16

I think one of the things that struck us was that when we looked
at the different boards they were all truly different, there were dif-
ferent things about them, and I think what happened was that the
boards were configured based upon the conditions and the particu-
lar crises and situations that occurred at the time.

So I think you are right, there are a lot of things out there to
choose from, and the thing that we observed was, there wasn’t a
given cookie cutter kind of approach.

Mr, Davis. I would also say the good news is that we don’t have
to reinvent the wheel, and neither does the District government
have to reinvent the wheel. Other governments have been through
this, and have made tough decisions and helped themselves get
from under the burdens of these boards or the threat of the boards.
Is that correct?

Mr. FINCH. That is correct, sir. There are a lot of good examples
out there that the city might look to in terms of things to try.

Mr. Davis. That was a good presentation.

Let me get to one of the issues, which is members of the govern-
ing bodies in these different cities serving on the control boards. Is
New York the only one that employed that?

Mr. FINCH. Well, let me just run them down for you, Mr. Chair-
man.

Mr. Davis. OK, that would be fine.

Mr. FINCH. Perhaps that would be helpful.

Mr. Davis. This has been asked of me a lot, and I think we need
to understand the precedent here.

Mr. FiIncH. OK. Good. In New York there were a total of seven
members. The seven members were comprised of the Governor as
the chair, the State comptroller, the mayor, the city comptroller,
and then three appointed people. The three appointments were ap-

inted by the Governor with the advice and consent of the State

enate. The Chicago School Finance Authority, there were five
members, and two were appointed by the Governor with the ap-
proval of the mayor, two by the mayor with approval of the Gov-
ernor, and one qointy by the mayor and the Governor, but the
school board ha nothing to do with any of the appointments, but
the school board, which was the control device there, had no ap-
pointments or representations.

In Cleveland there were a total of seven. They were comprised
of the State treasurer, the director of management and budget, the
mayor, the presiding officer of the city legislative authority, and
the appointments. The way the appointments came about, the
mayor and the presiding officer of the city legislative authority
nominate five persons to the Governor who selected three with the
advice and consent of the State Senate, and if the list that was pro-
vided wasn’t satisfactory that it provided enough well qualified
candidates, the Governor can ask for additional names in terms of
going over that.

In Pennsylvania the board was comprised of five members. They
were appointed, one by the Governor, one by the president pro tem-
pera of the Senate, one by the minority leader of the Senate, one

the Speaker of the House, and one by the minority leader of the
louse,

Mr. Davis. OK. Thank you.


37

at. We have to look beyond this simple criteria of whether or not
you have been able to scrape enough money together this year to
lance your budget.

Ms. CiarK. And I think you will see in the other cities that they
are taking more stringent actions to have those changes in the
budget carry through to changes in the city operations.

Ms. Norton. My time has expired.

Mr. Davis. Right, I was just reminding you, I think the President
is a Democrat right now, so we are back in these boom times.

We are going to keep this—this is not a partisan issue, we are
just—kidding aside, any other questions? If there are no other
questions.

I Ms. Norton. Wait a minute. I do have some other questions if
could.

Mr. Davis. Please go ahead. Why don’t you conclude.

Ms. Norton, Thank you, Mr. Chairman.

Did any of these other cities pay as much as 10 percent of their
operating budgets out of their pockets every year for pensions for
employees?

Mr. Finca. Do you know?

Ms. CLARK. I don’t have that information here. We can provide
it.

Mr. Fincu. We can try to get that for you, Ms. Norton, if you
want it.

Ms. Norton. I would appreciate knowing how they dealt with
pensions, because the reason I ask also is because of the interest-
ing paragraph on page 8 of your testimony in which you say that
the city reduced its pension costs two ways, better investment—we
are already getting better investment and work force reduction.
Obviously there is going to be some work force reduction, and then
you say as a result of these efforts, according to city estimates, Bos-
ton’s pension costs decreased from $130.5 million in 1988 to $112
million in 1993. This is such a major part of our own crisis and one
that is, for once, not the city’s fault because the debt was created
before home rule, that that would be information that would be
very useful.

{The information referred to follows:]

BOSTON

Boston is a member of the state retirement system. The city’s system is called the
State-Boston Retirement System (S-BRS). The S-BRS serves all city employees. in-
cluding the School Department, the Department of Health and Hospitals, the Boston
Water & Sewer Commission, the Boston Redevelopment Authority, and the Boston
Housing Authority. City employees do not participate in the federal Social Security

syatem.
According to the city’s Consolidated Annual Financial Report, dated June 30,
1994, the S-BRS system membership is 35,633 employees. This membership is
made up of 21,701 active participants, 13,679 pensioners and 253 members that are
vested in the system but are not active.
System Administration

The State-Boston Retirement System is administered by a Retirement Board of
three members: (1) the City Auditor, who serves ex-officio, (2) a person elected by
members of the system, an (3) and a person chosen by the other 2 Board members,
or appointed by the Mayor if the 2 Board members do not agree on a selection with-
in 30 days of a vacancy.


33

the city out, and it was a transfer of functions that the State could
better provide those services than could the city.

Mr. LaToureTTe. OK. I guess in that situation all the benefit
then flowed to the city.

Mr. Fincn. All that—yes, in that sense, right.

Mr. LaTourRETTE, OK. When I was talking about the city giving
anything, there was nothing that the city gave up except for con-
trol, I suppose, of the hospital—to get the State to agree to run
their Superior Court system or to agree to run their hospital sys-
te

m,

Mr. FINCH, No.

Mr. LaTourRETTE. The city came in to bail out the city—or the
State came in to bail out the city.

Mr. Fincu. The State came in to bail out the city, right.

Mr. LaTourRETTE. OK. And just one followup question to Mr.
Hill, if I might.

Since our last hearing and the discussion in my last questions
and Miss Collins’s questions about tax-exempt properties, we have
been provided with a document that lists the tax-exempt properties
in the distribution. As you might expect, the biggest belong to the
Federal Government followed by the District of Golumbia, There is
a line item for miscellaneous, and it is 425 parcels or properties
with a total assessment of over $2 billion. Do you know from your
review of the District’s books or operations what type of properties
would be listed in the miscellaneous section for tax-exempt?

Mr. HILL. No, I don’t, but, again, we can look at that if you would
like us to.

Mr. LaToureETTE. If you could. We have the District religious in-
stitutions, educational, charitable, hospitals, libraries, foreign gov-
ernments, cemeteries, the United States, and there is—that is a
pretty exhaustive list. I am just wondering what is left to be mis-
cellaneous.

Mr. Davis. Mr. LaTourette, let me just add, we have a complete
printout of everything, but it is not categorized the way you would
like it. I think our committee staff, working with the GAO and the
city, can come up with that information.

Mr. LaTourETTE. I would appreciate that. Thank you very much.

{Due to the high cost of printing, the information referred to has
been retained in the subcommittee files.]

Mr. Davis. Thank you very much.

I have just a few more questions for the record. The first is on
the residency requirements imposed on these financial control
boards. I take it it was different in the different jurisdictions we
visited.

Mr. FINCH. That is correct, sir. Let me flip a page here and find
it so I don’t—in New York the requirement was that at least two
private members should be city residents or have principal place of
business in the city. The Chicago school board, there wasn’t a spe-
cific provision in that regard. In Cleveland, residents of assisted
city or have primary business in the city. So there was a require-
ment there.

Mr. Davis. Residents or business.


42

of covered payroll,1 or $30 million to $35 million annually, to the Municipal Plan.
The state does not contribute to the PGW or RDA Plans.

Board of Pensions and Retirement

Philadelphia’s Board of Pensions and Retirement was charged under Philadel-
phia’s Home Rule Charter with the creation and maintenance of an actuarially
sound retirement system providing benefits for all city employees. The Board plays
a very active role in the determination of investment policy and strategy for all
three of the city’s pension plans. All major decisions wit regard to the pension as-
sets portfolio are approved by the Board based on recommendations from its invest-
ment consultant, portfolio managers and investment staff.
Municipal Plan

The city is required by the Philadelphia Home Rule Charter to maintain an actu-
arially sound pension and retirement system. The Municipal Plan, a single employer
plan, covers all uniform porsonnel—Police and Fire—and municipal employees that
work for the city of Philadelphia.

e Plan’s pension funding policy provides for periodic employer contributions at
actuarially determined rates. se rates, as expressed as percentages of covered
payroll, are computed to be sufficient to accumulate sufficient assets to pay benefits
when due. The city contributions in 1993 amounted to 21.3% of the covered payroll.
Employee contributions to the Plan that year were 3.9% of the covered payroll.

Philadelphia Gas Works (PGW) Plan

The Philadelphia Gas Works has a noncontributory public employee retirement
system covering substantially all PGW employees. The Plan is funded with contribu-
tions by the Gas Works to the Gas Works Retirement Reserve Fund. These contribu-
tions include amortization of the unfunded pension benefit obligation over a 40-year
period, which began in 1967. In addition, current payments to retired PGW employ-
ees and other beneficiaries are being made directly by the Gas Works.

‘The pension funding policy of the PGW Plan provides for periodic employer con-
tributions at actuarially determined rates, as percentages of annual covered payroll.
The rates for these contributions are computed to accumulate sufficient assets to
pay benefits when due. The Philadelphia Gas Works contributed 12.4% of its cov-
ered payroll to the PGW Plan during 1993.

Redevelopment Authority (RDA) Plan

‘The Redevelopment Authority contributes to the RDA Plan. The RDA Plan’s pen-
sion funding policy provides for actuarially determined periodic contributions at
rates that increase gradually over time so that sufficient assets will be available to
pay benefits when due. In 1993, the Authority contributed 6.8% of its covered pay-
rofl and the employees contributed 5.4% of the Authority’s covered payroll

Table 1 summarizes the status of the Municipal Plan, the PGW Plan and the RDA
Plan as of June 30, 1993.

Table 1: Status of Philadelphia's Pension Plans As of June 30, 1993

Idols in Thousands}
Overunded (Under

: Toda Pension Sane Wet Assets alae Ovetunded (Under-
Pension Pans Guigetn O80" rents Mot“) FEO Facog ata
$4,236,009 $1,848,182 ($2,387,827) (56)
299,484 259,911 39,573) (13%)
30,916 37,628 6712 a
4,566,409 2,145,721 (2,420,688) (53)

‘Source: City of Philadelphia Comprehensive Annval Financial Report, Fiscal Year Ended June 30, 1993; percentages computed by GAO.
City planned actions to reduce unfunded pension liability

Table 1 shows that Philadelphia's pension plans are underfunded by 53 percent
of the total pension benefit obligation. To reduce this liability, the city has requested
that the state increase its contributions to the city’s pension plans.

Jn addition, Philadelphia is taking additional actions to reduce ite pension costs.
These actions are to reduce pension benefits through new labor agreements, adopt-

1Covered payroll is the payroll for employees covered by the pension plan. For example, the
covered payroll for the Municipal Plan for the year ended June’30, 1999 wes about $1 biltion.


10

tions taken five cities that had experienced similar problems.
These cities—Boston, Chicago, Cleveland, New York, and Philadel-
phia—and their States made management changes that improved
the cities’ financial conditions. As a result of these changes, they
are now better able to manage their financial affairs.

Based on information obtained from these cities and their respec-
tive States, our discussion today centers on the following three
areas: First, problems experienced by all five cities; second, actions
taken by State established boards to oversee city finances and by
the cities to improve the cities’ financial health; and, third, common
characteristics of these boards. We relied on available data and
evaluations provided by city and board officials. We did not inde-
pendently evaluate the information provided.

The five cities we visited experienced similar problems. Some of
the problems were caused by the cities’ changing demographics;
others were due to the cities’ inability to make the hard financial
decisions needed to live within their means. Over the past few dec-
ades these cities, like other Eastern and Midwestern cities, faced
a migration of tax-paying residents and employers, both individuals
and jobs, to the suburbs and other locations. Their remaining popu-
lations contained an increasin; proportion of residents, such as the
poor and the elderly, who needed relatively more services but could
pay little for them. During this same period, the Federal and State
governments sharply reduced aid for social and other city pro-
grams. Collectively these changes—shifting demographics, in-
creased needs for costly services, and reduced Federal and State
aid—resulted in a declining revenue base.

Even as the revenue bases continued to decline, the cities were
reluctant to take the hard financial and managerial steps nec-
essary to adjust to these changes. According to studies on the cities’
finances, the cities in general did not want to disclose the severity
of their conditions. Therefore, according to current and former city
officials, the cities often resorted to accounting and budgeting
schemes. These schemes included pa ‘ing for operating expenses
from capital budgets, accumulating deficits from 1 year to the next,
and understating expenses.

City officials told us that when the State governments, local busi-
nesses, and bond rating agencies discovered the cities’ true finan-
cial positions, the cities began to lose their credibility. The officials
said that this loss of credibility created an environment of distrust
and confrontation. In general, this loss of credibility caused the
bond rating agencies to lower the cities’ bond ratings. As a result,
the cities that received lowered bond ratings lost their ability to
borrow and began defaulting on prior loans. Eventually each city
was faced with such unstable financial conditions that a financial
crisis either occurred or was imminent.

As conditions worsened, Boston and Chicago had sufficient finan-
cial discipline to restore their credibility and their financial health
without direct oversight. However, Ohio, New York, and Penn-
sylvania wanted some assurance that financial discipline would be
rerestored and maintained in Cleveland, New York ity, and Phila-
delphia. Illinois wanted similar assurance for Chicago's school dis-
trict. To achieve such assurance, these States established oversight
boards for the three cities and Chicago’s school district. The boards


70

2, DURATION OF CONTROL BOARD

The New York State Emergency Financial Control Board was established on Sep-
tember 9, 1975.% It was designated as a governmental agency and instrumentality
of the State. According to provisions of the Financial Emergency Act, it was to stay
in. place, until the earlier of (a) July 1, 2008 (§5401, see torical note, and
$5418)5° or (b) the date when

i. nds and notes containing the pledge or agreement under the Act (see
$5415) are refunded, redeemed, discharged or otherwise defe: or

ii. there is no longer outatanding guarantee by the United States Govern-
ment to pay the principal of or interest on any bond issued by the city or a

State financing agency,

whichever of (i) or (ii) shall occur later (§ 5418).

The State legislature permitted the city to continue to use bond proceeds to pay
operating expenses for up to ton years, gh FY 1986.57 On June 30, 1986,
city met conditions necessary to activate the sunset provisions of the law.5#

Board remains on stand-by authority until the outstanding debt is retired.
This arises from its power to reimpose a “control period” when it determines that
certain fiscally risky conditions exist.

The “control period” was defined as the period of time from the effective date of
the Act until the date when:

(a) condition (ii) above held (there is no longer any federally guaranteed debt
outstanding);

(b) for three immediately preceding fiscal years the city’s budget (other
than the capital budget) had Sod he balance; and

(c) the comptroller of the State and of the city y jointly. certify that securities
sold by or for the benefit of the city in the general public market (ie., without
special favors or considerations) for the preceding and current fiscal year can
satiefy the capital and seasonal financing requirements of the city.

However, after the termination of the control period, but until there are no longer
any cutetanding notes or bonds protected under the Act, the Board can reimpose
a control period “. . . upon 8 determination at any time that any of the following
events has ¢ occurred or that there is a substantial likelihood and imminence of s1
occurrence:’

(i) the city has failed to the principal of or interest on any of its bonds
or notes when due or payable (other than certain MAC notes);
sll) the city shall have incurred a operating deficit of over $100,000 during its

iscal year;

Gi) the city ehall have issued notes in violation of the Act;

(iv) the city shall have violated any provision of this Act in a way that sub-
stantially impairs ite ability to pay principal or interest on its bonds or notes
or to balance its operating budget; or

(y) the city and comptrollers cannot certify (c) above.

Board is to terminate the reimposed control period when it determines that
the condition that triggered it no longer exists. The is to annually review con-
patel 2 through (v) to determine whether any of the items have recurred

1.12),

3. BOARD COMPOSITION AND APPOINTMENT AUTHORITY

The seven voting members of the Control Board include four ex.officio members:
the State Governor, State comptroller, mayor of the city, city comptroller; and three
members appointed by the Governor with the advice and consent of the State Sen-
ate. Two of the appointed members must be residents of, or have their principal

of business in, the City of New York. All appointed members serve at the
pleasure of the Governor. The Governor is Board chairman and he or his represent-
ative presides over all meetings of the Board. (Every member of the Board who is
otherwise an elected official of the State or city is entitled to designate a representa-
tive to attend, in his place, and vote or otherwise act in his behalf; these representa-

Si From the date ofits inception through June 30, 1978, the Board was known as the New
York State Emergency Financial Control Subsoquenty, “Emergency” was dropped from
the name. The period from 1975 to 1978 was considered by the Slate legislature as the “Finan-
cial Emergency Period.” Bailey, The Crisis Regime, p. 7.

"Section in this part of the discussion are to the New York State Financial Emer-
yw York (1976), as amended, N.Y. UNCONSOL. LAWS (VOL. 65)

FRBLbi Zo chimney 1970.8 ‘Supp. 1994).
c . 1994).
7 Smith, The ‘Appraisal of Municipal Credit Risk, p 920,
Moody's Municipal and Government Manual 1992, Volume 2, p. 3791.


52

sistants or support staff, In addition, there has generally been a general counsel
(legal advieor), who may be either in-houee stall ar on outside contrac.

ach board has usually contracted with outside accountants and auditors to re-
view the financial accounts of the city in question, and with outside financial advi-
sors (underwriters) and bond counsel to manage bond issuance by the oversight
board. Substantial powere were delegated to the outside accountants in some cases.
This was particularly true under the Ohio law’s provisions concerning the “financial
supervisor’—the CPA firm to be retained by the financial planning and supervision
coramission for the city in distress.

‘When the Chicago School Finance Authority (CSA) had its financial powers rein-
stated and enhanced in 1993, the new position of inspector general was created to
investigate allegations of waste, fraud, and financial mismansgement by employees
of or contractors with the Board. The CFSA also has a corporate secretary, but no

financial analyst.

