Beyond Dispute - June 2013: Super Control Board May Be in the Near Future for New York State

more+
less-

Amid signs of an improving economic climate, municipalities continue to struggle to meet financial obligations. At a time when most industries are now showing positive job growth, the government sector continues to slash positions to stay within budget. As a result of increasing deficits, unfunded liabilities for retiree healthcare, and the ever increasing likelihood of exceeding the constitutional tax limit, several local governments are on the verge of bankruptcy in New York State. Consequently, there is growing discussion of imminent legislation that would create a “Super Control Board” patterned on the Emergency Financial Control Board, which was first created to address the New York City fiscal crisis of 1975. Creation of such a “Super Control Board” would affect, among other things, the approval of and payment on distressed municipalities’ contracts with their vendors in the private sector.

In 1975, the New York City Financial Control Board (“NYC Control Board”) was established pursuant to the New York State Financial Emergency Act of the City of New York (“Act”) to oversee the financial management of New York City government and certain related public authorities. The Act gave the NYC Control Board powers and responsibilities of review and oversight. Thereafter, when other local governments were on the brink of fiscal crisis, the State responded on a case-by-case basis by legislatively creating other control boards. In addition to the NYC Control Board, today there are control boards in Erie County, Buffalo, Nassau County, and Troy (collectively, “Control Boards”).

There is growing speculation that New York State Governor Andrew Cuomo and State Comptroller Thomas DiNapoli are reviewing proposals that would create what has been termed a “Super Control Board” with the power to oversee the finances of counties, cities and towns on the verge of bankruptcy; the “Super Control Board” would oversee all control boards, including the current existing Control Boards. However, the distinction from the prior implementation of the Control Boards is that the “Super Control Board” would be automatic without the need for a case-bycase implementation. Currently, eight local governments, including New York City, are close to exceeding their constitutional tax limit which ties the amount of money a local government can spend to a percentage of its property-tax value. Other communities approaching spending limits include Cortland County and the cities of Binghamton, Jamestown, Lackawanna, and Herkimer. According to State Comptroller Thomas DiNapoli, almost 300 local governments in New York State ended one of the last two fiscal years with a deficit and 27 have depleted their rainy-day reserves.

A “Super Control Board” would not be unusual. The State of New York has typically created legal entities with a host of powers in an effort to restore fiscal health to a local government.

Nassau County Interim Finance Authority

The New York State Legislature created the Nassau County Interim Finance Authority (“NCIF Authority”) in June 2000. NCIF Authority is a corporate governmental agency and instrumentality of the State of New York constituting a public benefit corporation created by the Nassau County Interim Finance Authority Act, Chapter 84 of the Laws of 2000. The NCIF Authority is empowered to issue its bonds and notes for various County purposes, including the restructuring of a portion of the County’s outstanding debt. In the absence of a control period, the NCIF Authority is empowered to review financial plans; make recommendations or, if necessary, adverse findings; monitor compliance; make transitional State aid available as it determines; and comment on proposed borrowings by the County.

The NCIF Authority’s powers, however, are not limitless. On February 14, 2013, the U.S. District Court for the Eastern District of New York issued an opinion granting summary judgment to several law enforcement unions who were seeking to nullify the NCIF Authority imposition of a wage freeze in 2011. Honorable U.S. District Court Judge Leonard Wexler found that the NCIF Authority froze wages more than two years after its authority over the contracts expired. Specifically, Judge Wexler ruled that the NCIF Authority exceeded its powers to freeze police wages in 2010 after the period of greater state control expired. In March 2013, the NCIF Authority appealed the decision to the United States Court of Appeals for the Second Circuit. Carver v. Nassau Cnty. Interim Fin. Auth., 2013 U.S. Dist. LEXIS 20149 (E.D.N.Y. Feb. 14, 2013), appeals docketed, No. 13-801 (2d Cir. March 6, 2013), No. 13-840 (2d Cir. March 8, 2013). If not reversed, this decision could cost Nassau County at least $20 million.

Buffalo Fiscal Stability Authority

Similar to the NCIF Authority, in response to a State Comptroller’s report on the financial condition of the City of Buffalo, and a subsequent determination by the New York State Legislature that the City faced a severe fiscal crisis that could not be resolved without State assistance, the Legislature passed, and then-Governor George E. Pataki signed, Chapter 122 of the Laws of 2003—the Buffalo Fiscal Stability Authority Act (“BFS Act”) and the BFS Authority. The BFS Act, adopted with unanimous bipartisan support in the State Legislature, declared the maintenance of a balanced budget by the City of Buffalo to be a matter of “overwhelming State concern.” Toward the end of returning the City of Buffalo to fiscal stability, the BFS Act: (1) established the BFS Authority as a fiscal control agency over the City and its covered organizations; (2) required the annual development of a four-year financial plan for the City and its covered organizations, and invested the BFS Authority with the power to insure compliance with that plan; (3) authorized the BFS Authority to provide deficit financing assistance to the City and its covered organizations over a four-year period; (4) set forth a legal basis to create a highly-rated borrowing structure to reduce City borrowing costs and provide short term budgetary assistance; and (5) empowered the BFS Authority to impose financial control mechanisms if the City and its covered organizations were unable to adopt a balanced financial plan and/or operate in accordance with that plan.

The BFS Authority began its existence during a “control period,” which means that it commenced operation with its maximum authorized financial control and oversight powers. Among them were the powers to review and improve or disapprove contracts, including collective bargaining agreements into which the City or any covered organization had entered; to approve or disapprove the terms of borrowing by the City and covered organizations; to approve, disapprove or modify the City’s financial plans and take any action necessary in order to implement the financial plan; to impose a wage or hiring freeze, or both, with respect to employees of the City or any covered organization; and to review the operation, management, efficiency and productivity of the City and covered organizations.

Erie County Fiscal Stability Authority

The Erie County Fiscal Stability Authority (“ECFS Authority”), a New York State Public Benefit Corporation, was created on July 12, 2005, by the Erie County Fiscal Stability Authority Act (“ECFS Act”), Chapter 182 of the Laws of 2005, as amended by Chapter 183 of the Laws of 2005. The ECFS Act declared Erie County to be in a severe fiscal crisis that could not be resolved absent assistance from the State. The ECFS Authority was established in an “advisory” capacity in order to preserve the confidence of those who had invested in the County’s bonds and notes and to protect the economy of both the region and the State as a whole. The ECFS Authority is vested with control and advisory authority to oversee the budget, financial, and capital plans of the County and covered organizations; to issue bonds or other obligations to achieve budgetary savings through debt restructuring or deficit financing; to finance short-term cash flow or capital needs; and, if necessary, to develop financial plans on behalf of the County if the County is unwilling or unable to take the required steps toward fiscal stability.

In accordance with the ECFS Act, the ECFS Authority is to switch from an advisory to control capacity if the County fails to adopt an on-time balanced budget; fails to pay debt service; incurs an operating deficit of more than 1%; loses access to the market for borrowing; or violates any provision of the ECFS Act. The ECFS Authority is required annually to review and approve the County’s proposed budget and four-year financial plan, which details the County’s future expenditures, revenues, and gap-closing measures. The ECFS Authority is also required to review County applications for State efficiency grants and approve efficiency grant funding made available in the State budget when it deems it appropriate to do so.

With several counties and cities on the verge of financial crisis, the creation of a “Super Control Board” is very near. The municipal fiscal crisis, however, is not confined to New York State. In August 2012, for example, San Bernardino became the third city in California to file for federal bankruptcy protection. One can only speculate that 2013’s anticipated legislative solution to create a “Super Control Board” may serve as a model in addressing this crisis in New York.