley Doctrine—a legal ruling from Michigan’s own Chief Justice Thomas Cooley in the nineteenth century—argued that the localities had inherent rights to legislate themselves and the state’s role was to support, not subordinate, the local government. Dillon’s Rule has been the predominant interpretation of federalism, however, holding that the state’s power to grant authority to the localities includes the power to take it away. In the fiscal federalism literature, Dillon’s Rule and the state’s ultimate responsibility for its local governments are similarly supported (Berman 1995; Bowman and Kearney 2012; Cahill et al.1994).

Yet there is significant recognition that it is not a purely hierarchical relationship, especially where larger urban areas are concerned or places where the localities and the states share objectives and must reconcile competing interests. Cigler (1993) described the context of fiscal federalism from 20 years ago that shares common traits with much of today’s financial distress situations: “The emerging system of fiscal federalism relies upon shared fiscal, service delivery, and policy-making responsibilities among states and their local governments” (p. 181). Increased sophistication of intergovernmental relationships since the 1990s has softened the strict interpretation of Dillon’s Rule. Cigler (1993) continued, “Improved state-local fiscal relationships are a key for a successful decentralized fiscal federalism. The states have significant powers over the basic policy-making and regulatory authority of local governments, as well as local revenues” (p. 184). This is especially pertinent when the interests and influence of large urban areas are competitive with the rest of a state, as seen in the situations of New York City in the 1970s, Cleveland in the 1990s, and Detroit today. In cases where local governments have significant power over populations beyond their own jurisdictions, the state’s decision to intervene may be constrained by considerable outside concerns such as pending court rulings, national government agendas, or large labor unions.

Anderson (2011) observed that the “current fiscal crisis has brought a startling escalation in the powers granted to state intervention authorities,” noting that Michigan and Rhode Island have been recent examples of states that implemented strong legislation for executive branch supersession of localities (p. 577). The laws do not directly address the structural problems that led to the crises, but do have an impact on local democracy. She offered the concept of “democratic dissolution” to interpret new models of receivership: “removal of the city’s government without the termination of the city’s corporate form” in contrast to true dissolution, which is the termination of a charter without local consent (Anderson 2011). “Democratic dissolution captures the centralization of state power taking place and acknowledges the incapacitation of local officials” (Anderson 2011). The problem with such policy, according to Anderson, is the belief that sacrificing the value of local democracy will necessarily ameliorate local fiscal distress.

Ammons, Smith, and Stenberg (2012) confronted the problem point blank: “The question is whether the fiscal pressure is so great that it will evoke more than incremental changes across the landscape of local government . . . Will it evoke radical change?” (p. 66S). Their research on local government management from 1971 to 2005 suggests that the answer to this question was typically in the negative. They offered a hypothesis that radical change adherents would support:

Local governments across the nation will respond to severe financial stress by imposing on themselves fundamental and permanent changes in their services and structures, or will have such changes forced on them by their states. These changes will be lasting, so as to ensure not only survival from the immediate crisis but also avoidance of distress from a similar cause in the future. (Ammons, Smith, and Stenberg 2012, p. 67S)

Yet Ammons, Smith, and Stenberg (2012) then regretted to report that the conditions that are “now referred to as the ‘new normal’ are unlikely to change fundamentally the scope, quality, or delivery of services in most counties and cities or to reshape the local jurisdictional or intergovernmental landscape, despite predictions to the contrary” (p. 72S). The contradiction between their hypothesis and conclusion suggests that past cases of fiscal distress are not being taken as learning opportunities for a strategic approach, as recommended in this research.

Predicting Fiscal Distress

Fiscal federalism is a part of emergency financial management insofar as the state having both the awareness of a local government’s distress and the authority to intercede when necessary. The ability to anticipate fiscal distress is of concern to local governments and states. There is continuing debate over what metrics are germane to assessing a local government’s degree of distress (Kloha, Weissert, and Kleine 2005b). Coe (2008) advocated a three-step approach: (1) monitoring local finances to predict fiscal distress, (2) providing assistance in various forms, and (3) using intervention authority to force corrective action as needed. Alas, this model fails where political and bureaucratic inertia makes it too easy for the first and second steps to be ignored (Kloha, Weissert, and Kleine 2005a; Stehr 2006).