Some control boards were authorized to request the loan of staff from the State
or the local government. Some were also authorized to request that the city (or
school district, in the case of Chicago) provide the control board with office space.

5. POWERS OF SUCCESSFUL BOARDS

Technically speaking, in some cases the power or rule to be mentioned below has
been part of the law that established the financial oversight control board rather
than being a power of the control board per se.

e new borrowing authority and the financial oversight control board have been
intended to be temporary, not permanent institutions. ‘The goal is to get. the city
back on its own financial feet within a reasonable number of years (specifically, to
be able to reenter the bond market on ite own). The root of the problem, however,
has been the city’s inability to obtain sufficient revenue sources or to adequately
control spending on ite own. Consequenty, in exchange for receiving temporary fis
cal relief from the new borrowing authority, the city has given up some independ-
ence in shaping its own budget.

To be successful, the oversight sanctions have had to be sufficiently unpleasant
to motivate the city government to clean up its own financial house to the degree
needed to throw off the yoke of oversight. The very existence of the oversight board
may have served as an adequate threat for the city to get its budget finances in

, even if the board itself did not take direct actions,

There are several main ways in which control boards have contributed to removal
of the obstructions cities face in trying to balance their budgets. They have:

© provided city officials with the backbone to cut expenditures;

persuaded the city employee unions to accept wage freezes, staff cuts, and in-
creased flexibility in work rules;

* overridden local citizens’ resistance to raising local taxes;

© gotten the State to loosen its restrictions on the city’s ability to levy taxes; and

© obtained permission from the State to restructure the city’s debt obligations
from short to long term and relax conditions related to tax and revenue anticipation

An important design question has been whether it was necessary or helpful for
the financial control board to manage the city’s budget in det order to accom-
plish the necessary discipline. Or, was it sufficient for the ove: igh board to set ag-
gregate requirements, such as requiring a balanced budget and limiting the amount

at the city could borrow. Most of the control boards reviewed here have focused
on macromanaging by setting aggregate spending limits, determined by the esti-
mated revenue available.

In terms of attracting the attention of the city to the gravity of the situation, two
of the most important powers for an oversight board seem to have been:

* the authority to enable the city to borrow or to prevent it from borrowing; relat-
edly, the authority to determine the amount of debt the city may issue; an

© the authority to prevent the jurisdiction from spending any money whatsoever
if it is not operating under “an approved financial plan,” that is, a balanced budget
plan approved by the board as required under the enabling law.

In terms of guiding the city toward reformed behavior, some of the most impor-
tant powers for an over it board seem to have been:

© authority to review the city’s revenue estimates; if the board does not approve
the city’s the board makes its own revenue estimates; the approved reve-
nue estimates set the aggregate limit on permissible spendi

© authority to review the city’s budget, requiring quarterly or, if more serious,
monthly reporting by the city;



50

rospective financial lan with operating and capital budgets in balance, The num.
of year required in the fioancial plan ranged from two for the Chicago schol
board (recently reduced from three years), to three for New York, four for Yonkers
(replacing the initial requirement of only one year), and five for Philadelphia. The
Ohio lawedid not ia number of years.

Some statutes also require that all bonds and notes or other loans involved in the
rescue are fully paid for and discharged or otherwise provided for before the board
can be fully dismantled (Chicago Scheol Finance Autharity, Philadelphia, NYSMAC,
NYSFCB, and Yonkers 1984). ‘These same statutes, however, may provide that, al.
though some bonds might still be outstanding, the board's powers are to be scaled
back to stand-by monitoring authority if the city has achieved a balanced budget
for a certain number of years and is projected to continue to have a balanced budget
for a certain number of future years,

‘The maximum maturity period of the bonds issued becomes particularly relevant
in those cases where the Uabilities must be fully discharged before the board can

te. (The ‘m term of the bonds is not typically specified in the ena-
bling legislation; it appears to be left to the discretion of the borrowing authority.)
cate of the Chicago School Finance Authority 1994A series, the maximus
maturity waa 16 years, fa Philadelphia, the maximim maturity of any PICA bonds
ingued was 30 years. New York's MAC issued bonds with maturities up to 30 years.

Ip some cans 9 "no ater than” termination your in specified inthe enabling lege
lation. For New Yorks Financial Control Board and MAC. it was 2008, This cor
respon expectit emergency period to end in 1978, plus a 30 year
‘maximium maturity of PAC bonds} ?

3. BOARD COMPOSITION AND APPOINTMENT AUTHORITY

The control boards examined had more differences in composition than features
in common.

FEATURES IN COMMON

The number of voting members of the control board has always been odd: five for
Chicago and Philadelphia; seven for Cleveland, Yonkers, and the New York FCB;
and nine for New York’s MAC.

members of the board have typically served without compensation but were
entitled to reimbursement for actual and necessary expenses.

Most members of the boards have been appointed persons rather than publicly
elected officials, All of the boards have had appointed members. In addition, four
boards have had ex-officio members, but many of those people hold appointed—rath-
er than elected—State or local positions. The ex-officio member of a control board
most likely to be an elected official has been the city mayor (Cleveland, New York
FCB, and Yonkers). None of the members of the MAC board is permitted to be an
employee of a Federal, State, or local government. In Ohio, the appointed members
are not to have held public office for five years prior to their appointment, or to be-
come a candidate while serving as a member of the commission.

Most but not all of the financial contro! boards have been required to have one
or more ex-officio members with budgetary expertise. This ‘may Be the State comp-
troller, treasurer, or secretary of the budget, and the city comptroller or director of

finance.

DIFFERENCES AMONG BOARDS,

The board composition differed among the five cities examined, in several aspects
of political interest:

* whether the membership of the board was determined largely by the State ver-
sus whether the city had significant representation; relatedly, what offices the ex-
officio members of the board held (whether State or city offices);

* how the chairman was determined (whether the chairman ie beholden primarily
to the State Governor or was selected by the board itself);
__© whether there were also non-voting members and who appointed those non-vot-
ing met 3

* whether city employees were represented; and

whether the minority parties in the State and the city were represented.

STATE VERSUS CITY APPOINTMENT AUTHORITY

On the Cleveland and Chicago boards, approximately half of the appointment au-
thority was shared by the State with the city, Of five directors in Chicago, two are
appointed by the Governor with the approval of the mayor: two are appointed by


56
APPENDIX A. CHICAGO SCHOOL DISTRICT: CHICAGO SCHOOL FINANCE
AUTHORITY

1, SUMMARY OF INSTIGATING CRISIS 19

There were early signs of financial trouble during the mid-1970s when the Chi-
cago Board of Education was managing to meet its cash requirements only by in-
creasing its short-term outside borrowings and borrowing internally from several of
its nonoperating funds, including debt service funds, in order to cover operating ex-
penses. Cash in the various Board funds had been pooled in a single account. To
cover its operating deficit the schoo! district had spent money that should have been
set aside to repay an $84.3 million bond issue coming due in 1979.

A crisis gmerged in November 1979 when Moody’s lowered its rating on the Chi-
cago Board of Education, impairing the Board’s effort to market short-term notes.
The school superintendent info1 asked the city of Chicago to back the School
Board to help sell its notes. Mayor Jane Byrne hired outside financial experts to
analyze the school fiscal crisis and a special task force was formed to work on the
crisis, The schools’ superintendent and the School Board president both. resigned.

In fiscal year 1980, the Board of Education failed to meet its payroll and was de-
nied access to the bond market. The 1980 bailout by the State of Ilinois included
subjecting many of the school district’s financial decisions to the review and ap-
proval of a newly created oversight board, the Chicago School Finance Authority.

The school district for the city of Chicago had reached its State-imposed debt limit
(five percent of total assessed valuation). The Chicago School Finance Authority was
created by the Dlinois General Assembly as a separate unit of local fovernment (a

ial district) with an additional debt ceil to issue short-term and long-term ob-
ligations secured by a property tax levy to be voted by the Chicago City Council.
Although the city of Chicago collects the property tax and transmits it to the Au-
thority, it is not classified as a city tax revenue but rather as a tax levied by the
Authority.

‘The Chicago Board of Education regained its independent access to the bond mar-
ket in 1989, nine years after the Authority was first created.

A serious crisis eme: again in September 1993 when the School Board failed
to have a balanced budget approved by the Authority and, as a consequence, the
schools were closed. The State Assembly designed a bail-out plan in November 1993.
The plan involved no serious effort to address the underlying structural problems,
even though operating deficits were projected for fiscal years 1993, 1994, and 1996.
Instead, the crisis was deferred for two years by additional borrowing through the
oversight authority. Reflecting their concern, in December 1993, Moody's and Stand-
ard and Poor’s lowered their credit ratings on both the Chicago Board of Education
and the Chicago Schoo] Finance Authority.11

In recent years, the opening of Chicago schools has been threatened each Fall by
either a teachers’ strike or a deficit in the school district budget. With bargaining
contracts for the teachers’ union and the trade employees up for renewal and a defi-
cit already forecast, September 1995 is likely to mark another such year.

