What Happened?
The state of New York is considering whether “control boards” should automatically take control of municipalities that fail certain financial strength tests.
So What?
The debate highlights a question that is starting to rear its head from Florida to California: What is the state’s role in local bankruptcies? Already, critics are saying that California should have done more to help its cities avoid bankruptcy.
What’s a Control Board?
Typically established on a case-by-case basis, state control boards are emergency oversight councils that help manage municipalities in crisis. Sometimes these boards have more power than elected officials, which enables them to unwind agreements or annul contracts; for example, according to a recent Thomson Reuters article, Buffalo’s control board froze the salaries of public workers in 2003.
In other cases, the control board acts in an advisory capacity; in fact, that happened in Buffalo, where the control board shifted from an active oversight role to an advisory role. According to a very detailed presentation by lawyer James Spiotto, at least 10 states have financial control boards that provide supervision and review functions.
New York Story
The state of New York currently has control boards for Troy, Nassau County, and Eire County; according to Thomson Reuters, another control board was recently considered for Rockland County. The New York Post recently reported that state Comptroller Thomas DiNapoli wants to consider a “super control board” that would have the power to take over the finances of local governments when certain financial triggers occurred.
California Story
On the other side of the country, where three cities have filed for federal bankruptcy protection—Stockton, Mammoth Lakes, and most recently San Bernardino—critics are blaming the state for its “hands off” approach to keeping cities out of bankruptcy. Blackrock’s Peter Hayes recently told the San Francisco Chronicle that “seven, eight or ten” additional California bankruptcy filings are likely within the year, and other states—such as Michigan, Pennsylvania, New York and Rhode Island—have been more “proactive” in aiding municipalities.
Research
Before we provide information on municipal bankruptcies and control boards, it’s important to know whether your state even allows municipal bankruptcies. According to Mr. Spiotto’s 160-page presentation, only sixteen states specifically authorize municipal bankruptcies. Those states are Alabama, Arizona, Arkansas, California, Florida, Idaho, Kentucky, Minnesota, Missouri, Montana, Nebraska, New York, Oklahoma, South Carolina, Texas, and Washington.
Another eight states can authorize municipal bankruptcies under certain circumstances: Connecticut, Louisiana, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, and Rhode Island. Five other states limit filing with certain exceptions: Colorado, Georgia, Illinois, Iowa and Oregon. More than 20 states are unclear, or do not specifically authorize municipalities to file for bankruptcy.
Bond firm HJ Sims recently wrote a very good overview of the state’s role in municipal bankruptcies. The document provides examples of cities where control boards were created—including New York and Detroit—and explores whether state actions in California and elsewhere have exacerbated municipal fiscal problems.
A list of frequently asked questions is available from the Government Finance Officers Association, and the law firm of Orrick has published a very clear overview on municipal bankruptcy issues.