In mid-May, New York governor Andrew Cuomo acknowledged a “long-festering” problem: many of the state’s cities, towns, and counties were virtually broke. “In the private sector, a company goes into bankruptcy court, gets restructured, and comes out in a relatively short period of time,” Cuomo said. “There is no governmental equivalent.” The closest that New York localities came to bankruptcy, he pointed out, was the “financial control board,” an instrument that the state could use to take over insolvent local governments. But those boards interceded only “after the locality really was financially bankrupt for a long period of time”—an unacceptable wait. The governor’s solution, approved by lawmakers in June, was a statewide “financial restructuring board.” Yet this new creation won’t solve the fiscal woes of cash-strapped cities, towns, and counties because Cuomo designed it to be impotent. In particular, it lacks the power to take on the main forces that drive up costs for localities: public-sector unions and the politicians who covet their support.
But there is a way for municipalities to tackle insolvency. Contrary to Cuomo’s assertion, local governments in America can declare bankruptcy—and they’ve been doing so more frequently since the 2008 financial crisis began. Last year alone, four public-sector entities that bondholders had previously considered “investment-grade” fell into default—as many as in the previous eight years combined, according to the Standard & Poor’s bond-rating agency. Two of those entities, Stockton and San Bernardino, were California cities; a third California city, Vallejo, had entered bankruptcy earlier, in 2008. These cities have much to teach New York. If Cuomo fails to heed their lesson and reform his new board accordingly, distressed New York cities might heed it—by declaring bankruptcy.
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