EXACERBATING CIRCUMSTANCES

During the period from 1980 to 1994 the school district was also under pressure
to address the provisions of a school desegregation lawsuit filed in 1980 and an edu-
cational reform effort enacted by the State in 1988.

20The entire appendix draws heavily upon information presented in: Chicago School Finance
Authority. Official Statement of Chicago School Finance Authority Relating to $405,380,000
General Obligation School Financing Bonds Series 1994A. Bond issue prospectus, February 17,
1994.

11'The bonds issued in February 1994 were, however, triple-A rated, based on the insurance
purchased from the Municipal Bond Investors Assurance Corporation. Hattori, April. Shades of
1980 as School Finance Authority Sets Bond Sale to Bail Out Chicago Board. The Bond Buyer,
Feb. 15, 1994, p. 1.


60

cal year 1993. Thus, there had been eleven years of balanced budgets before the re-
lapse into financial crisis in September 1993.

'y State legislative action, the Chicago School Finance Authority had been re-
duced to budget monitoring functions (in contrast to active review and approval of
plans) for the five years preceding the 1993 crisis. The Authority was not given seri-
ous responsibility to act preventively during this interim period. During the period
of weakened Authority powers, the school board approved a three-year labor con-
tract (for fiscal years 080-93) that called for a 7 percent per year increase in em-
ployee compensation; the board subsequently had to renegotiate the agreement be-
cause there was not sufficient revenue to cover it.

The Chicago School Finance Authority's Rowers are seriously circumscribed by the
Mlinois legislature. The State legislature has restricted the Authority's ability to
raise additional revenues, has diminished the Authority’s effectiveness in enforcing
spending cuts, and has avoided seriously addressing the underlying structural prob-
lems facing central city school districts.

‘The State legislature has not permitted either the School Finance Authority or
the Chicago 101 Board access to tax revenue sources other than the property tax
and has not significantly increased State aid. The school district’s dominant source
of local revenue is the property tax. The State of Ilinois sets the maximum permis-
sible level of local property tax rates for four of the school district’s operating funds.
To service and repay the bonds issued by the Chicago School Finance Authority, the
State’s 1980 Act permitted the Authority to levy a Separate, additional pert tax
exclusively for that purpose, Ta the case of the new bonds ‘authorized by the State
in 1993, however, the State lowered the tax rate that could be levied to pay for the
Board’s Educational Fund to offset the special property tax imposed to Rnance the
new bonds; in effect, the State arranged to for the new bonds by shifting and
earmarking property tax revenues that would otherwise go to the School Board for
general operating purposes (approximately $48 million).

Since 1985, the Authority has not been permitted to reject multi-year contracts
if the first year of the contract is consistent with the financial plan, even if later
years of the contract are not. In 1993, the legislature reduced the time frame of the
multi-year financial plan from three to two years.

Chicago, like other Illinois school districts, still faces long-term fiscal problems.
It ably needs a new source of revenue other than increases in the loca! Pad y
tax. Some favor an increase in the State income tax as a source of more State ai
funds. Mayor Richard M. Daley has promoted casino gambling in Chicago as a new
source of local revenue for the schools.

The Authority's ability to enforce spending cuts to achieve a balanced budget has
been chreunseted by relief measures enacted by the Mlinois General Assembly.
The State has dealt with the various financial crises by “bendi: the rules pre-
viously set by the Authority that forbade expenditures if the bu was not bal-
anced. Instead, the legislature permitted the school district to cover its operatin;
expenses by further borrowing through the Authority and diverting State school ai
intent for special pro, 8 to cover general operating expenses.

"The Chicago school district has been described’ as being subject to
“micromanagement” by the Illinois General Assembly which establishes various re-
quirements for the expenditure of State aid funds and the delivery of educational
services.

The 1993 rescue plan basically postponed any serious attack on the school dis-
trict’s financial problem for two years and overrode certain balanced budget require-
ments of the 1980 Act. The 1993 bailout involved having the Chicago School Finance
Authority issue $378 million in bonds over the next two years to help cover operat-
ing expenses, to be paid off from the tax-levy revenue of the Authority. (It did not
involve borrowing $110 million from the Chicago teachers’ pension fund, another
controversial pro) supported by the School Board.) The 1993 rescue plan also
diverted $32 million from the State compensatory aid program for schools serving
low-income children into the school district’s general operating budget. This action
was later characterized as illegal by the Chicago Panel on School Policy, and was
described as diverting funds from programs for low-income children to pay for the
central school district bureaucracy.

The 1993 amendments also vided that the Authority could not require the
Board to maintain a “reserved fund balance” in excess of $100 million which is not
available for appropriation by the Board. The effect of this is to permit the Board
to appropriate in its budget for a fiscal year certain accrual-basis revenues when
the cash supporting those revenues will not be received by the Board until the fol-
lowing fiscal year. On February 1, 1994, the Authority amended the accounting sys-
tem and procedure to require that the 's operating funds be balanced for each
fiscal year on a cash basis, both fund-by-fund, as well as on a combined basis, as



48

were established after the crisis had already occurred, the financial control boards
did not have the opportunity to engage in “preventive intervention.”

Ohio adopted legislation in 1979 specifying the financial distress conditions under

which the could step into the affairs of any municipality.** This laid the
uundwork for subsequent intervention in Cleveland. In all of the other cases, the
State adopted omergeny legislation particular to the city in distress.

In the cases of both Yor and the Chicago School District, the powers of the
oversight boards were suspended at some point (when the jurisdictions in question
achieved a balanced budget for the number of years specified by the governing legis-
lation), only to be reinstated a number of years later when the city failed to submit
a balanced budget. In Chicago, even though the financial control board was still in
place during the intervening years, it was effectively denied the opportunity to in-
tervene preventively during the years immediately preceding the second crisis.

NEW ENTITY CREATED BY THE STATE TO ISSUE BONDS ON BEHALF OF THE CITY; THE
FINANCIAL OVERSIGHT BOARD MAY BE PART OF THAT BORROWING ENTITY, OR A SEPA-
RATE ENTITY

For the city to regain access to the credit markets, in some cases a new borrowing
entity was established, distinct from the jurisdiction in financial distress. The new
borrowing authority was a creation of the State Government, often characterized as
@ special district. In some cases, the borrowing agency itself exercised the functions
of a financial oversight board (as in the case of the Pennsylvania Inter omental
Cooperation Authority or the Chicago School Finance Authority). In other cases, the
borrowing agency worked in conjunction with a separate financial oversight control
board (as with New York’s Municipal Assistance Corporation as borrowing authority
working with the New York State Financial Control rd).

In many cases, the triggering event of a financial crisis has been the city’s reach-
ing a State-imposed constitutional or statutory restriction: a debt limit, tax rate
limit, or other budgetary provision such as adequately funding a stabilization or
cash reserve fund, The creation of a special borrowing authority by the State has
been a way to circumvent the debt and tax limits and effectively increase the
amount of permissible borrowing for the city. It also avoided the need for Jocal voter
a] al of bond issues.

lo separate borro' authority was set up for Yonkers or Cleveland. In the case
of Yonkers’ first crisis (1975-78), the city was able to reenter the bond market once
the emergency financial control board was established and the State comptroller
was empowered as fiscal agent of the city. In Yonkers’ second crisis (1984), New
York State loaned Yonkers the money through the State insurance fund. In the case
of Cleveland, the local banks which normally financed Cleveland’s operating and
capit | needs agreed to lend the money once the city agreed to certain budget re-
quireme

NEW BORROWING ENTITY HAS A SEGREGATED REVENUE SOURCE, DEDICATED TO
SERVICING ITS DEBT

The paramount concern of the financial control boards has generally been estab-
lishing the creditworthiness of the new borrowing authority. To that end, a revenue
source was often earmarked to pay the interest and principal on the debt issued by
the new borrowing authority. may be either a new (or increased) tax, or an
old revenue source (including State aid) that would otherwise have gone into the
general Tevenues of the city. The money collected from that dedicated source was

posited into a special account, often maintained by the State, or by a private bank
named as trustee. The money to service the debt was, most importantly, kept sepa-
rate from other funds of the city in distress. The debt issued by the new authority
‘was explicitly not the responsibility of either the city or the State.

“Local Fiscal Emergencies," OHIO REV. CODE ANN. ch. 118 (Page 1990).
‘“THtinois amended its School Code in 1994 to permit the State Board of Education to establish
a financial oversight pane! to oversee the financial affair of pchool districts in communities with
population under 500,000 (every Illinois community other than Chicago) that are j to be
in financial difficulty according to criteria set forth in the law and which have failed to comply
with the financial plan they had submitted to, and had approved by, the State Board of Edu-
cation. The oversight panel could be installed even if the State is not providing emergency Snan-
iD B04, Soin General Asnembly, 1004 Nglar Seaton effextive Sep. 8, 1904, amending prov
. 1 ion, effective Sept. 9, 1994, amending provi-

sions of P.A. 86-954 and 87-1014.



20

on these nonprofits? What was the hammer? Was it all by—what.
do I want to say—cooperation? Negotiation?