Trussel and Patrick (2009) tested a predictive model of the relationship between fiscal distress and several of its possible causes. For example, they found strong relationships that indicate “decreases in inter-governmental revenues (relative to total revenues) and increases in administrative expenditures (relative to total expenditures) have the biggest influences on reducing the likelihood of fiscal distress” (Trussel and Patrick 2009, p. 581). This indicates that local governments face risk if they are overly dependent on outside sources of revenue, as well as problems encountered by a budget with too many programmatic and debt-service costs (as opposed to the latitude of discretion in “administrative” costs). They hold that a state’s (in)ability to monitor local governments is the main constraint in preventing fiscal distress. Thus, a workable fiscal federalism depends on keeping close watch for changes in the ratio of independent revenue and portion of the budget dedicated to public management. Chernick, Langley, and Reschovsky (2011) added another indicator in their model for central city spending reductions based on the structural issues underlying municipal fiscal distress, namely, the sea change effect (i.e., permanent and major shifts in labor, industry, and employment levels) of the Great Recession on local economies and the housing crisis’s snowball effect on property tax revenues. Their analysis accurately indicates that Stockton, California, would suffer greatly due to housing value declines, as evidenced by its Chapter 9 bankruptcy in 2013.

State policy responses to fiscal distress are necessarily reactive measures because they are implemented when a situation is out of the control of the local government: “States use indicators that recognize or identify distress after it has occurred” (Cahill et al. 1994, p. 261). The responses typically involve some combination of efforts to increase revenues and reduce expenditures. A recent best practice survey of county governments in Georgia and California by Afonso (2013) reports more success when measures to reduce expenditures—as opposed to raising taxes—were put in place before communities felt the eventual effects of the Great Recession. Such preventive action runs contrary to the usual bureaucratic and political processes that look to empirical justification for change. C. Levine, Rubin, and Wolohojian (1981) presented three major obstacles: (1) issues of credibility about the nature and extent of the actual crisis, (2) resistance to change and bureaucratic inertia, and (3) opposition from special interest groups that expect to be negatively impacted by any cutbacks. They noted that

under conditions of fiscal distress, local officials tend to take a short-term view of their problems . . . Unfortunately, shortsighted decisions that cut costs with a concern for only one fiscal year may produce secondary consequences that are counterproductive in the long run. (C. Levine, Rubin, and Wolohojian 1981, p. 14)

Beyond the predictive models, there is little theoretical discussion in the current literature; fiscal distress research has not taken a step back from the mainstream managerial perspective. Nelson (2012) made a contribution toward a strategic approach, showing that the tactics of fiscal distress management in local governments demonstrates bounded rationality characteristics, an important consideration for trying to generalize a strategy. Jimenez (2013) discussed strategic planning as a way to avoid fiscal crises, but did not confront the kind of planning that needs to be in place in case the crisis is imminent. There is broad agreement that predicting fiscal crises is the optimal approach on the tactical side, but there is a dearth of consideration about how to strategically plan for such crises. The following section describes a scheme for analyzing the causal factors of fiscal distress to establish a strategic approach.

Factoring Fiscal Distress

Although economic factors are the broadest predictor of fiscal distress insofar as governments function by virtue of their tax receipts, political issues and social behaviors are also pertinent. Chapman (2008) examined the trends of state and local government budget imbalances to identify “three specific sets of pressures that affect subnational fiscal sustainability—cyclical, structural, and intergovernmental” (p. S115). These pressures can then be supplemented with Rubin’s (1982) analysis of the fiscal distress literature that found three theoretical elements: migration and tax base erosion, bureaucratic growth, and political vulnerability. All of these pressures and elements are present in the current context for Pontiac, Detroit, and many other distressed cities. Cahill et al. (1994) collected evidence that makes “a convincing argument that most distress is caused primarily by structural factors, including changes in the economic base of localities, regions, and the nation, as well as shifting demographic patterns” (p. 261).

A simple framework for analyzing fiscal distress can help to deconstruct the problem for local governments as they search for solutions in policy and/or person. Macroeconomic factors tend to be the catalysts—such as resource crises, property value bubbles, and investment market fluctuations—whereas the microeconomic conditions locate the fiscal distress in specific contexts. For instance, Detroit was not only vulnerable to the Great Recession like any other city, but it was also susceptible to fiscal distress from factors that were unique to its urban character. The context must therefore be considered as a unique agglomeration of internal and external factors (Table 1).

Table 1.

Factors of fiscal distress.

