Bankruptcies, defaults, and other local government financial emergencies Page: 34
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situations, but the state experienced problems in New
York City and Yonkers for which it had to enact stronger
measures. In both instances, special legislation was
passed approving the issuance of bonds to fund large
accumulated deficits, with a requirement that earmarked
revenues flow directly into a segregated debt
service fund. However, unlike New York State's experience
with other financial emergencies of lesser magnitude,
the simple form of legislation was not sufficient to
induce investors to buy the bonds in these two
NEW YORK CITY
The additional actions required in New York City included
creating a state emergency financial control
board in September 1975. This board was given many of
the powers recommended by the ACIR in its 1973 report,
including: requiring the city to develop a plan to balance
its budget; approval power over most city contracts, including
those with labor unions; and other powers to
require adequate financial reporting and adherence to
the approved plan to balance the budget. Although the
mayor and city comptroller were members of the control
board, state officials were effectively in charge of the
Prior to creating the control board, the state also created
a separate agency (Municipal Assistance Corporation,
usually called MAC or "Big Mac") to issue bonds
for the city and to oversee a separate debt-service fund.
However, even with the control board overseeing the
city's finances the MAC was not able to issue sufficient
bonds to fund $2.4 billion in maturing notes. Thus, despite
the best efforts of the state, a default could not be
averted, and there was discussion of bankruptcy under
Chapter 9 of the Federal Bankruptcy Act. Bankruptcy
was averted by federal direct short-term loans approved
by Congress in November 1975. While the immediate
financial emergency was eliminated by the state actions
and the federal loan guarantee, the city was still faced
with a badly imbalanced operating budget.
The plan the city submitted to the control board provided
for corrective actions that would cause revenues
to exceed expenditures by 1978. The city followed the
plan and revenues exceeded expenditures by $32 million
in 1978. Although this balance was achieved on a
"financial plan basis" as required by the control board,
the budget was unbalanced by $712 million on a generally
accepted accounting principle basis, mainly because
the city continued to use capital funds for
operating purposes. Based on city plans and under continued
supervision of the control board, the city
achieved a fully balanced budget in 1981 and continued
to do so in 1982 and 1983. It now appears that the control
board's powers may sunset as early as 1986. Although
the state was obviously late in determining that
the city had a financial emergency requiring supervision,
the state actions have since been effective.
The Yonker's situation was also so serious that it required
creation of an emergency financial control board
to oversee the city's finances. The state legislation creating
this board was approved in October 1975, about a
month after the New York board was approved, and the
board's structure and powers were similar to that of New
York's. However, several features were different. The
Yonker's legislation specifically authorized a 1% increase
in the city's sales tax, and it froze all city government
wage and salary levels for fiscal 1976, later
extended to fiscal 1977 as well. However, the Yonker's
control board had less direct control over the city's revenues
and contracts than the New York City board had,
and thus had trouble enforcing compliance with financial
As was the case with New York City, the control board
was not sufficient to restore investor confidence and
permit bond sales. To achieve this end, additional legislation
was passed in July 1976, empowering the state
comptroller as "fiscal agent" to approve city budgets,
control a special segregated debt service account with
earmarked revenues, segregate bond proceeds, and approve
of note issues. This legislation, in effect, transferred
the supervisory powers from the control board to
the state comptroller, although the control board remained
in existence until December 31, 1978. The fiscal
agent's powers will remain in effect until the bonds issued
to pay the deficit are retired.
Although the combined control board and fiscal agent
legislation were adequate to get Yonkers back into the
bond markets, the city's continued problems in balancing
its budget, as evidenced by the need for state loans to
balance its budget in 1979 and later years, raise doubts
about the effectiveness of the state actions. These doubts
were confirmed by the reimposition of a state control
board in May 1984. It appears that the state comptroller,
or fiscal agent, does not exercise political or institutional
power comparable to that of the control board in New
York City, and has thus been unable to impose sufficiently
strict financial budget discipline on Yonkers to
solve its financial problems.
Evaluation of New York Experience
New York State has chosen a flexible approach to
local government emergencies. The state determines the
existence of an emergency by special legislation and
tailors the legislation to address the particular emergency.
Both the determination of an emergency and the
solutions are made in a political environment. In Ohio
local governments know in advance the conditions that
will trigger an emergency declaration and the state actions
that will ensue, while in New York local governments
cannot be sure when or how the state will act.
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United States. Advisory Commission on Intergovernmental Relations. Bankruptcies, defaults, and other local government financial emergencies, book, March 1985; Washington, D.C.. (digital.library.unt.edu/ark:/67531/metadc1317/m1/44/: accessed January 24, 2019), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.