NY state officials eye automatic control boards

NEW YORK Mon Aug 6, 2012 8:51pm EDT

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NEW YORK (Reuters) - New York state is considering whether control boards for cash-poor cities and counties should automatically go into effect when localities fail certain fiscal tests, instead of being approved on a case-by-case basis as they are today, a source said on Monday.

The new control boards, which could serve either as advisers or managers, might be triggered for municipalities such as Utica and Troy that have been in economic decline for decades. Some downstate local governments, including Rockland County and Yonkers, also might be at risk.

Some emergency control boards have stronger powers than local elected officials; they can suspend union contracts, for example. Buffalo's control board froze public workers' salaries from 2003 to 2007, prompting the employees to sue.

A debate over what role states should play when their cities, towns or counties are struggling to remain solvent is playing out around the nation.

California, for one, did not get involved when three of its cities filed for bankruptcy this summer.

But some other states have intervened, including Pennsylvania. In Michigan, voters will decide this November whether the state's emergency managers should keep enhanced powers to run city governments, including the power to set aside union contracts.

A total of 15 states - including New York - let municipalities seek bankruptcy protection, while another nine states only permit such filings under certain conditions, according to a 2011 report by James Spiotto, a bankruptcy lawyer with Chapman and Cutler LLP in Chicago.

New York, however, has a long tradition of saving its local governments.

In 1975, New York City "met all the criteria for municipal bankruptcy: it was insolvent, couldn't meet its debts as they came due and its financial books were in disarray," said Richard Larkin, director of credit analysis for broker/dealer HJ Sims, in Iselin, New Jersey.

The state responded by creating a control board to pull New York City back from the brink of a fiscal collapse. Another entity, the Municipal Assistance Corporation, was set up to sell debt on the city's behalf, and by 1981, the city was once again able to sell bonds, Larkin said.

The New York State Financial Control Board actively managed New York City's finances from late 1975 until 1986.

From 1986 until 2008, the control board's powers would have been reactivated if New York City had met any one of five specific conditions, such as failing to pay debt service on any of its obligations or running up an operating deficit of more than $100 million during a fiscal year.

THREE ACTIVE CONTROL BOARDS

The state has three active control boards, for Erie County, Nassau County and the city of Troy.

In late May, Buffalo's control board stepped down from active oversight to an advisory role.

This spring, a few state and local officials debated creating a control board for Rockland County, which lies just north of New York City, and is struggling with a multi-year deficit. But no bill was passed.

"Our office continues to examine a number of options," said a spokesman for New York state's Comptroller Thomas DiNapoli, a Democrat, who monitors the finances of about 4,000 localities around the state, from school districts to New York City.

"We have not had any discussions with the governor's office on any specific proposals," the spokesman added.

"The problem is that we are keenly aware that no one size fits all localities across the state because local governments have their own distinct issues," the spokesman said.

A spokesman for Governor Andrew Cuomo, a Democrat, had no immediate comment.

Currently, the comptroller or local or state officials can request that the New York legislature enact a bill creating a control board for a municipality.

SOME RISK LOSING STATE AID

The latest discussion of control boards in New York follows a report last week by DiNapoli that noted eight municipalities were so close to hitting the maximum level of property tax allowed by the state that they were at risk of losing state aid.

The concepts that policy makers now are analyzing would sidestep the political process by devising a list of fiscal indicators, according to the source, who requested anonymity. If a municipality was in the danger zone on a minimum number of them, an advisory board might be created, or the localities' finances might be handed over to a control board.

Tests might include whether the fund balance was in deficit, whether reserves had been exhausted, or whether the municipality had exceeded the maximum property tax level.

Some policy makers are concerned that automatically creating a control board to run a localities' finances would give the state too much power, the source said.

(Editing by Tiziana Barghini, M.D. Golan and Jan Paschal)

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