Dimension Versus Scope	External	Internal
Economic	Macro Behavior	Micro Behavior
Political	Federal Policy	Local Policy
Social	Global Trends	Provincial Trends
Environmental	Catastrophes	Infrastructure

This depiction expands on the two-by-two matrix that C. Levine (1978) offered as causes of public organization decline; his “admittedly crude scheme” divided internal and external causes with political and economic/technical dimensions (p. 318). The variety of fiscal distress factors may extend beyond the purview and control of bureaucracy, but an understanding of what contributes to the hardships can help public administration shape responses in a strategic plan. When the fiscal emergency is significantly beyond the capabilities of any one governing body, then such a scheme can help assign responsibility for a coordinated effort. It can also help to identify mistakes; as Thompson (2014) advocated, the knowledge of where the fault lay is also important. A triage analysis by a dedicated administrator (a “preventive ombudsman”) may provide for a compartmentalized approach that will make the situation more manageable as the proper authorities are deployed to treat the factors in due order. Such a scheme to analyze fiscal distress has value for informing a strategic plan, insofar as local government administrators can allocate resources and implement policies to best confront the causes of their problems.

These factors are simultaneously self-explanatory and open to local interpretation. For example, the flooding of New Orleans by Hurricane Katrina in 2005 could be classified as an external-environmental catastrophe if one discounts the previous warnings from the Corps of Engineers that the levies and flood control infrastructure surrounding the city were insufficient for the potentiality (which would then move the classification to the internal-environmental cell). By contrast, the fiscal distress in Jefferson County, Alabama was centered over the debt deal to restructure the sewer system, thereby attributable to internal factors of the economic, political, and perhaps environmental kind. The bankruptcy of Stockton, California, was a result of economic, political, and social factors both external and internal; the housing bubble burst cut across many categories.

When considering the fiscal emergency in Detroit, there were numerous factors at play. Practically every cell of the matrix could be included as a causal factor, excepting the external-environmental catastrophic factor. The global trend away from Big-Three automaker products, the generous benefit plans for municipal employees, the changing demographics of the local workforce, problems with public utility services, and political corruption weighed on Detroit (Eisinger 2014). As the problems in this city mounted over the course of decades, it might have been beneficial to classify and allocate their monitoring according to departments that would have the authority to plan responses before they became urban catastrophes.

Identifying and classifying the causes of past fiscal crises can generate knowledge of use in the future. Public administrators can use a matrix such as Table 1 offers to guide their attentions in a strategic manner and stave off fiscal distress and/or allocate responses accordingly. An organized approach to the challenges of contemporary urban contexts is important to matching resources and policy; thus, isolating the causal factors of fiscal distress may help inform a strategic approach, as it is developed in the following section.

A Strategic Approach to Emergency Financial Management

Since most state and local governments are required to balance their operating budgets, the declining fiscal conditions shown in our simulations suggest that, without intervention, these governments would need to make substantial policy changes to avoid growing fiscal imbalances. That is, absent any intervention or policy changes, state and local governments would face an increasing gap between receipts and expenditures in the coming years. (Government Accountability Office [GAO] 2009, p. 3)

There may indeed be a “new normal” after the Great Recession. Local governments face an increased level of susceptibility as external factors of fiscal distress and decreased support from intergovernmental sources impact their ability to deliver good governance. As day-to-day effectiveness is compromised, local governments will be caught in a difficult situation as they try to implement a strategic approach to emergency financial management. They must attempt to carry on without admitting any likelihood of their own shortcomings in managing fiscal affairs, which would further undermine their legitimacy. Whereas C. Levine (1978) cautioned almost 40 years ago that “we know very little about the decline of public organizations and the management of cutbacks,” modern public organizations have become all-too-familiar with such conditions (p. 316). The “new normal” includes greater risk of fiscal distress as local governments enter increasingly complex arrangements to stay ahead of their debts. The problem is often that short-term tactics are implemented without consulting the long-term objectives; there is not the luxury of developing the grand plan when little fires keep flaring up. This section gives some guidance from the disaster management field and then develops a strategic approach to emergency financial management with four key elements.

