Can NYC Go Bankrupt? Would It Impact Teacher Pensions and Health Benefits?

Every day Governor Cuomo has a press briefing, an update on the data: are the curves flattening? moving downward?  and, muses about the political scene in Washington. Governors and mayors have been asking the feds for another infusion of dollars, this time to the states; after all, teachers, police, fireman, etc., are local and state employees. If you expect states and localities to take the lead in fighting the pandemic you have to support the efforts with federal dollars.

Mitch McConnell (Kentucky), the majority leader  in the Senate, opposed any aid to states, states who didn’t have sufficient resources, McConnell crowed, should declare bankruptcy. Cuomo snapped back,federal law did not allow states to declare bankruptcy, and, New York State was the fifth biggest contributor to the feds and Kentucky 6th in contributing the least.

While federal law does not allow states to declare bankruptcies cities can: Chapter 9 of the Bankruptcy Law.

The New York Post added to concerns, “New York City is Edging Towards Financial Disaster, Experts Warn.”

A conservative website follows up on the NY Post article supporting the possibility of a New York City bankruptcy.

What is bankruptcy?

What is Chapter 9? It’s the portion of the federal bankruptcy code that applies to municipalities. Created by Congress in 1937, it allows municipalities to seek court protection in the event of fiscal crisis and is meant to ensure that basic government functions can continue while policy makers restructure their debt.

Who can file for Chapter 9? Only municipalities — not states — can file for Chapter 9. To be legally eligible, municipalities must be insolvent, have made a good-faith attempt to negotiate a settlement with their creditors and be willing to devise a plan to resolve their debts.

They also need permission from their state government.

How common are municipal bankruptcies? Very rare. .

What happens once a municipality files for Chapter 9?  … the courts themselves have no authority to make spending or other policy decisions on behalf of the municipality. That power remains with the locality under the U.S. Constitution. Under Chapter 9, municipalities must come up with their own debt restructuring plans, and courts approve or reject it with input from other stakeholders.

What are the risks associated with municipal bankruptcy?
 Local leaders shudder at the notion of bankruptcy, and for good reason.

Public workers worry about slashed salaries or benefits, and all residents could see higher taxes, loss of services or deferred maintenance on necessities such as schools,

What does it mean for states when a municipality goes bankrupt?
 States cannot simply brush off municipal bankruptcies … a bankruptcy can saddle states with significant new responsibilities and the political risks that accompany them.

Local credit problems can have a statewide ripple effect, too. State officials …fear their states’ credit ratings could be downgraded because of individual municipal bankruptcies.

How long do municipal bankruptcy cases typically take?
 It depends on the size and complexity of the case. For large jurisdictions with more debt, the process can be a matter of years, not months.

In 1975 New York City was on verge of bankruptcy, a great deal is different. The Comptroller, the Independent Budget Office, the Citizens’ Budget Commission and the City Council closely monitor city finances, and, since the 2008 Great Recession the city has sharply increased revenues. The pandemic will have significant impacts on the current budget that must be approved by the City Council by June 30th.

The 20-21 budget will contain many, many reductions in services, there is a freeze on new hires even to replace retirees, and, there is a possibility that layoffs could occur.

It is inconceivable that New York State would allow New York City to declare bankruptcy.

The state has considerable authority over cities and counties within the state. The state must approve any tax that the local authority wants to create. For example, property tax increases are capped at 2%; sales taxes, state income taxes are created/modified by the legislature and the governor.

The state could impose an Emergency Financial Control Board to approve any city expenditures.

State pensions are protected by the state constitution.

After July first, nineteen hundred forty, membership in any pension or retirement system of the state or of a civil division thereof shall be a contractual relationship, the benefits of which shall not be diminished or impaired.  

Has a large city ever gone bankrupt?

Yes, Detroit declared the largest bankruptcy by far in American history. It was not a surprise; it had been in the works for decades.

The loss of the automobile industry, the dramatic loss of population, ineffective leadership and decision after decision that dug the fiscal hole deeper and deeper (Read the sad account here; the bankruptcy petition was not a surprise.). Municipal workers saw reductions in pensions and health benefits that have yet to be restored.

A little deeper into the weeds:  will the federal bailouts, trillions of dollar, burden future generations?

I search out and read commentary and opinion from the most knowledgeable sources, and, Paul Krugman, a Nobel Prize winner in economics might be considered a reliable and knowledgeable source.

Public and private debt should not be confused. If you don’t pay back your car loan the car will be repossessed, if you don’t pay back the loan shark you may end up limping. We owe public debt to ourselves.

For each borrower there is a lender.

Krugman and other highly regarded economists explain the differences between private and public debt here and    here.

The decisions of the current administration are political, not economic. Large states are blue states and there is no enthusiasm to assist them in recovering before the November general election.

While bankruptcies are highly unlikely in the short term the length of the recovery will determine future events.

City provided health plans are negotiated by the Municipal Labor Council representing all public employee retirees in the city. The current agreement last until 6/30/21, Read the text of the Agreement here.

The next agreement will be determined in part, by the fiscal situation of the city.

Hope can retires protect themselves?

The unions are our protection.

Are you a COPE contributor? Have you joined teacher union Facebook pages?  Do you contribute to the Democratic National Committee (DNC)?  Do you contribute to the candidate of your choice?

The consequences of four more years of the current administration and their policies are frightful, the most effective way to protect our hard earned benefits is through the political power of our unions, and, we are the unions.

6 responses to “Can NYC Go Bankrupt? Would It Impact Teacher Pensions and Health Benefits?

  1. Lawrence H. Block

    Not surprisingly, you failed to mention anything related to the governance under which New York State and New York City have realized a substantial financial decline even before the Pandemic.It is no secret that there has been a substantial movement of New Yorkers to other states that are more tax friendly and more frugal when it comes to the politicians spending other people’s money. I’m a strong supporter of the unions but if my memory serves me well, and there is a greater chance by the day that it does not, didn’t the unions support Cuomo and De Blasio? Is there any hope that the unions will back a candidate who is fiscally responsible? Perhaps a better managed city and state will ultimately support and save our hard earned pensions and benefits. Then again, I may have misspoke in not pointing all fingers of blame at the feds. If that be the case, please forgive me for a momentary lapse in judgement and in thinking. Yes, yes, I’m fine and there is no need to refer me to a re-education camp this summer. Please!!!!!


  2. ken karcinell

    Historically, cities run by socialist communist progressives are the ones that teeter on the brink of bankruptcy. Just look at this Mayor’s expenditures. 1 Billion for THRIVE.Gone! at least 250 mil at DOE for phony positions.Gone! Only good thing is that he will soon be gone..Lets go Eric Adams!


  3. Tom Siracuse

    There is plenty of money available for NYC to avoid bankruuptcy. To mention a few: End the annual billion dollar tax exemptions given to big real estate developers to erect high rise luxury residential buildings if they include 20-30% of the ujnits as “affordable”. This program supported by Mayor DeBlasio & Gov Cuomo is called “Mandatory Inclusionary Housing & Zoning. However, those whose annual incomes are under $30,000 are usually not eligible. Stop refunding the stock transfer tax to investors in the stock market, Tax the sale of million+ dollar condos. Raise the tax on multi-millionaries. Tom Siracuse-Tenant Action Network


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