Could a Municipal Bankruptcy Happen in NY?

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  • Could a Municipal Bankruptcy Happen in New York?

    NYSGFOA Annual ConferenceApril 3, 2014

    Patrick M. Malgieripmalgieri@harrisbeach.com

    Todd Milestmiles@harrisbeach.com

  • PatMalgieri&ToddMiles(585)4198800HarrisBeachPLLC,2014

    Fiscal Challenges Facing New Yorks Municipalities

    Principally a result of The Great Recession? Factors:

    Population Aging Declining Poorer

    Tax Base Shrinking Stagnant or Declining in Value

  • PatMalgieri&ToddMiles(585)4198800HarrisBeachPLLC,2014

    Fiscal Challenges Facing New Yorks 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

  • PatMalgieri&ToddMiles(585)4198800HarrisBeachPLLC,2014

    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

  • PatMalgieri&ToddMiles(585)4198800HarrisBeachPLLC,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

  • PatMalgieri&ToddMiles(585)4198800HarrisBeachPLLC,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: 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

  • PatMalgieri&ToddMiles(585)4198800HarrisBeachPLLC,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.

  • PatMalgieri&ToddMiles(585)4198800HarrisBeachPLLC,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

  • PatMalgieri&ToddMiles(585)4198800HarrisBeachPLLC,2014

    Could a Municipal Bankruptcy Happen in New York?

    Filing by municipality under Chapter 9

    Eligibility thresholds

    Limits on bankruptcy courts powers

    Debt adjustment plan

  • PatMalgieri&ToddMiles(585)4198800HarrisBeachPLLC,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

  • PatMalgieri&ToddMiles(585)4198800HarrisBeachPLLC,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

  • PatMalgieri&ToddMiles(585)4198800HarrisBeachPLLC,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

  • PatMalgieri&ToddMiles(585)4198800HarrisBeachPLLC,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

  • PatMalgieri&ToddMiles(585)4198800HarrisBeachPLLC,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

  • PatMalgieri&ToddMiles(585)4198800HarrisBeachPLLC,2014

    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

  • PatMalgieri&ToddMiles(585)4198800HarrisBeachPLLC,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

  • PatMalgieri&ToddMiles(585)4198800HarrisBeachPLLC,2014

    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

  • PatMalgieri&ToddMiles(585)4198800HarrisBeachPLLC,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

  • PatMalgieri&ToddMiles(585)4198800HarrisBeachPLLC,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

  • PatMalgieri&ToddMiles(585)4198800HarrisBeachPLLC,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

  • PatMalgieri&ToddMiles(585)4198800HarrisBeachPLLC,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

  • PatMalgieri&ToddMiles(585)4198800HarrisBeachPLLC,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

  • PatMalgieri&ToddMiles(585)4198800HarrisBeachPLLC,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

  • PatMalgieri&ToddMiles(585)4198800HarrisBeachPLLC,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?

  • PatMalgieri&ToddMiles(585)4198800HarrisBeachPLLC,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 didnt approve

  • PatMalgieri&ToddMiles(585)4198800HarrisBeachPLLC,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

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