Brown Bag Discussion Series

Clayton Gillette on Financial Control Boards for Fiscally Distressed Cities

Jonathan Stewart Jonathan Stewart

Clayton Gillette of New York University’s School of Law presented the findings of his forthcoming paper, “Dictatorships for Democracy: Takeovers of Financially Failed Cities,” to a brown bag lunch at the NYU Stern Urbanization Project. When a municipality experiences financial distress, states sometimes create financial control boards (FCB) with the mandate to correct the problematic fiscal situation. Clay refers to these boards, which can also be a single person, as dictatorships because they are a move by the state to substitute the normal political and governmental functioning of a municipality.

FCBs have been much more frequently utilized than is commonly realized. New York City in the 1970s and Detroit today are widely recognized examples of FCBs, but they have also been used in places like Buffalo, NY, Flint, MI, Washington, DC, Springfield, MA, and Camden, NJ. They all have varying degrees of interference with local autonomy. Their powers can include the ability to review, approve or disapprove proposed budgets, contracts and collective bargaining agreements, increase taxes, issue new debt with superpriority, authorize a bankruptcy filing, and fully displace elected officials.

Especially when more interventionist models are used, FCBs are sometimes seen as undemocratic expropriations of normal local governance. The state’s interest in ensuring the fiscal health of its municipalities is justified because the financial problems of one municipality can affect nearby municipalities through economic spillovers and ability to obtain financing. Furthermore, Clay pointed out that states typically impose FCBs when “normal” local politics are unable to deal with fiscal distress.

In particular, the financial health of municipalities often deteriorates in part due to the fragmentation of local decision-making. The many decision makers provide multiple access points for a well organized interest group to take advantage of the decision making process. It also incentivizes city officials to make decisions that are in the best interest of their specific agency or geographical jurisdiction without necessarily considering the long term costs to the entire municipality, much less the surrounding municipalities. Financial Control Boards “defragment” the political process through their electoral accountability, their small numbers of decision makers, and their ability to undo special deals, circumvent interest groups, implement long-term plans and restructure debt.

Financial control boards do not typically have the power to change the structure of the municipal government. However, certain government structures are highly correlated with fiscal stability, including centralized decision-making, at-large elections, and the privatization of some service delivery. Democratic entrenchment of the existing political system could be an obstacle to reform of government systems. Clay therefore suggested that in the future FCBs should perhaps be granted the power to engage in structural reform and even be required to reform the city charter.

This analysis unfortunately does not involve any data on the success of various financial control boards. Some recidivism of municipalities has been observed, but there is little reliable data on the fiscal outcomes. For example, bond ratings are not a reliable indicator because a deal could be struck that assures bondholders of repayment but provides little additional money for the provision of municipal services. Additionally, the ongoing ability of a municipality to provide services to its citizens can be difficult to measure, and this capacity is perhaps the most important outcome of a financial control board.

Tile image courtesy of Ralph Daily.

Clayton Gillette

Clayton Gillette

Professor of Contract Law, NYU Law School

Clayton Gillette joined the New York University School of Law faculty in 2000. For the prior eight years, he was the Perre Bowen Professor of Law at the University of Virginia School of Law. Professor Gillette began his teaching career at Boston University where he served as the Warren Scholar in Municipal Law and Associate Dean, and has been a visiting professor at the University of Michigan and the University of Virginia as well as at NYU School of Law. Gillette's scholarship concentrates on commercial law and local government law.

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