How a municipal bankruptcy in Stockton, Calif., could affect New York.

When the city of Stockton, Calif., was allowed to enter bankruptcy earlier this year, it immediately became a test case for other financially strapped cities across the state?and some say the implications of its move could reverberate even as far away as New York.

At the center of the country?s first-ever Chapter 9 bankruptcy case, Stockton is facing a confrontation between federal bankruptcy law and state law protecting pension obligations, which make up a sizable chunk of Stockton?s budget. Since they cannot liquidate assets, Stockton and other struggling municipalities will have to restructure their finances and wipe out some of their debt, although creditors, bondholders and pension plans are all resisting.

?What?s going to happen in Stockton?either there?s going to be a resolution by consent or there?s going to be a resolution with litigation and ultimately a bankruptcy court solution. Either way, it?s a bellwether,? said Mark Kaufman, a bankruptcy attorney with McKenna Long & Aldridge. ?I don?t see the circumstance where whatever happens in Stockton stays in Stockton.?

Kaufman, who spoke at City & State?s ?State of Emergency? conference last month, said that the conditions municipalities are facing in California are not unlike those in New York, with a similarly toxic mix of generous union contracts, large pension obligations and hefty retiree benefits, combined with shrinking property tax revenue and slashed federal funding.

?That?s going to ripple not only through California but I believe in any of the industrial states that have a heavy union concentration where the same dynamics exist,? he said.

Whether a New York municipality actually enters into bankruptcy, the threat of one and the precedent set in California could spur local governments and public sector unions and creditors to confront the stark financial reality, Kaufman added.

?Nobody sees bankruptcy as the answer. That?s a last resort,? Kaufman said. ?What you need is a bankruptcy threat. The whole notion is, why would anybody sit at the table and say, ?I?m ready to make concessions,? unless you have an offer and then a stick in your hand to say, ?Something worse could happen?? If you don?t have that dynamic?and half of the states, by the way, don?t have bankruptcy as an option? then there?s no dialogue that can really be had.?

?I agree that we need to have these conversations at a very serious level so that we do not get to the point where people even start thinking that bankruptcy is an option,? said Ward, who joined Kaufman as a panelist on a ?State of Emergency? discussion on the role of courts and states in addressing municipal fiscal crises.Others are less certain that a local government in New York would ever have to take that painful step. Robert Ward, a state deputy controller in New York, said that although bankruptcy is a legal option for municipalities here, he doesn?t know any that are giving it serious consideration.

Marc Shaw, who headed the MTA and was Mayor Rudy Giuliani?s top budget aide, said the fact that top officials were increasingly paying attention to the situation in Stockton and to states with severe pension problems, like Illinois, was a positive sign.

?While Stockton is something that we?re going to see as a test model, in many ways it?s also serving the purpose of preventing it from happening in New York, because dialogues just like this are taking place here these days, and that?s a really healthy thing,? said Shaw, who is now a senior vice chancellor for budget, finance and fiscal policy for the City University of New York. ?The fact that these dialogues are taking place right now is going to prevent municipalities in New York State from ending up like Stockton.?

Kaufman said that Stockton?s bankruptcy could also prove helpful for other struggling cities, towns and counties across the country by setting a precedent for how the unions, bondholders, contractors and other players share the pain.

?One can say it?s scary because it invites other cities to do it,? Kaufman said. ?On the other hand, it also creates a notion that there?s a set of parameters and a go-by as to how cities ought to do it. And it also makes something that otherwise has been underneath the table, not wanting to be talked about, now a discourse that can be had, because the players have already made some concessions, and they?re open to do business.

Source: http://www.cityandstateny.com/municipally-bankrupt/

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