It is worth noting that strategic approaches are fundamentally at odds with some of the political realities of local and state governments. Allocating funds and resources for the prevention of fiscal distress is anathema to most political agendas, as elected officials are loath to admit that fiscal distress could happen on their watch. Similarly, any such admission of an imminent financial emergency would also be accepting some of the blame and make reelection more difficult for a legislator. Canny politicians will spin responsibility for fiscal distress to their opposition as the opportunity arises, but the de facto political behavior is to kick the can down the road. This behavior is not limited to the local governments alone; just as a parent resists confronting their children’s faults, the state may ignore a local government’s fiscal distress for fear of admitting their own shortcomings in oversight or political power.

Borrowing from Disaster Management

It is worthwhile to get perspective from the more “traditional” disaster management literature that provides a well-defined framework that applies to the various crises and catastrophes that societies face. There are four phases in the cycle of disaster management: mitigation, preparation, response, and recovery (Drabek 1987). The preventive phases of mitigation and preparation are the strategic elements for disaster management, whereas response and recovery are reactive and more tactical. When applied to a natural disaster, the roles and responsibilities of public administrators are planned in the first two phases and there should be the political will and support to carry out the latter phases. The immediacy of a catastrophe’s onset and repercussions extends considerable force to administrative authority, going to the extreme of Martial Law, if need be. Although many strategists lament poor support for mitigation and preparedness, a significant disaster does garner adequate response and recovery efforts (Choi 2008). For the United States, the Federal Emergency Management Agency (FEMA), the Department of Homeland Security (DHS), the Environmental Protection Agency (EPA), and other administrative authorities are preeminent in this field. Unfortunately, there is still weak political will to support strategic planning in these important arenas (Choi 2008; Stehr 2006); thus, emergency management is often relegated to the reactive phases of response and recovery. Yet there is growing emphasis on disaster risk reduction (DRR) by organizations, such as the United Nations, that promote the benefits of extending more efforts before disasters happen (www.unisdr.org). Public administration will do well to take notice of the need and value of the strategic components of disaster management by putting greater emphasis on mitigation and preparedness (Stehr 2006).

Looking beyond the United States, Nakamura and Kikuchi (2011) characterized the administrative aspects of the Fukushima nuclear power plant disaster as a lack of rigorous management of the relevant nuclear safety issues. Just as a regulatory shortfall can allow a meltdown, so can municipal governments become complacent and invite disaster of the financial kind. Nakamura and Kikuchi (2011) wondered, “How could such a serious accident occur in a modern, highly sensitive, nuclear-conscious country?” (p. 893). One can easily replace the nuclear disaster with Pontiac’s economic meltdown and wonder how it could happen in a socioeconomically sensitive place like Pontiac. One general recommendation includes a resolve to relieve distress by ensuring that “government and industry must stand ready to avoid the worst-case scenario, they also must be prepared to meet any hazards head on” while adding that “crisis management has an important public policy dimension” that requires balancing development with “sufficiently considering the detriments and disadvantages” (Nakamura and Kikuchi 2011, p. 898). They attribute much of the problem to “politico-administrative relationships” that were dominated for years by policy decisions from bureaucrats who were too close to the ruling party (e.g., corruption and/or questionable loyalties) while still cautioning that a backlash against such entrenchment should not be carried out by closing off public officials from policy formulation. The experience and expertise of administrators should be a part of the process, neither the beginning nor the end alone.

The prolonged ruin of a government’s fiscal solvency does not parallel the violent destruction of weather phenomena. To its credit, fiscal distress is usually realized as a gradual decline in a local government’s condition and the urgency for response is only necessary if political infighting hinders reactions at the early stages. Emergency financial management has negligible costs for mitigation and preparedness as compared with the stockpiling of supplies and training required to plan for a natural disaster. Yet while the priorities and actions needed after an earthquake are clear and not politically negotiable, this does not hold true for a fiscal emergency. As the research corpus shows, predictive ideas are feasible but rarely practiced, whereas response and recovery tactics are few and generally short-sighted. Some cases of fiscal distress are being resolved through patience and fortitude, whereas other situations have required direct action to counter bad conditions. As the GAO (2009) warned above, those local governments that shied away from policy changes have suffered significant imbalances.

