A New Fulcrum Point for City Survival

William & Mary Law Review Volume 57 | Issue 1 A New Fulcrum Point for City Survival Samir D. Parikh Repository Citation Samir D. Parikh, A New Fulcrum Point for City Survival, 57 Wm. & Mary L. Rev. 221 (2015), https://scholarship.law.wm.edu/wmlr/vol57/iss1/5 Copyright c 2015 by the authors. This article is brought to you by the William & Mary Law School Scholarship Repository. https://scholarship.law.wm.edu/wmlr Article 5 A NEW FULCRUM POINT FOR CITY SURVIVAL SAMIR D. PARIKH* ABSTRACT Municipalities have historically enjoyed immense stability. This era of tranquility is over, and fiscal deterioration is accelerating. Policymakers and scholars have struggled to formulate debt restructuring options; almost all have embraced federal bankruptcy law. But this resource-draining process is not the fulcrum point for any meaningful solution to municipal demise. Indeed, for the vast majority of distressed municipalities, the lever of municipal recovery will not turn on the solutions that have been offered to date. This Article radically shifts the municipal recovery debate by arguing that state law is the centralized point at which officials can exert the necessary amount of pressure to gain concessions from key creditor constituencies. To that end, I propose a comprehensive fiscal monitoring system that identifies and then directs distressed municipalities into a dynamic negotiation model designed to restructure inveterate debt obligations. Animating this proposal is a more nuanced understanding of the Contracts Clause that allows a municipality to explore unilateral contract modification in an effort to facilitate consensual agreements with creditor constituencies. * Associate Professor of Law, Lewis & Clark Law School. I thank Douglas Baird, Nathan Christensen, Ozan Varol, Brian Blum, Jay Westbrook, Rafael Pardo, Oren Haker, Michelle Wilde Anderson, Paul Diller, Colin Marks, Nancy Rapoport, and Rishi Batra for their input and guidance. I thank Michael Langanger, Andrew Freeman, and Gillian Schroff for their research assistance. Finally, I would like to acknowledge my family for their unwavering support. 221 222 WILLIAM & MARY LAW REVIEW [Vol. 57:221 TABLE OF CONTENTS INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224 I. CHALLENGES FACING MUNICIPALITIES . . . . . . . . . . . . . . . . . . 230 A. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230 B. Perverse Incentives and Cost Shifting . . . . . . . . . . . . . . . . 232 C. The Elusive Nature of Resource Adjustment . . . . . . . . . . 235 II. MORE AGGRESSIVE FORMS OF REHABILITATION: STATE AND FEDERAL ATTEMPTS TO ADDRESS MUNICIPAL INSOLVENCY . 237 A. Current State Law Restructuring Approaches . . . . . . . . . 237 B. The Misplaced Fulcrum: Why Chapter 9 Is Not the Answer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242 III. A NEW FULCRUM POINT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 248 A. Overarching Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249 1. Sustainable Viability . . . . . . . . . . . . . . . . . . . . . . . . . . . 250 2. Proactive, Delineated Debt Adjustment Mechanism . . . 252 3. Meaningful Unilateral Contract Modification Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255 4. Maintain Access to Credit Markets . . . . . . . . . . . . . . . . 256 5. Safeguard the Chapter 9 Option if Negotiations Fail . 257 B. Managing the Restructuring Mechanism: State Primacy and Reversing Devolution During Financial Distress . . . 258 C. Addressing the Contracts Clause . . . . . . . . . . . . . . . . . . . 262 1. A New Perspective on the Contracts Clause . . . . . . . . . 263 2. The Federal Judiciary’s Approach to the Contracts Clause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265 3. Distilling Contracts Clause Jurisprudence to Understand a Distressed Municipality’s Bargaining Position . . . . . 274 IV. THE NUANCES OF AN OPTIMAL STATE DEBT ADJUSTMENT MECHANISM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277 A. Stage One: Soft Monitoring’s Scarecrow . . . . . . . . . . . . . . 277 B. Stage Two: Financial Triggers . . . . . . . . . . . . . . . . . . . . . 279 C. Stage Three: Reversing Devolution During Municipal Distress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280 1. The Poles in the Local Governance Spectrum . . . . . . . . 280 2. Restructuring Control Boards and the Center Point . . 282 2015] NEW FULCRUM POINT FOR CITY SURVIVAL D. Stage Four: A Clear Negotiation Structure and Contract Modification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Negotiating with Bondholders . . . . . . . . . . . . . . . . . . . . 2. Negotiating with Employee Unions . . . . . . . . . . . . . . . . a. Compensation and Benefits . . . . . . . . . . . . . . . . . . . . b. Current Employee Concessions . . . . . . . . . . . . . . . . . c. Retiree Concessions . . . . . . . . . . . . . . . . . . . . . . . . . . . E. Stage Five: Recovery Plan . . . . . . . . . . . . . . . . . . . . . . . . . V. CONSEQUENCES OF IMPLEMENTATION: RAMIFICATIONS TO BORROWING COSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223 284 286 289 289 291 293 294 296 298 224 WILLIAM & MARY LAW REVIEW [Vol. 57:221 INTRODUCTION On October 16, 1975, Hugh Carey, then governor of New York, was attending an event at the Waldorf Astoria when one of his aides approached and informed him that he was needed at his midtown office.1 No further explanation was necessary. Carey promptly left the event as if he had been summoned to a loved one’s deathbed.2 And, in some ways, he had. New York City was facing its financial death. When Carey entered his office, he discovered that the city did not have sufficient funds to meet its payroll and other obligations that would come due the next day.3 City and state officials were working frantically to secure additional funds.4 Abraham Beame, then mayor of New York City, had called the White House and asked to plead his case to President Gerald Ford.5 Beame was told that Ford was sleeping, but, rest assured, his staff was monitoring New York City’s situation.6 The White House was well aware of New York City’s impending demise. City leaders planted the seeds of the city’s death spiral in the 1960s when they removed barriers to the growth of its payrolls and social programs and financed the city’s largesse with excessive borrowing.7 From 1961 to 1975, municipal employees unionized and labor costs increased 313%.8 During the same period, spending on social welfare programs increased over 828%.9 City residents enjoyed free tuition at the City University of New York and subsidized fares on the mass-transit system.10 City officials (...truncated)