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New York state announces plan for board to help cash-strapped cities

New York Governor Andrew Cuomo arrives for a meeting with Appropriations Committee Chairman and Vice-Chairman Senator Daniel Inouye and Sena
New York Governor Andrew Cuomo arrives for a meeting with Appropriations Committee Chairman and Vice-Chairman Senator Daniel Inouye and Sena

NEW YORK (Reuters) - New York state lawmakers on Tuesday announced plans to create a financial restructuring board and binding arbitration process to help struggling municipalities manage their finances.

The legislation, which will be taken up by the state legislature soon, is designed to shore up fiscally distressed communities with shrinking tax bases and high expenses.

"Localities across the state are facing a growing financial crisis of soaring retirement costs while their populations stagnate and property values drop," said New York Governor Andrew Cuomo, announcing the deal with the majority leaders in both houses of the state legislature. "The only options for struggling municipalities cannot be bankruptcy or being subject to a financial control board."

The governor did not indicate which cities and towns would likely take part in the new program.

The board would be charged with making recommendations on improving fiscal stability, management and the delivery of public services to municipalities that request its help. The board would be able give communities up to $5 million to make the changes.

The board would also serve as an alternative arbitration panel for negotiations between municipalities and public sector unions, assuming both agree.

In these negotiations, the board would give greater weight to a municipality's ability to pay for services than under current law. The municipality's ability would be weighted at 70 percent of the decision, while other criteria, like age comparison, prior contracts, and the public interest, would make up the remaining 30 percent.

State government takeovers of large cities are rare in the United States, though the finances of New York City in the 1970s and Philadelphia in the 1990s were steered by state boards that kept them out of bankruptcy court.

Across the country, there are 23 states with some legal mechanism to address the fiscal problems of cash-strapped localities, according to James Spiotto, a municipal bankruptcy expert at Chicago-based law firm Chapman and Cutler.

For example, the state of Michigan - which has among the strongest oversight powers in the nation - has taken Detroit, its biggest city, through the appointment of an emergency financial manager. The move was triggered by Governor Rick Snyder's declaration of a fiscal emergency.

Many experts in municipal bankruptcies argue state control of cities and towns is often a better tool than bankruptcy court for fixing strangling debts, revenue shortages and failed big-ticket projects that often tip cities into crisis.

According to the New York bill, the 10-member board would include the budget director, the state comptroller, the attorney general, and the secretary of state. The board would also include six members appointed by the governor, including one recommended by the Senate president and one by the speaker of the Assembly.

(Reporting by Edith Honan; Editing by Lisa Shumaker)

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