Ms. CLARK. By and large it was through cooperation and negotia-
tion.

pois CoLLINS. Because it benefited them to have the city solve
that.

Ms. CLARK, That is correct.

Miss Coins. Thank you very much.

Mr. Davis. Miss Collins, thank you very much.

Mr. Gutknecht, the vice chairman of the subcommittee.

Mr. GUTKNECHT. Thank you, Mr. Chairman.

I have been following this whole story with interest, and as we
talk about this board I think we have to almost go back a little bit
and talk about what happened here in Washington and what hap-
pened in some of the other cities, and I think if we don’t learn from

istory I am afraid that we are going to only be once again doomed
to repeat it. One of my favorite economists was Milton Friedman,
and he probably put it as simply as anybody that I have ever
heard. He said if we tax something we will get less of it, and if we
subsidize something we will get more of it, and it seems to me—
and I would like to fet some response from any or all of the mem-
bers of the panel—if in fact part of the reason that we reached this
juncture here in Washington and subsequently—or previously, I
should say, in some of the other cities was that they sort of pur-
sued this notion that you can tax wealth and you can tax produc-
tivity and you can oversubsidize nonproductivity; in fact, in some
respects you might even say here in Washington dependency and
even illegitimacy.

I am wondering if you can talk a little bit about that basic phi-
losophy and if, as some editorial writers around the country have
said, this is a classic example of the failure of the welfare state.
I wonder if you can comment on that.

Mr. FINCH. Well, I think in the cities that we looked at sir, a
common problem that they faced was a declining revenue base,
which gets at your point.

Mr. GUTKNECHT. Which is a nice way to say that they have driv-
en the wealth out of the city.

Mr. FincH. There was an urban flight. There was an urban
flight, both individuals and debs that left the city. There may have
been a number of reasons for that, and in terms of which reason
is the most prevalent reason I am not real sure, as to whether it
was increasing taxes or whether it was crime or whether it was
congestion or city services or what, but the point is that the reve-
nue base declined as individuals and jobs left the city, and it was
a common problem.

Mr. GUTKNECHT. It’s a common problem, but I mean if you don’t
really define how the problem got that way, how are you going to
solve it? I mean how did they deal with it in New York?

Mr. FINCH. In New York they did a number of things, and No.
1 in terms of the structural part of the problem, which is what I
think you are addressing, sir, comes in two parts really. One part
are the functions that the city performs, and in New York they
were able to transfer some of the functions that they had been per-
forming to the State. For example, the State took over the Superior


38

System Contributions

The S-BRS is a member of the Massachusetts Contributory Retirement System.
Accordingly, all retirement benefits are paid from a fund supported by contributions
from employees, the city of Boston and the state.

Active members contribute either 5, 7, or 8% of their gross regular compensation
depending on the date their membership began. In addition, members who joined
the System after Jan. 1, 1979 are required to contribute an additional 2% of regular
compensation over $30,000.

city, or its related agencies or authorities, is required to contribute the re-
maining amounts necessary to pay the benefits when due. Accordingly, each year
members of the system are required to fund an amount equal to the actuarially de-
termined normal cost! plus an amount to fund the unfunded liability by June 30,
2020. As of its fiscal year ending June 30, 1994, the city’s contribution to the S~
BRS system wes $100 million, which included $83 million for teachers. The city’s
contribution represented about 95% of all employer contributions to the S-BRS sys-
tem, Of the city’s contributions, $24 million was used lo cover normal costa and $76
million was used to amortize the unfunded actuarial liability.

Under Massachusetts law, the state is required to reimburse Boston for the costs
of teachers’ pension benefits who constitute approximately one-quarter of all city
employees. The state currently reimburses the S-BRS system for the portion of the
Pension benefit payments owing to costof living increases granted after the imple:
mentation of Proposition 2 1/2. Proposition 2 1/2, a state law passed in 1980, capped
the amount of revenue a municipality could raise through property taxes.

System Funding
Boston’s pension fund is underfunded by about 41 percent, a shown in Table 1.

Table 1: Status of Boston's Pension Funds as of June 30, 1994

{Dollars im thousands)
Nat Assets Arai ‘Overndad (Under Dvertunded (Under.
Employee Pension Fund setts mae 749! Pn ene ie Ror mans
State-Boston Retirement System $1,490,058 $2,474,352 ($1,024,293) 14)

gat ty of Beton Masechesat Compton Anne Fnacal Repar Far he Yar Endod une 30, 1854. Pcntogns compe by

Adjustments to Boston’s Unfunded Pension Fund Obligations

The underfunded pension obligation of $1,024,293 was calculated before adjust-
ments. To arrive at the unfunded accumulated benefit obligations, as reported in
Boston’s financial statement, certain adjustments are made. Boston’s unfunded pen-
sion fund obligations are reduced for projected salary increases. In addition, two
types of state reimbursements are also deducted. Specifically, Massachusetts reim-
burses Boston for the (1) cost of pension benefits for city teachers and (2) the portion
of the benefit payments owing to cost-of-living increases. These adjustments are
shown on Table 2.

Table 2: Unfunded Accumulated Pension Obligations Due to State Reimbursements and Reduction for
Projected Salary Increases

State Reimbursements & Adjustments to Unfunded Pension Benefit Obligations as of June 30, 1994 Totals
‘Unfunded Pension Benefit Obligation . $1,024,293
Less: Adjustment to Reduce the unfunded pension benefit obligation for projected salary increases (164,826)
Less State Reimbursements:

(1) Cost-of-Living Adjustments (270,897)
(2) Estimated Reimbursement for (306,079)
Unfunded accumulated benefit Obligations . 282,491

‘Source: City of Boston Massachusetts Comprehensive Anaual Financial Report For Fiscal Year Ended June

Pension Reform

In 1988, to comply with the state's Pension Reform Act, Boston began funding the
$_BRS system based on a schedule approved by the SRS and actuary. Based on
this schedule, the city pays (1) the current year’s estimated present value of pension

1Normal cost is the current year’s estimated present value of benefits earned during the year.


69

date. Many noteholders accepted the exchange, but the Flushing National Bank of
the Borough of Queens, New York, took the matter to court. After a lengthy battle,
through several courts, on November 19, 1977, the State Court of Appeals, the high:
est court in New York State, declared the moratorium unconstitutional. The court’s
order required renegotiation of the ety's original nates, with payment in full as soon
as possible. The city had to find the money to pay off the defaulted notes not already
d for MAC issues.

A July 1980 amendment empowered MAC to issue bonds and notes in an
gate principal amount not exceeding $10 billion, under certain conditions and ex-
cluding refunding bonds and notes payable within the fiscal year in which issued.

In a July 1990 amendment, the corporation was authorized to issue an additional
$1.5 billion of bonds and notes to fund a portion of the capital programs of the New
York City Transit Authority and the New York City School Construction Authority.
That law provided for a reduction in the issuance authority to the extent such cap-
ital programs are funded by the city.

1. EFFECTIVENESS

The original authorization was for MAC to issue up to $3 billion in State general
obligation bonds ($1 billion each in July, August, and September 1975).5! These
were “moral obligation” bonds and did not have the traditional “full faith in credit”
backing of the State. In thie way, the State avoided potential problems with its own
debt limit, MAC was only partially successful in selling these moral obligation
bonds. Additional intervention, through creation of the Emergency Financial Control
Board and ultimately loans and guarantees from the Federal Government, was
needed to restore participation by the credit markets.

At first, MAC was a refinancing agent and an advocate for New York City in the
money market. Following the poor reception of its initial bond offering, MAC instead
became an advocate for the bond market with the city. In this revamped role, MAC
joined others in pressuring the city to reduce its deficits.5? The budgetary oversight
powers originally granted to MAC were effectively given over to the Emergency Fi-
nancial Control Board when its was created in September 1975.55

By the end of the city’s fiscal year 1986—eleven years after the Corporation began
its work—MAC's control of allocations of cash funds helped result in a balanced
ba t and financial plans according to generally accepted accounting principles

8, LEGISLATION

New York State Municipal Assistance Corporation Act, N.Y. PUB. AUTH. LAW
(VOL. 42) § 3001 et seq. (McKinney 1981 & Supp. 1994) or 1975 N.Y.LAWS 168. En-
acted June 10, 1975.

NEW YORK STATE FINANCIAL CONTROL BOARD

1, SUMMARY OF INSTIGATING CRISIS

The creation of the Municipal Assistance Corporation (MAC) in June 1975 was
not sufficient to restore investor confidence in the City of New York. There was an-
other default-threatening deadline just three months later.

While MAC was mainly a financing institution, the Emergency Financial Control
Board (EFCB) was a political institution with much broader legal powers than the
MAC. The primary function of the original EFCB was to oversee the creation and
execution ofa financial plan aimed at forcing on the City of New York a budgetary

rocess that would result in balanced budgets within the three fiscal years ending
june 30, 1978.

“Bailey, The Crisis Regime, p. 167. Smith, The Appraisal of Municipal Credit Risk, p. 321.
U.S. Library of Congress. Congressional Research Service. The New York City Financial Crisis:
Important City, State, and Federal Considerations. CRS Report no. 76-147 B, by Stacey M.
Kean, Avg, 2, 1976, p78.

ni Seide The a yan 1 Credit Risk,

1 Smith, The isal of Municipal tisk, p. 320.

Bailey, The Cruse Regine peat .

