“This is a thoroughly treated, must read book on local government/municipal finance and bankruptcy challenges. The book’s uniqueness is its strength on emergency financial management stress, fiscal distress, and government bankruptcy with loss of financial capacity in modern times. The authors have done an excellent job of explaining and illustrating this highly significant feature of contemporary financial management; their work is admirably well done with adequate details without overwhelming the students, researchers, and instructors. The select case studies of the second half of the book supplement the theory, concept, and issues covered earlier, and are extremely useful to readers. Highly recommended for upper undergraduate and graduate MPA students, as well as for courses in public financial management, for its easy to read and substantive content”. – Ali Farazmand, Florida Atlantic University “Ermasova and Guzman provide the reader with an approachable yet thorough understanding of the conceptual underpinnings of fiscal stress, its effects, and remedies that is augmented through the use of carefully selected case studies”. – C. Kurt Zorn, Indiana University “Through a compelling review of current scholarship and a detailed discussion of case studies, the authors share with us their wealth of knowledge on the origins of fiscal malaise in U.S. cities and stimulate us to reflect on policy action that can counteract the economic, political, institutional and managerial environments that are conducive to local financial crises. A captivating read for scholars and practitioners interested in the management of local government financial condition!” – Evgenia Gorina, University of Texas at Dallas MUNICIPAL FISCAL STRESS, BANKRUPTCIES, AND OTHER FINANCIAL EMERGENCIES It is difficult to find someone who has not heard about the Puerto Rico, Detroit, Michigan, or Orange County, California, bankruptcies. While guides for responsibly managing government finances exist, problems often originate not because of poor financial reporting or financial deficiencies but because issues external to financial wellbeing arise, such as economic, demographic, political, legal, or even environmental factors. Exacerbating the problem, there is not much advice in the existing literature on how to act when municipalities face financial struggles. Filling this important gap, this book explores fiscal health and fiscal hardships, municipal defaults and bankruptcies, and many other aspects to help guide local governments during fiscal distress. Fiscal hardships negatively affect the quality and availability of public goods and services and, consequently, the wellbeing of residents and businesses living and working in distressed municipalities. Turned off streetlights, unmaintained public parks, potholes, inconsistent garbage pickup, longer response time from emergency services, and multiple other issues that residents of the struggling municipalities deal with, lead to higher crime rates, lower quality of K-12 education, dangerous road conditions, lower housing values, outmigration of wealthier population, and numerous other problems. The COVID-19 pandemic put additional unprecedented pressure on municipal finances nationwide. In this book authors Tatyana Guzman and Natalia Ermasova evaluate distressed cities and municipalities and provide practical recommendations on improving their financial conditions. What are conditions and signs to look for to not to find yourself in similar situations? What can be done if your municipality is already experiencing fiscal hardships? What are the consequences of fiscal misfortunes? How does one exit a fiscal emergency? This book answers these and other questions and serves as a guide to fiscal health and prosperity for U.S. municipal governments, students and researchers in public finance, and general public management fields. Tatyana Guzman is Associate Professor in public finance and policy analysis at Cleveland State University. Dr. Guzman received her PhD in public affairs from O’Neill School of Public and Environmental Affairs at Indiana University and also holds an MA degree in economics. Dr. Guzman’s primary research interests are in various aspects of the public finance field, including taxation, budgeting, and municipal bond markets. She has published over 20 journal articles and book chapters. Her research has appeared in such peer-reviewed journals as Public Budgeting and Finance (PBF), Policy Studies Journal (PSJ), American Review of Public Administration (ARPA), Journal of Benefit-Cost Analysis (JBCA), Tax Notes, and other outlets. Tatyana has 15 years of teaching experience at Cleveland State University, Indiana University Bloomington (IUB), and Indiana University Purdue University in Indianapolis (IUPUI), where she has taught undergraduate and graduate public finance and budgeting, research methods, economics, and statistics courses. Natalia Ermasova is a Professor at Governors State University, Illinois, USA. She has a PhD in public affairs (SPEA, Indiana University, USA). Her primary research interests