The (Now Urgent) Case for State-Level Monitoring of Local Government Finances (or, One Way to Protect Localities from Trump's 'Potemkin Villages of Nothing')
NYU Journal of Legislation & Public Policy, Forthcoming
39 Pages Posted: 10 May 2017
Date Written: May 8, 2017
The financial crisis of 2008 demonstrated that local governments often do not have the expertise to use debt wisely, much less the expertise to reform their use of pensions or to design tax systems that can raise more money with less economic distortion. Yet local governments must do all of these things and more, as they are squeezed by pension obligations and the need to reinvest in infrastructure. The expected Trump infrastructure plan would make billions of dollars in funding available to local governments, but would also require them to negotiate extremely complicated public-private partnerships (P3). There is not a convincing policy reason for structuring a public infrastructure plan so as to profit private parties in this way, which is why Treasury Secretary Lawrence Summers aptly described the plan as a “Potemkin Village of nothing.” The Trump plan would therefore create a greater likelihood that local governments will get swindled without any discernible benefit.
We are worried that ordinary citizens might run into trouble when engaging in complex financial transactions. We have therefore erected many consumer protections for individuals (though, admittedly, many of those protections are also at risk from the Trump Administration). Yet when those same individuals are asked to make much more complicated decisions when they sit on local government boards, they receive much less protection. This is a mistake and state governments have all the power they need to protect their local governments from getting fleeced.
Furthermore, we do not want local governments merely to make non-disastrous financial decisions; we want them to make good decisions. There is useful expertise available, and the question is how do we aggregate this knowledge and make it available to local decisionmakers in a manner consistent with the norms and goals, both political and economic, of local democracy. For this, we need new institutions. There are examples of such institutions, such as North Carolina’s Local Government Commission, but their role – and the reasons for their success – have not yet been adequately theorized. That is the task of this Article.
In short, I will argue that a new state-level institution can succeed in improving local government financing in a manner consistent with preserving local autonomy if its expertise is used in the first instance to design default rules that are both simple and (mostly) correct. Beyond the default rules there should be expert review to allow for exceptions, but in most cases the default rules should provide a workable options or set of options with which a local government can achieve its goals.
Keywords: Municipal Finance, Municipal Debt, Financial Regulation, Local Government Law, Local Tax Policy
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