Fiscal distress may be compared with a slow rising water table that threatens to flood a city if drastic measures are not taken. Fiscal distress and natural disasters both have widespread effects on communities: They divide citizens, have long-term ramifications, and leave scars that remind people of shortfalls in mitigation and preparation for the worst. Emergency management of both fiscal distress and catastrophic events require strong leadership with appropriate levels of authority to relieve the problems as quickly as possible. But whereas the existence of a natural disaster is generally beyond human error (although the level of damage it inflicts can be mitigated by human factors), a financial emergency results from human activity. Although the response and recovery of New Orleans after Hurricane Katrina were charged with political, economic, and social issues that had nothing to do with the weather phenomenon that predicated the flooding (Comfort 2006; Stehr 2006), the factors that led to Detroit’s fiscal distress and the subsequent bankruptcy filing were a political, economic, and socially instigated phenomenon through and through. There are parallels as well as tangents between the disciplines and therefore one can draw useful lessons from emergency management of the natural disastrous kind to form an understanding of how to manage the financial kind.

States that adequately monitor and assist the fiscal distress levels of lower jurisdictions are practicing varying levels of preventive and sustaining maintenance policies (Coe 2008; Kloha, Weissert, and Kleine 2005b), reinforcing the value of mitigation and preparedness. This gives support for the idea of a preventive ombudsman: an administrator who has the access to information and authority to get ahead of the problem, a chief fiscal distress strategist, as it were. Michigan has a state-level board that serves some of this function, albeit with political appointees and primarily reactionary powers. Ideally, the preventive ombudsman would be a neutral administrator with responsibility to closely monitor the local government dashboards and run independent diagnostic tests. The political feasibility of such a position is a challenge; however, the interests of transparency and accountability could be better satisfied by a state willing to support the idea.

Fiscal distress is at an advantage compared with a natural disaster in this sense, as there is time to act before the situation becomes an emergency, assuming that there is the political will and administrative authority in place. The emergency status forces the states into a reactionary mode whereby decisions and changes are made from the fiscally distressed position, which can quickly lose sight of the potential long-term outcomes. Cahill et al. (1994) concluded through their studies that state responses often assume that the problem is managerial in nature (in contrast to environmentally induced) and short term, ignoring strategic implications while nonetheless leaving the end-days of state oversight terms open. The mitigation of a catastrophe is a function of how likely the event is to occur and what effects it may have on the material welfare of the community. Preparing for a flood or earthquake can be accomplished through specific plans for protecting life and property, whereas preparing for a financial emergency means readying a community for unspecified changes to their welfare. Thus, the strategic elements between disaster and financial emergencies are more distinct as the former have some degree of clarity to them, whereas the latter are fundamentally murky.

Developing a Strategic Perspective

Emergency financial management is regarded as a response to mismanagement and, implicitly, a failure of the checks and balances needed for sound governance. Fiscal federalism as practiced today demands that the lower government recognizes the ultimate responsibility of the state to answer for its financial troubles (Gere 1982; Saxton, Hoene, and Erie 2002). Determining the locus of responsibility (Thompson 2014), the authority for planning, and the objectives of emergency financial management are crucial components of a strategic approach. As the broken-window theory illustrates how an entire neighborhood can decline when one house is abandoned, so too can an urban region suffer a domino effect when one of its cities declares bankruptcy. But while a neighbor (or even a block) has little power or authority to stop a single house from being foreclosed, a state does have the ability to save a city. Therefore, the first part of the strategic approach is having a clear conception of the government relationships vis-à-vis fiscal federalism.

A fundamental question involves when local fiscal control is incapable of meeting local needs. This is also an issue of transparency; public service ethics demand that governments let their citizens know when conditions are tenuous, when they cannot be handled in house, and when they must accede to help from the state despite local pride or fear of lost autonomy. Where does the ultimate responsibility for fiscal distress lay? If the politics of a city lead it to the brink of bankruptcy, then the elected officials have shown that they are incapable of forging a solution on their own; the citizens should not be made to suffer the political delays stemming from the conflicting reform promises made over several election cycles. If the fiscal distress has administrative origins, then the system that fostered the error needs a higher authority for reform. As the federal system would then call upon the state to remedy the situation, there needs to be a policy for state governments to implement change that does not allow further political infighting or bureaucratic blunders to sacrifice the public welfare, while also respecting democratic processes. The second element is therefore the use and obedience to a warning system, such as dashboard indicators, that have been codified by the local and state governments in both policy and practice.