are capital budgeting, business ethics, public finance, leadership, risk-management, innovation management, and public education funding. She was Visiting Professor in Germany (Ludwigsburg Academy for Civil Services), Corvinus University (Hungary) and Fulbright Visiting Professor (SPEA, IU). Dr. Natalia Ermasova is a board member of the International Journal of Public Administration (IJPA) and Co-Editor of Global Encyclopedia of Public Administration, Public Policy, and Governance. More than 60 of her articles, books, and chapters were published in the USA, UK, and Australia. She is the author of six textbooks about budgeting systems, financial management, and risk-management. Her articles have been published in journals including Public Finance and Management, State and Local Government Review, the International Journal of Public Administration, and the Journal of Management Development. MUNICIPAL FISCAL STRESS, BANKRUPTCIES, AND OTHER FINANCIAL EMERGENCIES Tatyana Guzman and Natalia Ermasova Designed cover image: krisanapong detraphiphat (Getty Images) First published 2023 by Routledge 605 Third Avenue, New York, NY 10158 and by Routledge 4 Park Square, Milton Park, Abingdon, Oxon, OX14 4RN Routledge is an imprint of the Taylor & Francis Group, an informa business © 2023 Tatyana Guzman and Natalia Ermasova The right of Tatyana Guzman and Natalia Ermasova to be identified as author[/s] of this work has been asserted in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. Library of Congress Cataloging-in-Publication Data Names: Guzman, Tatyana, author. | Ermasova, Natalia, author. Title: Municipal fiscal stress, bankruptcies, and other financial emergencies / Tatyana Guzman and Natalia Ermasova. Identifiers: LCCN 2022025936 | ISBN 9781032349374 (hardback) | ISBN 9781032349381 (paperback) | ISBN 9781003324553 (ebook) Subjects: LCSH: Municipal finance—United States—Case studies. | Municipal bankruptcy—United States—Case studies. Classification: LCC HJ9145 .G86 2023 | DDC 336.73—dc23/eng/ 20220907 LC record available at https://lccn.loc.gov/2022025936 ISBN: 978-1-032-34937-4 (hbk) ISBN: 978-1-032-34938-1 (pbk) ISBN: 978-1-003-32455-3 (ebk) DOI: 10.4324/b23117 Typeset in Bembo by Apex CoVantage, LLC CONTENTS Preface ix 1 Introduction 1 2 Measurements of Fiscal Health and Fiscal Health Monitoring Systems 12 3 Preventative Treatment and Federal, State, and Local Incentives for Unhealthy Municipalities 44 4 Legal Aspects of Municipal Bankruptcy 72 5 Fiscal Stress and Operating Budget 91 6 Fiscal Stress and Capital Infrastructure 108 7 Fiscal Stress During the COVID-19 Pandemic 128 8 Introduction to the Case Studies 148 9 Case Study: City of Detroit 153 10 Case Study: Colorado Springs, CO 179 viii Contents 11 Case Study: Jefferson County, AL 196 12 Case Study: Pittsburgh, PA 214 13 Case Study: Central Falls, RI 232 14 Case Study: Vallejo, CA 250 15 Conclusions and a Theory of Financial Management and Budgeting During Fiscal Emergency and Bankruptcy 266 Index 291 PREFACE In 2016, one of the authors, Dr. Tatyana Guzman, was approached by the cities of East Cleveland and Maple Heights, Ohio, with requests to assess potential ways of exiting the fiscal emergency situations these two cities were facing. Severe financial struggles meant that the municipalities did not have the funds to pay for expensive research. In the search for ways to help, Dr. Guzman engaged students in her graduate budgeting class to look for possible causes of the fiscal emergen- cies in these two cities and to study practices of other comparable cities that were in similar conditions and have improved their financial standing since then. While supervising the works of Dr. Guzman and Dr. Ermasova’s students and observing how little research there is to explain causes of financial emergencies and give advice on potential ways out of fiscal stress, the idea came to write this book to provide an affordable guide for municipalities on exiting financial struggles. While not a panacea for fiscal illnesses, this book consolidates, discusses, and evaluates general ways to measure fiscal health and then dives into assessments of fiscal stress situations for municipalities. The book discusses states’ monitoring practices of local government finances, early warning signs, intervention policies, states’ bankruptcy procedures, tax and non-tax incentives for economic devel- opment, budgeting approaches, and capital infrastructure maintenance during financially challenging times. The book also dives into case studies of several fiscally stressed municipalities to learn from the mistakes and successes of others. Most importantly, the book discusses major causes and positive practices in an attempt to prevent fiscal emergency in the municipalities in the first place and offers general recommendations on exiting fiscal emergency if it happens. This book could serve as a desk reference for practitioners, especially now that the topic of fiscal emergency situations and bankruptcy is again taking center stage during the COVID-19 crisis, rising gas prices, high inflation, and predictions of