Could a Municipal Bankruptcy Happen in New York?

NYSGFOA Annual Conference April 3, 2014

Patrick M. Malgieri pmalgieri@harrisbeach.com Todd Miles tmiles@harrisbeach.com

Fiscal Challenges Facing New Yorks Municipalities

Principally a result of The Great Recession? Factors:

Population

Aging Declining Poorer Shrinking Stagnant or Declining in Value

Tax Base

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Fiscal Challenges Facing New Yorks Municipalities (cont.)

Infrastructure

Aging rapidly Declining: Federal aid, state aid, tax recipients Pension contributions for defined-benefit plans Health care

Revenues

Public Employee Costs

State Mandates

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Historical State and Local Government Responsibilities to Challenges

Local Government Responses:

Cost and Program Reductions (Doing Moreor the Same---with Less) Shared and Contracted Services; Transfer of Functions (Inter-Municipal Agreements) Municipal Consolidations

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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 6 Mandate Relief Council Recommendations BUT: Wicks Law Tribororough Financial Control Board: New York City, Buffalo, Yonkers, Nassau County

Controversial (particularly with organized labor) Can address locally-created impediments Negative public perceptions
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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: Governors 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

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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.

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Could a Municipal Bankruptcy Happen in New York?

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

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Could a Municipal Bankruptcy Happen in New York?

Filing by municipality under Chapter 9 Eligibility thresholds Limits on bankruptcy courts powers Debt adjustment plan

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Could a Municipal Bankruptcy Happen in New York?

Mission of Municipalities

Provide essential services Contracts with employees, vendors, investors Bankruptcy threatens viability Loss of trust and credibility

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Could a Municipal Bankruptcy Happen in New York?

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

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Could a Municipal Bankruptcy Happen in New York?

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

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Could a Municipal Bankruptcy Happen in New York?

Control boards, municipal assistance corporations and fiscal stability authorities

Supervise budget process Approve collective bargaining agreements Approve or undertake borrowing Impose wage freezes

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Could a Municipal Bankruptcy Happen in New York?

State financial restructuring board

Takes applications from municipalities Reviews operations, finances, management Recommendations on restructuring operations Loans and grants for implementation Binding arbitration process

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Could a Municipal Bankruptcy Happen in New York?

Chapter 9 bankruptcy not debt elimination or liquidation of municipalitys assets Not takeover of operations by court Municipality continues operations Process results in debt adjustment plan Restructuring of operations and assets if municipality consents

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Could a Municipal Bankruptcy Happen in New York?

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

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Could a Municipal Bankruptcy Happen in New York?

Bankruptcy court powers limited

Court cant direct local officials to take actions Court cant remove governing board members Court cant give new powers to municipality Municipality controls financial affairs and operations, including spending money, dealing with property, paying expenses

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Could a Municipal Bankruptcy Happen in New York?

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

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Could a Municipal Bankruptcy Happen in New York?

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

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Could a Municipal Bankruptcy Happen in New York?

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

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Could a Municipal Bankruptcy Happen in New York?

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

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Could a Municipal Bankruptcy Happen in New York?

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

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Could a Municipal Bankruptcy Happen in New York?

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

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Could a Municipal Bankruptcy Happen in New York?

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?

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Could a Municipal Bankruptcy Happen in New York?

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 didnt approve

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Could a Municipal Bankruptcy Happen in New York?

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

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