The appointment of Emergency Financial Managers (EFMs)—the title for Michigan’s official—is adding an agent of the checks and balances needed to ensure that a local government’s fiscal situation is made transparent and accountable beyond the people in place. In that sense, it truly fulfills the neutral and impersonal competence required of the budgetary bureaucrat; the EFM is an office beyond the person. As noted by Kevyn Orr, the former EFM of Detroit, his appointment signaled that the city had “crossed the Rubicon” insofar as its condition demanded an irreversible strategy to save the city (interview on WDET public radio, March 15, 2013). Stephen Henderson (2012, para. 11), a columnist for the Detroit Free Press, took a sanguine view: “Emergency management isn’t a suspension of democracy; it’s an instance of a superseding democracy swooping in to protect the larger electorate from the irresponsible actions of a smaller unit of government.” His view contradicted much of the more sensational media coverage that portrayed EFMs as draconian hatchet men:

The emergency manager law . . . is an unpleasant necessity for Michigan right now. It’s a tough, proactive push back against the wicked twin sisters of prolonged mismanagement and inescapable decline in urban areas, exacerbated by the Great Recession.

The EFM is the administrative conduit from the state to the local government, although in Michigan critics often portray the EFM as the governor’s agent. Regardless of whether the process specifies the appointment of a single person, an oversight board, or a series of reporting protocols, the key is that there must be a clear center for coordination and control (Scorsone 2014). The third element of the strategic approach is having a clear process for addressing the problem with adequate authority.

A distressed or bankrupt city needs to restructure its debt. To do it with favorable terms, rather than paying usurious rates that reflect its bad credit, states can impart conditions to protect the general welfare while sharing its better credit rating to the embattled local government. Pontiac faced such problems with its debt, yet the EFM worked closely with Oakland County to absolve Pontiac’s liabilities from the county, which was then amenable to leveraging its superior credit rating to refinance outstanding debt. Detroit could not turn to Wayne County for such assistance because Wayne County is similarly distressed. Furthermore, the scale of Detroit’s fiscal distress and the impact on its urban area was so great that it could only be addressed adequately with direct support and cooperation from the capital. As of this writing, Detroit is emerging from Chapter 9 bankruptcy protection. Its future is very uncertain in most respects and the remedial actions underway make no promises for a return to normalcy (Eisinger 2014). Pontiac has avoided bankruptcy through sweeping cuts and fire-sale disinvestment in its own property and workforce. Pontiac has been gutted—facilities were auctioned off or demolished, increasingly crucial services were outsourced, several parks were closed or sold, and city hall is less than one-third occupied. Pontiac can serve as a warning lesson that without a strategic plan to preserve the desired outcomes, there may be nothing left but urban brownfields. The fourth and final element of the strategic approach is a readiness to make and accept the hard decisions in the short term.

Emergency financial management is an unfortunate necessity; a confluence of socioeconomic conditions and mismanagement has hurt many communities and urban areas. There is an important and disturbing subtext to the need for a developed strategy to emergency financial management: Some local governments are incapable (or incompetent) of managing their fates. Just as the EPA Superfund designation indicates a lack of adequate regulation and enforcement, so too does the appointment of a “work out” administrator or a state review board signal that a city cannot handle its fiscal responsibilities. Even if the fiscal landscape is clear of immediate hazards, there is still need for policy that directs administrative attention to mitigation and preparedness (Stehr 2006). This is as much a political problem as anything; there needs to be sufficient power in the administration to dedicate a portion of the budget to prevention and resist the narrow interests of elected officials who will avoid the realities of impending fiscal distress. A policy perspective that advocates a strategic approach should include adherence to fiscal federalism, robust monitoring of conditions, a structured process for authority, and alternative plans for corrective action.

What the literature has been missing thus far is a coherent justification for greater mitigation and preparedness efforts to address fiscal distress. Showing the public that revenues do not meet expenditures is a straightforward administrative task, but it is another thing to ask citizens to suffer the consequences of that condition. Further research could provide comparative analyses across states that have implemented fiscal distress remedies with time-series analysis to evaluate the relative successes in each context. The efficacy of EFMs is also an area for a long-term study, which could inform the realization of a preventive ombudsman-type office at the state level. The strategic approach could also be bolstered with survey and interview research that captures some of the effects of emergency financial management on communities after the fiscal distress has been alleviated, from the perspectives of both the administrators and the citizens. The work by Elling, Krawczyk, and Carr (2013) is a good starting point in that regard and one can hope that there are future studies that extend their research. There have also been several journal symposia and texts published in recent years to draw more attention to various aspects of fiscal distress in urban regions (e.g., Kasdan 2014; H. Levine, Justice, and Scorsone 2013). Still, one neither knows all the potential causes of fiscal distress nor all the optimal solutions for righting the fiscal ship. This article has argued that it would be prudent for governments to have a strategy in place in case fiscal distress is unavoidable.

