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: