Fitch: US Emergency Managers and Interventions Are No Panacea

NEW YORK--(BUSINESS WIRE)-- The appointment of emergency financial managers and the imposition of other procedures for state intervention in distressed municipalities have had a broad range of outcomes and may not improve prospects for full and timely debt repayment, Fitch Ratings says.

States that grant emergency managers or control boards the broadest powers may not be much more successful than those that grant fewer controls, and outcomes within a single state can vary widely. Any intervention that has the legal ability to affect labor contracts, benefits (including pension obligations), and other elements of spending must be viewed in the context of political realities within that state.

The situation in Atlantic City provides an illustrative example. The emergency manager's term expired in January 2016, but the city continues to face severe distress. The mayor, the governor and the state legislature have failed to agree on how to resolve the crisis while the city struggles to avoid a temporary shut-down of services. Paterson, NJ's school district recently regained local control after 25 years under state supervision, but is reportedly still facing a large operating deficit.

In Michigan, emergency managers have some of the strongest powers of any formal state intervention mechanism in the country. Detroit's bankruptcy filing demonstrates that, even with such powers, emergency managers may not stop credit deterioration or default. However, state monitoring and intervention programs have been helpful for other local governments in the state. A recent consent agreement in Wayne County appears to give the county government the tools it needs to navigate a financial restructuring and avoid a debt default. Earlier, the emergency manager in Pontiac was able to restructure that city's finances. Emergency manager activities can also have unanticipated consequences, as was seen in the handling of Flint's water supply.

The converse can also apply. In Illinois, there does not appear to be a formal process that grants the state the ability to intervene in Chicago Public Schools' financial affairs. However, the governor has stated his intent to have the state government take over the schools' finances. Legal and political hurdles are significant, and the outcome is unpredictable.

Fitch does not factor into its ratings the potential for use of a state intervention program and considers only the effectiveness when it is applied in specific cases.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Amy Laskey
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Source: Fitch Ratings

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