Talking Headways Podcast: Local Budgets … In A Bad State

This week we’re joined by Yale Law professor David Schleicher to talk about his new book, In a Bad State: Responding to State and Local Budget Crises. We chat about how historic fiscal crisis shape similar responses today and how infrastructure funding plays out in the United States.

A partial transcript of our conversation is below, while a full unedited version can be found at The Overhead Wire. Listen here:

Jeff Wood: It was interesting recently in Texas where they had an election and they voted to say “yes” to this big expansion of light rail, but then the funding mechanism was them creating a special entity. And then the now-impeached Attorney General Ken Paxton came out right saying, “Well, this isn’t legal under state law. You can’t just transfer money that you use for bonds into this company that you created for light rail.” There’s all these sticky questions about how you fund infrastructure in different ways in trying to not cook the books but rearrange and pull things around, and things like that.

David Schleicher: In the US, we mostly fund mass transit through public authorities. We fund a lot of things through public authorities. Why would we create a public authority like New York’s MTA to run our infrastructure? There are a couple of reasons. One is maybe you don’t think the voters should be voting directly on this kind of thing. I disagree with that, but some people think that. On the other hand, it allows you to get past your debt limits. One of the reasons we have authorities is they are remote from debt limits. That is to say they’re a different government, and so debt limits that would apply to a city or county wouldn’t apply if the state legislature just creates a new government called the public authority.

And public authorities are doubly remote because they generally rely on revenue bonds rather than bonds backed by particular revenue sources like fares or tolls. The history of public authorities and the history of mass transit is all about debt limits and things like revenue bonds, so people who are interested in mass transit or in infrastructure more broadly should spend a lot more time thinking about these tools of public finance — because they’re part of the story.

Jeff Wood: It reminds me of the story you told about Detroit too, where some of the folks had to take a haircut but then the school system got bailed out and the separation of government.

David Schleicher: Yeah, that’s a crazy story. Detroit school district is co-terminus with the city of Detroit, but it’s a separate government so when Detroit goes bankrupt, Detroit school district just gets a lot of money from the state. And so teachers get a hundred cents of their pension, a hundred cents of their dollar. They have full pensions, but police officers didn’t. And people who lent money to the people of Detroit through their school district got a hundred cents of the dollars. But people who lent money to the people of Detroit through the city government got much less than that. I think that’s a bad result for a couple of reasons, but one of them is that there’s declining marginal harms to any cuts.

So if you’re gonna cut something, the first thing you cut from your budget is not perfectly essential, but the 900th thing you cut is gonna be really, really, really painful. One of the things we’ve done in the way we deal with bankruptcy is that we often locate it all in one government even though they’re overlapping governments that then are able to survive. The result is that they don’t make the somewhat easier cuts. I don’t want to diminish the harms felt by the Detroit school district, but the declining marginal harms here suggests, and I think it’s pretty strong argument, that it would be better if all the overlapping governments were treated the same that, say, plunge into bankruptcy at the same time if one of them was gonna go into bankruptcy.

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