Emergency managers in Michigan have among the greatest powers of any state intervention mechanism in the country. But the city of Detroit's bankruptcy filing demonstrates that state intervention mechanisms do not preclude credit deterioration or default and supports Fitch's choice not to assume a state or federal bailout in its local government rating criteria and ratings. However, clearly state monitoring and intervention programs can be helpful in distressed situations, such as the case of Pontiac, Mich., where an emergency manager has restructured the city's finances.
As Fitch has indicated in the special report "U.S. Local Government Downgrades to Persist," the emergency financial management that states exercise over distressed local governments varies from state to state. Their impacts are affected by the strength of laws governing labor contracts, benefits (including pension obligations), service provisions and other factors.
Like Michigan, North Carolina also has a strong mechanism. The state local government commission monitors local entities' finances on an ongoing basis and intervenes once it has detected a deteriorating situation. The intent of this system is to avoid, rather than remediate, a crisis.
Rhode Island may appoint a fiscal overseer to develop a three-year plan to achieve fiscal stability. If this is ineffective, the state may appoint a budget commission with powers over spending, borrowing, fees and government structure.
California, which has experienced a few defaults and bankruptcies of cities in recent years, has no intervention program for cities, although it has an effective program for its school districts.
The issue of intervening in distressed local government situations is also getting attention at the federal level as the Senate Appropriations Committee just yesterday approved an amendment (as part of the FY 2014 Financial Services and General Government Appropriations Act) that would generally disallow the government from aiding cities in financial turmoil.