The optimal strategy is to understand and address the causal factors of fiscal distress before their effects are realized. This may be accomplished through a fiscal federalism structure with close monitoring of the predictors that the research literature has been developing for the past decades. Anticipation is not enough, though, as emergency financial management will require the accompanying authority to take action that may seem premature to the special interests that will be affected by such action before the fiscal distress has become fully manifest. But like building a rainy-day fund, a strategic approach to emergency financial management may help get in front of the challenges to better weather the storms of fiscal distress.

Footnotes

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) received no financial support for the research, authorship, and/or publication of this article.

Author Biography

David Oliver Kasdan is an Assistant Professor in the Department of Public Administration at Incheon National University, South Korea. He has lived in fiscally distressed urban areas.

References

Afonso

Whitney

. 2013. “Coping with the Great Recession: Theory and Practice for County Governments.” International Journal of Public Administration 36 (11): 768–79.

AlBassam

Bassam

. 2011. “State and Local Government Fiscal Crises: Causes and Solutions.” The Business Review, Cambridge 17 (1): 24–30.

Ammons

David

Smith

Karl

Stenberg

Carl

. 2012. “The Future of Local Government: Will Current Stresses Bring Major, Permanent Changes?” State and Local Government Review 44 (1): 64S–75S.

Anderson

Janet

. 2011. “Rightsizing Government: The Literature and the Detroit Experience.” State and Local Government Review 43 (3): 224–32.

Berman

David

. 1995. “Takeovers of Local Governments: An Overview and Evaluation of State Policies.” Publius 25 (3): 55–70.

Bowman

Ann

Kearney

Richard

. 2012. “Are U.S. Cities Losing Power and Authority? Perceptions of Local Government Actors.” Urban Affairs Review 48 (4): 528–46.

Britton

Neil

. 2001. “A New Emergency Management for the New Millennium?” The Australian Journal of Emergency Management 16 (4): 44–54.

Cahill

Anthony

James

Joseph

Lavigne

Jean

Stacey

Ann

. 1994. “State Government Responses to Municipal Fiscal Distress: A Brave New World for State-Local Intergovernmental Relations.” Public Productivity & Management Review 17 (3): 253–64.

Chapman

Jeffrey

. 2008. “State and Local Fiscal Sustainability: The Challenges.” Public Administration Review 6 (Suppl. S1): S115–31.

10.

Chernick

Howard

Langley

Adam

Reschovsky

Andrew

. 2011. “The Impact of the Great Recession and the Housing Crisis on the Financing of America’s Largest Cities.” Regional Science & Urban Economics 41:372–81.

11.

Choi

Sank Ok

. 2008. “Emergency Management: Implications from a Strategic Management Perspective.” Journal of Homeland Security and Emergency Management 5 (1): 1–21.

12.

Cigler

Beverly

. 1993. “Challenges Facing Fiscal Federalism in the 1990s.” PS: Political Science & Politics 26 (2): 181–86.

13.

Coe

Charles

. 2008. “Preventing Local Government Fiscal Crises: Emerging Best Practices.” Public Administration Review 68 (4): 759–67.

14.

Comfort

Louis

. 2006. “Cities at Risk: Hurricane Katrina and the Drowning of New Orleans.” Urban Affairs Review 41 (4): 501–16.

15.

Drabek

Thomas

. 1987. The Professional Emergency Manager. Boulder: Institute for Behavioral Science, Univ. of Colorado.

16.

Eisinger

Peter

. 2014. “Is Detroit Dead?” Journal of Urban Affairs 36 (1): 1–12.

17.

Elling

Richard

Krawczyk

Kelly

Carr

Jered

. 2013. “What Should We Do? Public Attitudes About How Local Government Officials Should Confront Fiscal Stress.” Local Government Studies 40 (3): 380–402.

18.

Gere

Edwin

1982. “Dillon’s Rule and the Cooley Doctrine.” Journal of Urban History 8 (3): 271–98.

19.

Government Accountability Office. 2009. Update of State and Local Government Fiscal Pressures (GAO-09-320R State and Local Fiscal Pressures). Washington, DC: Government Accountability Office.

20.

Henderson

Stephen.

