What is Governor Cuomo’s end game?

May 15, 2013

This week, New York Governor Andrew Cuomo unveiled his proposal to create a Financial Restructuring Board to help distressed local governments manage their finances. One of the key features is an alternative binding arbitration process for unions and municipalities to resolve contract issues more rapidly. New York has an unusual employee provision that leaves all previous contract terms in place if municipalities and unions fail to reach an agreement. This provision could prevent old contracts from festering with rich wage increases and swelling employee and pension costs. Governor Cuomo said in a press release:

Growing retirement costs, declining populations, decreasing property values, and the recent fiscal crisis have all contributed to the difficult financial issues facing localities today…The Financial Restructuring Board will bring together state and local officials to help localities make tough decisions and solve this crisis now instead of kicking the can down the road.

Governor Cuomo pointed his finger at four New York cities that have balanced their budgets for years with substantial state aid. It includes a chart that details state subsidies to these cities via the Aid and Incentives for Municipalities (AIM) program:

I wondered what incentives states need to go through this restructuring therapy. It’s rare to see a politician proactively make changes that will right a floundering ship. Politicians repeatedly make fiscal decisions that pass pain to future administrations. So where are Governor Cuomo’s carrot and stick to get these cities to take action? Is his end game to get the New York State Assembly to start walking down the amount of state aid to these cities? This would be a sea change for their finances, and it would require massive structural reorganizations.

The credit rating agencies have slightly upbeat assessments of these cities. Moody’s says Buffalo is low-to-mid investment grade at “A1”. Here is what Moody’s wrote about the city on April 1, 2013:

The A1 rating reflects the city’s overall solid reserves and liquidity despite current declines and structurally imbalanced budgets in the multi-year plan. The rating also factors: (1) challenges posed by the city’s below average demographic profile; (2) a high debt burden that is expected to gradually moderate; (3) the challenges posed by open employee contracts (4) the oversight of city operations by the Buffalo Fiscal Stability Authority (BFSA, sales tax and state aid secured bonds rated Aa1), which has approved the city’s four-year financial plan; (5) the city’s improved revenue raising flexibility given modest growth in assessed valuation and improved taxing margin; and (6) additional bondholder security provided by the city’s legally required and trustee-held bi-annual set-aside of debt service payments from first property taxes collected.

This sounds pretty stable, but it doesn’t take into account any possible reduction in state aid. It will be interesting to see how Moody’s and other raters assess this latest proposal which has to pass the New York State Assembly.

It’s unusual to see cities so reliant on state support. Even near-bankrupt Detroit receives only about 12 percent of its revenue through a state sharing program. Buffalo, with 33 percent of its city budget coming from the state, may be the national champion for state support.

If reorganization were to fail (through this or the Financial Control Board process), cities in New York could address union employee, debt and pension obligations through the bankruptcy court. The Cuomo proposal seems to be trying to get ahead of the need for such drastic medicine. It could be an interesting model for the nation if local politicians have the stomach and strength to create change.

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