Fitch: Structure, Implementation Key to State Oversight Success

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings says state oversight bodies are increasingly being appointed to administer municipalities and public school districts. Fitch believes that they are credit positive over the short term but their more important, longer term goals depend on their structure and implementation.

State oversight bodies are generally appointed by the governor of a state to turn around the finances of an entity. Under some state laws, the appointees essentially replace the elected town administrators or school board members and may be given greater powers than elected officials. Michigan is one such state, and the number of appointments there is on the rise. In other states, state oversight bodies function alongside the elected officials and oversee bond issuance and other financial matters. One example of that model functions in New York.

Four Michigan towns and one school district are being run by state oversight bodies. We expect Michigan to appoint managers for two to three more towns and one to two more school districts in the coming months. In the spring of 2011, state laws changed, allowing state oversight bodies the right to renegotiate, terminate, or modify labor contracts and sell and lease or privatize local assets with state treasury approval. This minimized the role of the local elected officials and motivated numerous community groups (including Michigan's powerful unions) to challenge the law. Whether this challenge will be successful remains to be seen.

Less political resistance formed when the Nassau County Interim Finance Authority (NIFA) came back into play in January of 2011. NIFA was formed in 2000 and this was the second time that it had imposed a control period during which the authority may approve or reject certain contracts and obligations (including debt issuance) and exercise some control over budgeting and management. Day-to-day operations continue to be administered by the elected officials. New York also has strong union groups and they did file suit after NIFA froze wages, but negotiations are ongoing.

Fitch believes that both strategies are clearly credit positive over the short term. Their affects on annual budgets can create savings and improve fiscal discipline. But for these towns, counties, and school boards to reduce their large deficits state oversight bodies must be able to work over a longer-term.

Additional information is available on www.fitchratings.com

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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Fitch RatingsRob Rowan, +1-212-908-9159Senior DirectorFitch WireFitch RatingsOne State StreetorAmy R. Laskey, +1-212-908-0568Managing DirectorUS Public FinanceorMedia Relations:Brian Bertsch, +1-212-908-0549Email: [email protected]

Source: Fitch Ratings