Could a Municipal Bankruptcy Happen in NY?

Could a Municipal Bankruptcy Happen in New York?

NYSGFOA Annual ConferenceApril 3, 2014

Patrick M. [email protected]

Todd [email protected]

Pat Malgieri & Todd Miles(585) 419‐8800© Harris Beach PLLC, 2014

Fiscal Challenges Facing New York’s Municipalities

Principally a result of “The Great Recession”? Factors: Population Aging Declining Poorer

Tax Base Shrinking Stagnant or Declining in Value


Fiscal Challenges Facing New York’s Municipalities (cont.)

Infrastructure Aging rapidly

Revenues Declining: Federal aid, state aid, tax recipients

Public Employee Costs Pension contributions for defined-benefit plans Health care

State Mandates


Historical State and Local Government Responsibilities to Challenges

Local Government Responses:

Cost and Program Reductions (“Doing More—or the Same---with Less”)

Shared and Contracted Services; Transfer of Functions (Inter-Municipal Agreements)

Municipal Consolidations


Historical State and Local Government Responsibilities to Challenges (cont.)

State Government Responses: Increased State Aid: but no prospect for significant increases in

AIM or other aid Mandate Relief: Medicaid

Tier 6Mandate Relief Council Recommendations

BUT: Wicks LawTribororough

Financial Control Board: New York City, Buffalo, Yonkers, Nassau County Controversial (particularly with organized labor) Can address locally-created impediments Negative public perceptions


Can Municipalities “Grow” Their Way Out Of The Problem?

Vigorous, strategic and well-conceived economic development efforts

Smaller municipalities without the “critical mass” may need to look to more regional solutions: Governor’s Regional Economic Development Councils

Economic Development Strategies Present Their Own Challenges: Property tax as the life blood of local government Changing nature of economic base from manufacturing to higher

education, research and health care: non-profit Aggressive real property tax-exemption or abatement policies Start-Up New York


Is There A “Third Way”?

Is the business model for local governments sustainable in the 21st Century?

Top-to-Bottom Review to Develop a Plan of Government What do we expect all levels of state and local government to do? Which levels of government are best able to perform

what services? What types and methods of payment for which services are most

efficient and equitable?

Breaking down the barriers at both the state and local government levels.



Recent highly publicized cases in Detroit, Michigan and other states including Rhode Island, California, and Alabama

Bankruptcy has been discussed more openly in regard to fiscally distressed municipalities in New York

Detroit case provides most recent preview if this happened in New York



Filing by municipality under Chapter 9

Eligibility thresholds

Limits on bankruptcy court’s powers

Debt adjustment plan



Mission of Municipalities

Provide essential services

Contracts with employees, vendors, investors

Bankruptcy threatens viability

Loss of trust and credibility



Dilemmas for leaders considering bankruptcy

Default on debt – but need to maintain market access

Not honor collective bargaining agreements – but still attract and retain qualified employees



NY State programs to address fiscal distress

OSC training, advisory resources, fiscal guidance

OSC fiscal distress monitoring system

Employer contribution stabilization program

Property tax cap legislation

Deficit borrowing legislation



Control boards, municipal assistance corporations and fiscal stability authorities

Supervise budget process

Approve collective bargaining agreements

Approve or undertake borrowing

Impose wage freezes



State financial restructuring board

Takes applications from municipalities

Reviews operations, finances, management

Recommendations on restructuring operations

Loans and grants for implementation

Binding arbitration process



Chapter 9 bankruptcy not debt elimination or liquidation of municipality’s assets

Not takeover of operations by court

Municipality continues operations

Process results in debt adjustment plan

Restructuring of operations and assets if municipality consents



Municipality must voluntarily file

State consent to file required

NYS general consent in Title 6-A of LFL

Consent has been withdrawn in special cases

Upon filing automatic stay on lawsuits and enforcement actions



Bankruptcy court powers limited

Court can’t direct local officials to take actions

Court can’t remove governing board members

Court can’t give new powers to municipality

Municipality controls financial affairs and operations, including spending money, dealing with property, paying expenses



Bankruptcy court can approve the petition if it finds Eligibility Criteria satisfied

Court can permit municipality to choose which contracts it will honor or reject

Court can confirm the final plan of debt adjustment

Court can monitor implementation of plan



Eligibility for Chapter 9 relief requirements

Good faith negotiations with creditors failed

Good faith negotiations impractical

Municipality found to be insolvent

Municipality desired in good faith to effect a debt adjustment plan



Various classes of creditors likely to object to eligibility finding so case would be dismissed

Claimants for other post employment benefits

Claimants for unfunded pension benefits

Holders and insurers of outstanding bonds

Claimants for other contractual liabilities



Likely objections to eligibility – Detroit case

Chapter 9 violates the US Constitution

State law providing consent unconstitutional because it could impair OPEB and pension contract benefits protected under state law

Detroit court held that when state consents to filing, it submits to power of Federal bankruptcy court to impair these contracts



Court finding of insolvency – Detroit example

City stopped paying some debts and creditors to avoid running out of cash, deferred pension contributions

City was spending much more money than it was taking in – expensive deficit borrowings

Overwhelming evidence of “service delivery insolvency”



Other thresholds for eligibility

Court finds good faith negotiations before filing

Court finds that such negotiations were impracticable –as in Detroit case

Sheer number of creditors – thousands of retirees and bondholders with no formal representatives to negotiate with City



Debt adjustment plan

Designation of different classes of creditors.

How are impaired creditors treated?

Same treatment for all claimants in class?

Plan implementation – benefits reduced? property sold? bond terms changed?

Disputes settled? Which contracts honored?



Each class of creditors can approve plan or not

If at least one impaired class approves, Court can approve plan – known as the “cramdown”

Court must find plan is fair to impaired classes that didn’t approve



Detroit plan – a preview of what to expect

Retired and current city employees lose their cost of living increases for pension benefits

Pension benefits cut to 74% of current benefits, except police and fire get 96%

Retirees and dependents get 27-33% of OPEB

GO bondholders get 20% of debt payments – big losses for bond insurers

Leveraging of assets to generate revenues

Documents

Could a Municipal Bankruptcy Happen in NY?