Two Cities, Two States and a Bruising Battle for Control

Posted by & filed under CGR Staff.

Joseph StefkoWelcome to the main event!

In this corner, leaders of cities, long accustomed to controlling their destinies! And in the other corner, state governments, anxious to protect the rest of the state from the city’s crisis! It’s a battle playing out in two major communities – Michigan’s largest city and the capital of Pennsylvania – and has the potential to rewrite the book on state/local relations.

Let’s review how we got here.

Detroit and Harrisburg are the national poster children for municipal fiscal crisis. Struggling to maintain solvency, they teeter at the brink of maintaining payroll, meeting debt obligations and sustaining critical public services.

In Detroit, the crisis was fueled by a deeply wounded regional economy. Decades of population decline, an exodus of wealth and the oft-cited struggles of the American auto industry took their toll. Just two generations ago, Detroit was flexing its manufacturing might and experiencing explosive growth. Today, it’s struggling mightily to pay for the municipal structure that was created to meet that mid-century demand.

Harrisburg’s crisis, by contrast, is fundamentally about one failed large-scale project. A soap opera’s worth of mistakes regarding a garbage incinerator initiative – which was supposed to produce revenue through electricity sales – saddled the city with regular operating losses and $300 million in debt. Harrisburg’s per capita debt burden is now three times higher than Pennsylvania’s next-most indebted city, Philadelphia. The situation came to a head in 2009-10, when the city stopped making payments altogether on the facility, thumbing its nose at creditors and forcing its guarantors (including surrounding Dauphin County) to reluctantly pick up the slack.

When cities face bankruptcy, what is the power and obligation of the state to act? How can the cities survive without giving up their sovereignty?

Both Michigan and Pennsylvania (like New York) are “home rule states,” meaning that the state legislature has vested local governments with extensive powers and policy-making responsibilities to address local issues. Those powers and responsibilities grew throughout the 19th and 20th centuries, positioning local governments to manage their own affairs almost entirely, with virtually no interference from the state.

This is what makes the recent turn of events in Detroit and Harrisburg so fascinating. In both cases, state governments have stepped in to exert control citing overriding state interests in both cities’ solvency. The result has been a power struggle that may change the paradigm of state/local interaction. State governments hoping to avert disaster are inserting themselves in the process and exerting control; cities accustomed to governing themselves are reluctant to cede authority.

Procedurally, it’s not unlike the imposition of financial control boards in New York State in places like New York City in the 1970s, Yonkers in the 1980s, Nassau County in 2000, and more recently Buffalo (2003) and Erie County (2005). Yet the tale of Detroit and Harrisburg has been much more contentious.

In late 2011, the State of Michigan named a team to review Detroit’s finances as a precursor to appointing an emergency manager, a step that would effectively divest city officials of financial control. Local response was swift and vehement. Elected officials protested the move as illegal and anti-democratic. Community organizations, with help from a U.S. Congressman, rallied against the disenfranchisement of residents, particularly minorities. “Detroit needs to be run by Detroiters,” said its mayor, who even volunteered to serve as emergency manager.

Similar scenes have played out in Harrisburg. After rejecting a state-produced financial recovery plan last summer, the city council (notably, without the mayor’s support) voted in October to file for Chapter 9 bankruptcy protection, a move designed in part to keep the state from imposing its will on Harrisburg’s finances. In November, a federal judge dismissed the filing, paving the way for state control. And act swiftly it did, appointing an emergency receiver in early December and empowering him to develop a recovery plan and override the whims of city officials.

The drama playing out in Detroit, Harrisburg and other places has real potential to alter the fundamental relationship between states and their local governments. As fiscal crisis pushes more municipalities to the brink, states will be faced with the choice to impose more stringent controls that roll back powers localities have long exercised independently.

Where goals of fiscal stability and local control converge, which side wins?