How effective is central enforcement? Evidence from convened committees in failing local authorities

Abstract

The recent economic slowdown has revealed weaknesses in existing fiscal arrangements and led to the reintroduction of enforcement mechanisms on local authorities within the OECD. One extreme intervention approach for municipalities in financial distress includes neutralization of the elected local leadership and its replacement with a convened committee. Yet how effective are such enforcement methods in the stabilization of local authorities? We present, for the first time, a complete empirical examination of how neutralization affects the financial performance of failing local authorities, as measured by municipal spending, revenue and fiscal balance. We apply the difference-in-differences methodology using data on 77 Israeli municipalities during 2000–2011 to answer this question. We find a sizeable effect of convened committees on the financial performance of local authorities, including an 11% reduction in municipal labor costs, a 6% reduction in current deficits and a 40% reduction in municipal debt. We also find some evidence for an increase in local tax collection. The fall in debt is partly due to an increase in targeted government transfers and may reflect increased political trust. We discuss the results in light of possible tensions between the neutralization approach and local democracy and conclude that while convened committees improve the financial performance of local authorities, they should be reserved for extreme municipal crises.