2012. “Emergency Manager Law Unpleasant, but What’s the Alternative?” Detroit Free Press, August 5, 2012. http://archive.freep.com/article/20120805/COL33/120805016/Stephen-Henderson-Emergency-manager-law-unpleasant-but-what-s-the-alternative- (accessed December 2, 2012).

21.

Honadle

Beth

. 2003. “The States’ Role in U.S. Local Government Fiscal Crises: A Theoretical Model and Results of a National Survey.” International Journal of Public Administration 26 (13): 1431–72.

22.

Jimenez

Benedict

. 2013. “Strategic Planning and the Fiscal Performance of City Governments During the Great Recession.” American Review of Public Administration 43 (5): 581–601.

23.

Kasdan

David

. 2014. “A Tale of Two Hatchet Men: Emergency Financial Management in Michigan.” Administration & Society 46 (9): 1092–108.

24.

Kloha

Philip

Weissert

Carol

Kleine

Robert

. 2005a. “Developing and Testing a Composite Model to Predict Local Fiscal Distress.” Public Administration Review 65 (3): 313–23.

25.

Kloha

Philip

Weissert

Carol

Kleine

Robert

. 2005b. “Someone to Watch Over Me: State Monitoring of Local Fiscal Conditions.” American Review of Public Administration 35 (3): 236–55.

26.

Levine

Charles

. 1978. “Organizational Decline and Cutback Management.” Public Administration Review 38 (4): 316–25.

27.

Levine

Charles

Rubin

Irene

Wolohojian

George

. 1981. The Politics of Retrenchment. Beverly Hills: Sage.

28.

Levine

Helisse

Justice

Jonathan

Scorsone

Eric

eds. 2013. Handbook of Local Government Fiscal Health. Burlington, MA: Jones & Bartlett Learning.

29.

Luby

Martin

. 2013. “The Impact of the Great Recession on the Financial Management Practices of State and Local Governments: Part I.” Journal of Public Budgeting, Accounting and Financial Management 25 (1): 158–64.

30.

Mann

Stacey

. 2014. “Human Resources and Emergency Planning: Preparing Local Governments for Times of Crisis.” Public Administration Quarterly 38 (2): 163–205.

31.

Martin

Edward

Martin

Ariana

. 2011. “Economic Crisis in the United States: Management Strategies for a Democratic Economy.” Public Administration & Management 16 (2): 145–70.

32.

Nakamura

Akira

Kikuchi

Masao

. 2011. “What We Know and What We Have Not Yet Learned: Triple Disasters and the Fukushima Nuclear Fiasco in Japan.” Public Administration Review 71 (6): 893–99.

33.

Nelson

Kimberly

. 2012. “Municipal Choices During a Recession: Bounded Rationality and Innovation.” State and Local Government Review 44 (1): 44S–63S.

34.

Perlman

Bruce

Benton

J. Edwin

. 2012. “Going It Alone: New Survey Data on Economic Recovery Strategies in Local Government.” State and Local Government Review 44 (1): 5S–16S.

35.

Rubin

Irene

. 1982. Running in the Red: The Political Dynamics of Urban Fiscal Stress. Albany: State Univ. of New York Press.

36.

Saxton

Gregory

Hoene

Christopher

Erie

Steven

. 2002. “Fiscal Constraints and the Loss of Home Rule.” American Review of Public Administration 32 (4): 423–54.

37.

Scorsone

Eric

. 2014. “Municipal Fiscal Emergency Laws: Background and Guide to State-Based Approaches.” Working Paper No. 14-21, Mercatus Center, George Mason Univ., Fairfax, VA.

38.

Skidmore

Mark

Scorsone

Eric

. 2011. “Causes and Consequences of Fiscal Stress in Michigan Cities.” Regional Science & Urban Economics 41:360–71.

39.

Stehr

Steven

. 2006. “The Political Economy of Urban Disaster Assistance.” Urban Affairs Review 41 (4): 492–500.

40.

Thompson

Dennis

. 2014. “Responsibility for Failures of Government: The Problem of Many Hands.” American Review of Public Administration 44 (3): 259– 273.

41.

Trussel

John

Patrick

Patricia

. 2009. “A Predictive Model of Fiscal Distress in Local Governments.” Journal of Public Budgeting, Accounting and Financial Management 21 (4): 578–616.

42.

Waugh

William

Streib

Gregory

. 2006. “Collaboration and Leadership for Effective Emergency Management.” Public Administration Review 66 (Suppl. S1): 131–40.