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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
Pat Malgieri & Todd Miles(585) 419‐8800© Harris Beach PLLC, 2014
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
Pat Malgieri & Todd Miles(585) 419‐8800© Harris Beach PLLC, 2014
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
Pat Malgieri & Todd Miles(585) 419‐8800© Harris Beach PLLC, 2014
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
Pat Malgieri & Todd Miles(585) 419‐8800© Harris Beach PLLC, 2014
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
Pat Malgieri & Todd Miles(585) 419‐8800© Harris Beach PLLC, 2014
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.
Pat Malgieri & Todd Miles(585) 419‐8800© Harris Beach PLLC, 2014
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
Pat Malgieri & Todd Miles(585) 419‐8800© Harris Beach PLLC, 2014
Could a Municipal Bankruptcy Happen in New York?
Filing by municipality under Chapter 9
Eligibility thresholds
Limits on bankruptcy court’s powers
Debt adjustment plan
Pat Malgieri & Todd Miles(585) 419‐8800© Harris Beach PLLC, 2014
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
Pat Malgieri & Todd Miles(585) 419‐8800© Harris Beach PLLC, 2014
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
Pat Malgieri & Todd Miles(585) 419‐8800© Harris Beach PLLC, 2014
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
Pat Malgieri & Todd Miles(585) 419‐8800© Harris Beach PLLC, 2014
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
Pat Malgieri & Todd Miles(585) 419‐8800© Harris Beach PLLC, 2014
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
Pat Malgieri & Todd Miles(585) 419‐8800© Harris Beach PLLC, 2014
Could a Municipal Bankruptcy Happen in New York?
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
Pat Malgieri & Todd Miles(585) 419‐8800© Harris Beach PLLC, 2014
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
Pat Malgieri & Todd Miles(585) 419‐8800© Harris Beach PLLC, 2014
Could a Municipal Bankruptcy Happen in New York?
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
Pat Malgieri & Todd Miles(585) 419‐8800© Harris Beach PLLC, 2014
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
Pat Malgieri & Todd Miles(585) 419‐8800© Harris Beach PLLC, 2014
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
Pat Malgieri & Todd Miles(585) 419‐8800© Harris Beach PLLC, 2014
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
Pat Malgieri & Todd Miles(585) 419‐8800© Harris Beach PLLC, 2014
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
Pat Malgieri & Todd Miles(585) 419‐8800© Harris Beach PLLC, 2014
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”
Pat Malgieri & Todd Miles(585) 419‐8800© Harris Beach PLLC, 2014
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
Pat Malgieri & Todd Miles(585) 419‐8800© Harris Beach PLLC, 2014
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?
Pat Malgieri & Todd Miles(585) 419‐8800© Harris Beach PLLC, 2014
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 didn’t approve
Pat Malgieri & Todd Miles(585) 419‐8800© Harris Beach PLLC, 2014
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