"2 Ferretli, Fred. M.A.C. Forced Into Role of Selling City, With Ite Budgetary Functions Un-
used. New York Times, September 16, 1975, p. 81.

‘Bailey, The Crisis Regime, p. 2, 36. Smith, The Appraisal of Municipal Credit Risk, p. 320.


ACTIONS TAKEN BY FIVE CITIES TO RESTORE
THEIR FINANCIAL HEALTH

THURSDAY, MARCH 2, 1995

HOUSE OF REPRESENTATIVES,
SUBCOMMITTEE ON THE DISTRICT OF COLUMBIA,
COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT,
Washington, DC.

The subcommittee met, pursuant to notice, at 10:33 a.m., in room
2154, Rayburn House Office Building, Hon. Thomas M. Davis
(chairman of the subcommittee) presiding.

Present: Representatives Davis, Gutknecht, LaTourette, Flana-
gan, Norton, and Collins of Michigan.

Staff present: Ron Hamm, staff director; Roland Gunn, Al
Flezenberg, professional staff; Howard Denis, counsel; Ellen Brown,
clerk; and Cedric Hendricks, minority professional staff.

Mr. Davis. The meeting will come to order.

I want to welcome all of you to this hearing. Last week this sub-
committee, in conjunction with the District of Columbia Sub-
committee of the ‘Appropriations Committee, held a joint hearing
on the fiscal crisis confronting the District of Columbia. We discov-
ered that the city’s plight is worse than we had thought. The city’s
financial practices have made it impossible to deliver the core func-
tions of government. The across-the-board failure to deliver essen-
tial municipal services is Particularly tragic because of the devasta-
tion that it brings to the lives of the city’s most vulnerable resi-

ents.

A number of thoughtful people have shown outstanding leader-
ship by suggesting ways to bring the District’s critical situation
under control and prevent its reoccurrence. I will mention only two.
On February 7 Councilman Kevin Chavous began the discussion
when he proposed the creation of the District of Columbia Finan-
cial Review Board. My esteemed colleague, Ms. Norton, moved the
discussion along even further when on ‘February 16 she too called
for the creation of a financial oversight board.

Today our subcommittee is taking the next step in the process.
We are going to hear from a GAO team about what other cities in
crisis have done. The District of Columbia’s financial crisis is spe-
cial, but unfortunately it is not unique. The District is special be-
cause of the deep and abiding affection that all Americans have for
our Capital City. It is special because of its relationship to the Fed-
eral Government. Because the District lacks the normal State or
regional government to assist it with its affairs, Congress does
some of the things a State legislature would do.

qa


72

(6) Reviews the operations, management, efficiency and productivity of ci
operations and covered organizations and audits ‘compliance with the ‘haanctel

jan in any area.
(7) Recommends improvements to reduce costs and improve services, and ob-
tains information of the financial condition and needs of the city.
posed, regulations presented by the mayor for the tance
of contracts other obligations. The Board, within a specified amount of time,
may disapprove any contract it deems to be inconsistent with the financial plan
forbid the city to enter into it. No borrowing may be done by the city after

October 15, 1976, unless approved by the Board. (§ 5408).

The city comptroller must submit to the Board and the State comptroller quar-
terly reports on debt service requirements on all bonds and notes of the city for the
following quarter. The Board also shall receive from the city monthly and quarterly
financial reports. (These could be the same reports submitted to the US. De
ment of the Treasury.) The reports must indicate any variance between actual and
Ecce ae expenses or cash for the period covered by the report

If the city defaults on any bonds or notes, the Board is authorized to take any
action it deems necessary pursuant to Title 6-A of Article 2 of the local finance law,
and may direct the city to take any action that it is authorized to take under the
same law (§5408(2)).

‘The Board was prohibited from setting expense priorities within approved aggre-

e e

gate limits and from interfering with rights of employees to bargain with th

city (§ 5405-5404).

6. ACTIONS TAKEN

The Financial Emergency Act of 1975 required the city to submit a plan for bal-
ancing the city’s budget by FY 1978. A three-year plan was approved by the Board
in November of 1975. But the deadline for reaching a balanced budget had to be
extended for another four years (until FY 1982).®

The Financial Emergency Aet appropriated $760 milion in aid from State funds
($250 million for the city and $600 million for MAC). This was contingent on other
monies being obtained ffom the city and State employce pension funds, the banks,
and other sources. The Act authorized and directed the purchase of MAC bonds by
the State and city pension funds, for a total of $825 million.

of its negotiations with the banks, the Board required that the city’s pen-
sion funds purchase some of the securities. The labor unions protested, and the
courts later overturned the Board’s requirement.

The Board increased the amount of State appropriations for the city for AFDC
and Medicaid. However, the Board would not consider supporting permanent relief
for the city from the welfare and Medicaid burden.

Increases in salaries of any kind were forbidden, unless union and management
yorked out a wage deferral agreement that would contribute toward alleviating the

crisis,

the numerous belt-tightening measures undertaken in New York City dur-
ing the 1975-1978 period (some prior to the creation of the EFCB) were the follow-
ing: 1) a cut in the city’s workforce by 60,000, from 360,000 to 300,000; 2) a wage
freeze on remaining city employees; 3) $200 million in additional taxes were as-
sessed; 4) tolls and transit fares were increased; 5) road and bridge maintenance
was deferred; 6) capital projects were delayed or canceled; 7) hospitals were closed;
8) the tuition-free policy of the City University of New York ended; and 9) fire pro-
tection, police patrols, sanitation pickups, daycare facilities, and the school day were

7. EFFECTIVENESS,

The Board’s method of “macromanagement” (§5406) succeeded in changing the
city’s mode of operation without drastic changes in the city’s charter. In practice,
the city had some of its home rule powers revoked by the State. While Mayor Abe
Beame lost his leadership role to the State, he remained in office and the public
at least outwardly accepted a diminished level of services. State domination of the
budget planning process did result in a lowered rate of growth of city revenues, ex-
penditures, and debt.

Bailey, The is Regime, p. 1, 3!
Bailey, The Crisis Regime, P. 1


71

tives may not delegate this responsibility to any other person.) The Board acta by
majority vote ofthese seven members
ation, the Lieutenant Governor, temporary president of the Senate, minority
leader of the Senate, speaker and minority leader of the Assembly, the president
of the City Council of New York City, a designee of the city Board of Estimate, and
the vice-chairman and the minority leader of the City Council may appoint
nonvoting representatives to the Board. (§6407.1).
Members of the Board serve without compensation but are entitled to reimburse-
ment for actual and necessary expenses. (§ 5407.3)

4. STAFFING

‘An exeeative director ia appeinted jointly by the Governor and mayor. He serves
at the pleasure of the Control Board and may be removed by the Board. His power
othe Financial Emergency Act cleo, provided for the appointment of a special de
also provided for the appointment of a -
uty State comptroller lpr New York City who would report to the State comptroller.
Initielly, ip 1976, the special deputy State comptroller was to function as the Con-
trol Board's operations officer.°? The special deputy State comptrolier’s office was to
provide support staff and financial analysis for the MAC and the Emergency Finan-
Gial Control Board.®°
By 1976 the EFC Board had its own staff of about 25 professional members. In

fiscal year 1977, it had a budget of $750,000.61

As of December 1986, the State Financial Control Board listed a staff of 27. This
included the executive ‘director, four deputy directors (including one for economic
and revenue analysis, one for expenditure and covered o1 ‘ization analysia, one for
finance and capital analysis, and a first deputy director), a gencral counsel, a sec
retary to the board/public relations officer, 11 analytic f, and 9 administrative

and su) staff.
‘As of January 1, 1998, the State Financial Control Board far New York City had
28 full-time-equivalent (FTE) employees.

‘Under provisiona of the enabling statute, the city (not the Control Board) con-
tracts for a nationally recognized certified public accounting firm (or a consortium
of firms) to perform an annual audit of the cty's finances (§ $409).

6. ENFORCEMENT AUTHORITY, MECHANISMS, AND PENALTIES

f ane five major functions from which the Board’s legal powers are derived are as
follows:
a) oversight of the creation and enforcement of a financial plan for New York
City which results in balanced bu: A
b) ruling on the acceptability of all city borrowing;
¢) su sion of application of reorganization in the event of default;
d) administration of the Emergency Financial Control Board Fund which can
control most city revenues and expenditures if necessary; and
e) administer a State-imposed wage freeze on city employees.
According to the New York Financial imergency Control Act for the City of New
York, the ’a actions and responsibilities are as follows:
(1) After October 20, 1975, it collects all city revenues (unless gxemmpted by
1 fun
in

the Board) into a Board fund. Exceptions to this are noted in § 5411.1.
and accounts of the city also become the funds and accounts of the Board

(2) Establishes a debt service repayment account in which it deposits enough
money to meet the debt service requirements of covered organizations on their
bonds and notes (§ 5411).

