This deficit has got to go

Marching down Broadway this afternoon shouting chants such as “Hey-Hey, Ho-Ho, This deficit has got to go,” a coalition of Community Voices Heard and the newly formed Political Action Committee Change Newburgh headed to City Hall. They marched up to the second floor, where they were determined to meet City Manager Richard Herbek.

Herbek appeared and there was an exchange on various issues, including tax increases and “receivership” (which Change Newburgh has been encouraging.) Herbek said that what happens in New York State would be a financial control board, which the city council previously asked the State for, but the State refused.

Dissatisfied with Herbek’s answers, the group organized a phone-in and some members began making calls to Albany politicians Senator Bill Larkin and Assemblyman Tom Kirwan.

The group then continued downstairs to the sidewalk outside City Hall, where they held a press conference. Representatives from CVH, a local union, and Change Newburgh spoke.

OSC concerned planned tax increases may not be sustainable

In light of the recent concerns about Newburgh’s financial condition, I contacted the New York State Comptroller’s office to get some answers about various options.  Mark Johnson from the Press Office provided the following information (OSC.)

NA: Has any municipality, county, or other governmental entity ever gone bankrupt in New York State?  Has any ever gone into receivership?

OSC: NYC OTB recently filed a bankruptcy petition, and Suffolk Co. OTB’s board has authorized such a move if they deem it necessary. Not sure of the current status of either.  Not sure what you mean by “receivership.” If perhaps you are referring to instances in which a control board takes custody of city monies, yes that has happened (Buffalo and Erie County recently). Control boards are created by a special act of the State Legislature.

NA: Can you clarify the differences between municipal bankruptcy and municipal receivership?  Why would such status be advantageous or disadvantageous?

OSC: We cannot comment on any particular potential measure or approach.

NA: I have heard that municipal bankruptcy is “illegal” in New York State.  Is this accurate?

OSC: Here is the law:
§  85.80  Authority  for  municipality  or emergency financial control board to file petition under federal  statute.  A  municipality  or  its emergency  financial control board in addition to, or in lieu of, filing a petition under this title, or the city of New York  or  the  New  York state  financial  control  board,  may file any petition with any United States district court or court of bankruptcy under any provision of  the laws  of  the  United  States,  now  or  hereafter  in  effect,  for the composition or adjustment of municipal indebtedness.  Nothing  contained in  this  title shall be construed to limit the authorization granted by this  section.    However,  no  municipality  shall  file  any  petition authorized  by  this  section  for  so  long as its local ARRA bonds, as defined  in  section  twenty-four  hundred  thirty-two  of  the   public authorities  law, purchased by the state of New York municipal bond bank agency and secured by  its  pledge  of  tax  revenues  pursuant  to  the authority  of  section  twenty-four  hundred  thirty-six-b of the public authorities law remain outstanding.

NA: I understand that if a municipality (or other government entity) is about to default, the state will impose a control board.  Why would having a control board be advantageous or disadvantageous?

OSC: Financial control boards are created on a case-by-case basis.  The powers and duties of these board are provided in the specific enabling legislation that creates them, and since we don’t know what type of board, if any, would be imposed here, we can’t speculate on whether it would be “advantageous” or not.

For background: Boards are usually given the power to operate in “advisory” mode or “control” mode, depending on the financial situation of the municipality that they oversee.  While in advisory mode, the board generally is involved in reviewing, monitoring and recommending revisions to the municipality’s multi-year plan, budget and proposed borrowings.  When the board is in a control period, the board is typically given broader powers such as the power to approve all contracts (including collective bargaining) and borrowing, impose a wage or hiring freeze (or both), and borrow and intercept revenue to pay debt service on behalf of the local government.  Because of this intercept provision, control boards typically receive a higher credit rating than the municipality that they oversee and therefore are able to borrow at lower rates of interest, generating savings.

NA: Here in the City of Newburgh, there have been steep tax increases in recent years, with additional steep increases predicted for future years.  Are there any avenues by which the State might mitigate unsustainable tax increases?

OSC: It would be up to the governor and the Legislature to determine if additional state aid should be provided to the city to offset the tax increases.  The Office of the State Comptroller has been assisting the City by providing technical assistance.  OSC has reviewed and issued reports on the city’s last two budgets, receives and reviews quarterly financial reports, will be conducting an audit of the city’s operations, and administers the city’s debt service account (all pursuant to the Newburgh Fiscal Recovery Act of 2010.)

In addition, OSC recently offered to help the city modify its multi-year financial plan as our office is concerned that the tax increases planned in future years to achieve balanced budgets may not be sustainable.

NA: If Newburgh were to go bankrupt, into receivership, or have a control board imposed, is there any reasonable expectation that the predicted steep tax increases might be different?

OSC: It’s hard to say as there are many variables that can affect the City’s finances going forward and we would not want to speculate.

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Notes: regarding the ARRA stipulation in the law, while the City of Newburgh did receive American Recovery and Reinvestment Act (ARRA) Funding in 2009, that funding was not bonds but CDBG funds from HUD:

The U.S. Department of Housing and Urban Development will be awarding the City of Newburgh a total of $225,632 through the American Recovery and Reinvestment Act of 2009.

These funds are earmarked to the City as a CDBG entitlement grantee. HUD anticipates these funds to be managed through the CDBG administrative process and the majority of regulations which govern the use of CDBG funds will apply to the use of these additional funds – referred to as “CDBG-R” funds.

It is not clear if the city does have ARRA bonds outstanding.  Requests for comment from city comptroller Cheryl Gross were unanswered.

4/22/11 UPDATE: At the City Council Work Session yesterday evening, Ms. Gross said to me she would look into the ARRA funding and see if there were any bonds.  Ms. Gross also mentioned in the city’s original proposal to the state, they asked for a control board (and Ms. Gross was proposed to be on it), but the state said no.

4/23/11 UPDATE II: Cheryl Gross has confirmed that Newburgh has no ARRA bonds.