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Bankrupt California Cities Hold Lessons For New York's Broke Ones

August 14, 2013

By Nicole Gelinas

In mid-May, New York Gov. Andrew Cuomo acknowledged a "long-festering" problem: many of the state's cities, towns, and counties were virtually broke.

"In the private sector, a company goes into bankruptcy court, gets restructured, and comes out in a relatively short period of time," Cuomo said. "There is no governmental equivalent."

The closest that New York localities came to bankruptcy, he pointed out, was the "financial control board," an instrument that the state could use to take over insolvent local governments. But those boards interceded only "after the locality really was financially bankrupt for a long period of time" — an unacceptable wait.

The governor's solution, approved by lawmakers in June, was a statewide "financial restructuring board." Yet this new creation won't solve the fiscal woes of cash-strapped cities, towns, and counties because Cuomo designed it to be impotent. In particular, it lacks the power to take on the main forces that drive up costs for localities: public-sector unions and the politicians who covet their support.

New York's control-board process works as follows: When a local government gets into so much trouble that it can't pay its bills, it goes to Albany for financial help; usually, the power to borrow under a state guarantee. In return, Albany installs the control board, which assumes the municipality's budgeting authority and can impose emergency cost-cutting measures.

A control board served New York City well in the mid-1970s, when, after two decades of skyrocketing welfare and social-services spending, the city faced a 17.4% budget deficit.

Banks, growing nervous, then turned off the credit tap, preventing the city from paying its day-to-day expenses, which included repaying short-term bondholders. So the state (and eventually the feds) stepped in, guaranteeing new long-term debt to pay off those bondholders.

The control board proved successful because New York City's problems involved immediate costs — salaries, social services, and incessantly maturing debt. Freezing those salaries and restructuring that debt could therefore help.

But today, New York state's distressed cities and towns have a different kind of problem: they can't afford to pay their future obligations.

Many localities have promised to pay pensions to their workers or to cover their health-care costs, once they retire — but haven't put enough money aside to keep those promises.

Freezing wages today does nothing to curb these already unaffordable future costs.

Gov. Cuomo's new "financial restructuring board" looks like a Band-Aid.

It will help a distressed town employ "shared services," merging one department's administrative task with another department's or with another town's. The board will also encourage towns to reduce the number of elected officials to eliminate overlaps.

It will decide labor disputes for uniformed officers' unions — but only if the unions agree.

"It's in everyone's interest to make the kinds of reforms that we need ... obviously for the elected officials and also for the unions who represent the workers," Cuomo said.

But that's not true; it's not in unions' interest to give up free health care. Why should they agree to submit to a board that might take it away?

It's telling, moreover, that the governor himself won't serve on the board; his budget director will stand in, indicating a lack of heft.

If Cuomo wants to prevent New York cities from going bankrupt — and they can, according to state law — he should learn from California's bankrupt cities: Stockton and San Bernardino, which declared bankruptcy last year, and Vallejo, which did so in 2008.

Those cities have been able to do something that New York's similarly distressed municipalities haven't: reduce retiree health-care liabilities and get out of bad contracts. Doing that now could help the state's healthier cities and towns before it's too late.

But what about places like Nassau and Buffalo, where it is too late? There, Cuomo should take a page from the playbook of Michigan, which installed an emergency manager in its largest city, Detroit, earlier this year. The manager has the power to alter existing union contracts and to negotiate with financial creditors. Cuomo should ask lawmakers to invest New York control boards with similar powers.

Cuomo should also imitate Detroit's emergency manager in making clear that the state will no longer bail out municipalities by letting them borrow cheaply. Indeed, the state should charge struggling municipalities a penalty interest rate on any debt that it issues on their behalf.

Further, that debt shouldn't go toward refinancing existing debt, as it has in Nassau County; the bondholders who assumed the old debt should be stuck with the risks they took.

If Cuomo refuses to take these steps, the result might well be municipal bankruptcies, once his financial restructuring board fails to fix struggling cities' finances. Those bankruptcies could have absurd consequences.

For example, a county could probably use bankruptcy to cancel troublesome labor contracts — but once out of bankruptcy, it might have to readopt those contracts, depending on whether state or federal law prevailed in court.

But that could hardly be a more absurd situation than the one that New York's insolvent cities are in today.

Original Source: http://news.investors.com/ibd-editorials-viewpoint/081413-667518-new-york-cities-can-learn-from-california-cities-bankruptcy-experience.htm

 

 
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