(8) Consults with the city and covered organizations in the preparation of a
financial plan and certifies revenue estimates approved therein.

(4) Prescribes the form of the financial plan and the supporting information
required. (The city itself is expected to develop the financial (plan (§5409).)

}) Exercises the right of approval, disapproval and modification of the finan-

cial plan and the revenue estimates contained in it.

‘Ferretti, Fred. M.A.C. Forced into Role of Selling City, With Ite Budgetary Functions Un-
aes York Criss Feagime'p. Wf. South; The Appraisal of Municipal Credit Risk, p. 320
h ime, p. 17. P. 320.

“Bailey, The Crisis , p. 125,

©New York State Financial Control Board, New York City Financial Plan, FY 1987-1990,
Firat Quarter Review, Des. 11, 1986, frontgpage.

‘© 1994 New York State Statistical Yearbook. 19th Edition. Albany, The Nelson A. Rockefeller
Institute of Government, State University of New York. Table E-52, p. 200.


74

Rancial plan. The authority to make loans under this ect expired on June 30,

New York Il. On August 8, 1978, President Carter signed into law the New York
City Loan Guarantee Act of 1978 (P.L. 95-339). Unlike the short-term loans under
the 1975 ieyten the 2e78 extension authorized guarantees for the incipal and inter-
est on long. 8. The total amount of guaranteed debt lew York City
could inaue was et PSE billion, allocated aver four fiscal yeare: $760 cullen for Decal
Your (EY 1979, $260 million for FY80, $326 million for FY81, and $325 million for

‘The loan guarantees could last for as long as fifteen years and would be available
only for bonds sold to city or State pension funds. The guarantees formed an im,
tant part of a $4.5 pillion financing package consisting of funds from both pul lic
and private sources.”

APPENDIX D. PHILADELPHIA: PENNSYLVANIA INTERGOVERNMENTAL
COOPERATION RUTHORITY (PICA)

1, SUMMARY OF INSTIGATING CRISIS75

‘The city of Philadelphia had not had a truly balanced budget since 1987. The city
of Philadelphia was on its way to a fourth year of revenue shortfall over expendi-
tures in fiscal year 1991 with no remaining authorization to ease the cash crisis
with short-term borrowing, The city reached ite debt limit in June 1991.7 Access
to the bond market closed for the city, State legislation was needed to fund the fiscal
year deficit and finance capital projects.

2. DURATION OF CONTROL BOARD

By action of the State legislature, the Penney ‘vania Jatergevernmental Co Coopera-
tion Authority (PICA) was eatablished June 5, 1 391, and is still in existence.”7

The term of existence of the Authority was pot fos exceed one year after all of its
liabilities have been fully paid and diac!

Fin ites were set for the issuance of bonds by ne Authority: for a capital
Project or or a deficit other than cash flow, December 31, 1994; for a cash flow it

31, 1996 (sec. 319). The bond issues t call have serial maturities o

up to 25 y years. (See section 6 on “Actions Taken” for information on bonds issued.)

3. BOARD COMPOSITION AND APPOINTMENT AUTHORITY

The board includes five appointed, voting members and two exofficio,
nonvotfng members. The five members are appointed, one each, by the Governor,
the mt pro tempore of the Senate, the minority leader of the Senate, the
speaker of the House of Representatives, and the minority leader of the House of
presentatives. They serve in, the following offices, elected among themselves:
Chairperson, Vice Chairperson, Secretary, Assistant Secretary, and ‘and
such sther officers aa they may determine. The two ex-officio, non-voting members
are the exofficio representative of the Commonwealth of Pennaylvanis—the sec-
‘of the budget-and the ex-officio representative of the City of Philadelphie—
of finance (sec. 202(a)-(g).

U.S, Library of Congress. Congressional Research Service, The New York City Financial
Cris: Tiporant i, Bilt and Meleral Constieraflans, CRS Report No. 16-141 by Stacey M

Avguet 2, 197 1578 . Washington, 1976.
Ket ‘of Congress. Congressional ional Research Service. Overview of the Lockheed, New
York Cily, and: Chryale ag ay AE IRS Report no. 80-97 E, by James M.

ice. Guidelines for Rescuing Large Failing Firms and Munici-
29, 1984. Washington, 1984. p.

Ses Mar of information on PICA, see: P Official Statement relating to
4179 e000 eaneivania It Int mental ‘Cooperation Authority Special Tax Revenue Re-
funding iia Funding Program) Series of 193A. Bond issue prospectus,

De itera 11 oblig ligation debt limit is 13.5 percent of the avera as
valual of annble Fay for the 10 ps preceding fiscal yea =
‘wn Ponneyivann ia In mental Cooperation Anthority Act for Cities of the First Class.
(Nowe Ph tphia is ‘only “City of the first clas” in Pennsylvania.) Commonly known as
“The PICA Act, aes Ba Co STAT. ANN. § 12720 (Purdon 1991), Enacted June 8, 1991. Seo-
tion numbers referred to subsequently (in parentheses) 1 refer tg subsections of thie statute. In

‘important the “Intergovernmental Cooperation
‘Agreement by and between Pennsylvania Intergovernmental Cooperation Authority and the City


31

would cost and, two, how Jong yu think it would take to set up
a system that you believe would be reliable?

Mr. Fincu. Let me make just an opening comment and then turn
it to John.

There were some, like in New York—I think it was New York;
they were forced to set up—you know, to really create basically a
new accounting system, but that was back in the seventies, an
that was pretty costly for them to do it. There have been a lot of
technological innovations since then in terms of some packaged
program systems and that sort of thing. I am not sure what the
costs might be, but John may well.

Mr. HILL. We have not looked at the cost of such a system and
how long it would take to implement that system in the District.
However, I would say that that would be, I think, one of the No.
1 priorities that the city should look at and that the board should
consider, is, does it have the information that it needs in order to
evaluate some of the plans that might come out of the District, and
does the District have the information they need to construct those
plans and make them usable and also reliable? Right now we know
that the answer to that is no, that they do not have that informa-

ion.

One thing that we are considering doing is helping to identify a
list of items that a new control board might want to look at, just
a suggestion of what they might want to look at in terms of infor-
mation needs as a result of looking at the information that other
control boards had when they came in or, later on, after they were
in place for a while, to have some clues as to what information
would be useful in their work.

Ms. Norton. Did these other cities have this same problem? You
just didn’t have enough information to know anything reliable?

Mr, FINCH. Yes, to differing degrees of severity, this was one of
the first actions that was taken in each of these cities was to t
to get better numbers. You really need that in order to make fund-
ing decisions, and you really need that to restore the market’s con-

lence.

Ms. Norton. Let me ask—you have spoken about structural re-
forms, and I am interested in the extent to which problems this
deep can be remedied by downsizing and service cuts alone. Let me
indicate my concern. Governments of any kind don’t usually deal
in Productivity and efficiency terms. I mean businesses do because
they have a bottom line that helps discipline them. As a result,
some money is obviously spent redundantly necessarily because
governments are usually not run like businesses.

District of Columbia has an abundant number of court orders.
The existence of a court order indicates an underlying operational
problem, and our court orders in places from foster care to prisons
specifically speak to that problem, not to mention public housing.

Have these other cities had underlying operational problems as
well? If they have, have these contro] boards been useful in getting
at those problems?

And I ask that in the context of the following example. If you say
to the Department of Human Services, or whatever it is called that
deals with foster children, “Just downsize,” you will exacerbate a
problem and the receiver will say you can’t do that. So how, if at


17

In the New York case, wasn’t there a constitutional requirement
that you have elected officials, do you know?

Ms. CLARK. Yes, there was.

Mr. Davis. OK. Thank you.

What about in the Ohio case? Was there a constitutional require-
ment that elected officials be involved?

Ms. CLARK, I don’t believe so.

Mr. Fincu. I don’t recall that, sir.

Mr. Davis. All right. I wanted to know that. That is one of the
issues that has been raised. The point of authority issue is one
which right now is very much up in the air. The airports authority
has had some legislative history and has been up a couple of times
to the courts and down again. There is pending legislation to give
Congress the ability to appoint officers. Have you looked at that
issue as it concerns this board?

Mr. FINCH. We think, Mr. Chairman, that that issue could raise
severe constitutional questions perhaps. Let me ask counsel to re-
spond to that.

Mr. Davis. That will be fine.

Ms. MONTGOMERY. First question out of the box, Mr. Chairman,
as Mr. Finch indicates, is whether Members of Congress or its
agents can participate in this oversight board raises significant
constitutional issues. The court, in at dressing such questions in
other contexts, reviewed the structure of the board, including the
procedures for appointment and removal of members in relation to
the powers they perform, to determine whether they comply with
principles in the Constitution, including separation of powers con-
cepts and the appointments clause.

veral judicial decisions over the last 20 years have held that
constitutional principles preclude Members of Congress from either
serving on or appointing members of boards or agencies that exer-
cise executive functions. These decisions make clear that officials
who perform executive functions must be appointed in accordance
with the appointments clause of the Constitution, and as you all
are aware the appointments clause requires that the power of ap-
pointment in the Federal Government rests with the President.

Therefore, depending on the extent of the functions you all would
decide to invest in a control board, specifically if the control board
was performing executive functions, then clearly a congressional
appointment in this context could subject the board to constitu-
tional challenge under the appointments clause and separation of
powers concepts.

In addition, congressional membership on the board would simi-
larly subject the board to the significant likelihood of constitutional
challenge under the separation of powers doctrine.

Mr. Davis. OK. I could ask some more questions, and I may do
that later. Some other Members may have some questions too,
later.

Ms. MONTGOMERY. In addition, if you would like us to submit
something for the record, if that would be more appropriate, that
would be fine too.

Mr. Davis. That would be fine, to make that more complete.

Ms. MONTGOMERY. These issues are very complicated in the con-
text of the District.


23

Ms. NorTON. Now the major problem with a city—a city that
ts this far down has is a cash problem, a straight out cash prob-
lem. Do you think that an oversight board can set up in time

to meet the short-term cash problem the District has?

Mr. Fincu. I think an essential ingredient to that answer, Ms.
Norton, is how fast the Congress can move the legislation. I think
once | the legislation is in place the rest of it can come together very
quickly.

Ms. NorTON. Now in each case you have looked at cities that
didn’t have any access to the Treasury and they had to go to the
market, and yet you say that this was done in fairly short order.
Would there be any reason for the District not to follow the pattern
that has been set by these jurisdictions of trying to use the board
in order to go back to the market?

Mr. Fincu. I think that was the objective of all of the boards that
were put in place. One of the big things that the creation of a board
did was to restore confidence on the part of the markets. The
boards would initially—one of their first tasks would be to identify
and dedicate a stream of revenue that would be dedicated to servic-
ing the debt, and that went an awful long way toward restoring
market confidence so that they were able to proceed with funding
issues fairly quickly.

Ms. NorTon. Mr. Hill, can you identify any revenue streams that
would be analogous to that used by other cities, any revenue
streams here that would be analogous to those used by other cities
that went back into the market?

Mr. HILL. I’m not sure that I understand the question. I know
that there is one revenue stream that the District has attempted
to use, which would be the public safety fee, which is obviously a
tax——

Ms. Norton, I’m sorry. No. Mr. Finch has just testified that es-
sentially—I guess for collateral purposes, revenue streams were
identified by the jurisdiction that could be dedicated and
collateralized in order to allow the jurisdiction to get back into the
market, and all I’m looking for are analogies, not direct testimony
as to what should be done but analogies to similar collateral or rev-
enue streams that already exist in the District of Columbia.

Mr. HILL. Certainly the property tax is one that is currently—
is currently used to collateralize some of the debt that the District
currently has outstanding, such as the $250 million in TRANS, so
that that would be a stream of revenue.

The key would have to be that it was a stream of revenue that
has a history of collection, and then that would determine how the
markets would look at that—that revenue—how the markets would
value that revenue in terms of the rating that would be given to
the debt.

Mr. Davis. Thank you.

The time of the gentlewoman has expired.

The gentleman from Ohio, Mr. LaTourette.

Mr. LaTourette, Thank you, Mr. Chairman.

Mr. Finch, I noticed during your testimony that you went over
the composition of the boards in those cities that had boards, but
that there 8p) eared to be a mixture in those boards of individuals
from the public sector together with individuals of the private sec-


19

extent? All the District has to do is present something to the Treas-
ury to honor it. Or am I wrong on that?

ir. HILL. Well, they—it is not the same as a guaranty. However,
we do believe and the rating agencies have told us that that is con-
sidered in deciding what the District’s credit would be, the fact that
they can access the Treasury window to pay those bills.

Mr. Davis. OK. Thank you very much.

Mrs. Norton.

Ms. NorTON. Mr. Chairman, if I might, I would like to defer to
Miss Collins who has to go to another committee meeting.

Mr. Davis. Without objection.

Miss Collins.

Miss Co.uins. Thank you, Mr. Chairman. I have a very brief
question.

I am fascinated by the fact that Philadelphia was able to find
some way to tax their nonprofit institutions, and I just wonder,
how can you do that? Are churches included in that, nonprofit in-
stitutions?

Mr. Fincu. I don’t think churches were included in the ones that
are making payments to Philadelphia. This was more along the
lines of universities and hospitals and those kinds of things, and
these were agreements that were struck with the non-tax-exempt
entities.

Miss COLLINS. How did they pay it? I understand that they had
them pay 40 percent of what their property taxes would have been.

Mr. FIncu. Right.

Miss Couuins. And it says—your statement—these institutions
would pay the city and its school district more than $40 million an-
nually, and Philadelphia subsequently implemented this payment.
Was this by authority from the State? How did they pay it? Did
they pay it directly to the city? Did the State assess them what it
would be, and what happened if they didn’t pay it?

Mr. FINCH. Fran, do you want to take that?

Ms. CLARK. Certainly.

These were organizations that ordinarily were exempt from city
taxes, and they had a list of criteria that you had to pass in order
to be qualified as a nonprofit organization. If you didn’t pass any
one of those criteria, you were not considered to be a nonprofit or-
ganization and you were required to pay the full tax.

Miss CoLLins. That is property tax?

Ms. CLARK. Property tax and. any other taxes that they might
have to pay, but primarily Property tax.

If you passed all the criteria the city had established and you
were genuinely a nonprofit organization, then they entered into ne-
gotiations with the organization and negotiated that the organiza-
tions would pay approximately 40 percent of what they would have
paid in taxes, so that they still could retain some of the benefit
from being a nonprofit organization but also contribute to the city
and the support the city provided to them in terms of other serv-
ices.

Miss. CoLLins. What would happen if the nonprofit institutions
refused to negotiate or refused to pay that 40 percent? Was there
a penalty? Were there any penalties, or did the State come down


32

all, have these boards got at underlying operational problems that
may be part and parcel of the fiscal problem the city is having?

Mr. FincH. One way they did was b: through their review of
the budgets and the annual operating plans and the multi-year fi-
nancial plans and asking tough questions and really putting pres-
sure on the cities to try to come up with some of those operational
efficiencies.

Most of the cities, when faced with the establishment of a board,
re ‘izing the crisis that they were under, really did some out-
reach and did some soul searching and some evaluation to look for
operational efficiencies and did some innovative things, and I think
tl at would be true—hopefully that would be true in the District as
well.

Ms. Norton. Mr. Hill.

Mr. HILL. I think with the specific issue about the court orders
and what would need to be done in those situations, in looking at
some of the court orders certainly they are trying to bring about
a specific result, and although many of them have mandated levels
of employment, have also mandated specific levels of service, they
were all geared toward bringing about a specific objective.

I think that what needs to be done is to look at those court or-
ders in conjunction with the courts to see if there may be a more
efficient way from an operational standpoint to bring about the ul-
timate result of the court order and to—in that way I think that
the control board could be used as a mechanism to help the District
to develop plans that would address their court orders perhaps in
a more efficient way.

Ms. Norton. I see my time is up, Mr. Chairman.

Mr. Davis. Thank you.

The gentleman from Ohio, Mr. LaTourette.

Mr. LaTourerTTeE. Thank you, Mr. Chairman.

Mr. Finch, I have one question that I forgot to ask the last time.
In your testimony, I don’t recall which cities specifically you men-
tioned, but as I understood your testimony, there has been previous
testimony here that the District is unique in that it has respon-
sibility that no other city in the United States has and so forth and
so on. If I understand your testimony correctly, there were other
cities in your study that had municipal functions or nontraditional
municipal functions such as Medicaid, corrections, mental health,
and so forth and so on, and as I recalled your recitation, there was
an indication that there was some realignment of those responsibil-
ities in some of those cities where the State or the county came in
and assumed some of those functions.

The question that I have is, did the board, in dealing with those
programs—was there a give and take, a tradeoff, or was it pretty
much a one-way street where all the benefit flowed to the city be-
cause some other entity offloaded their responsibilities under those
programs?

r. Fancu. I think there was a give and take, sir.
_Mr. LaTourRETTE. OK. Do you remember what the city may have
ven?
oir. Fincu. I think in New York the State took over the Superior
Court. In New York also the State took over the hospitals and the
City University. So it—you know, they were really trying to help


14

nomic development between 1990 and 1994, with additional fund-
ing provided through low-interest loans from the business commu-
nity. Chicago’s development was often targeted to neighborhoods
most in need. Cleveland formed public-private partnerships with
local businesses, neighborhood organizations, and foundations.
These partnerships have stimulated housing development in poor
and blighted neighborhoods and built Cleveland’s new sports arena
and convention center, earning national praise.

The oversight boards established for Cleveland, New York, Phila-
delphia, and Chicago’s school district played key roles in improving
the cities’ and school district’s financial stability. These boards ha:
some common characteristics. Each board contained from five to
seven members. In general, the board members were committed to
the cities’ or school district’s future and qualified—that is, had a
strong background in financial and business management. Often
the board members included partners of law or accounting firms
and business executives from the private sector.

In addition, State legislation tied changes to the board’s duration
or power to specific improvements in the city’s financial condition.
For example, the period of active control by the New York board
ended in 1986 after the city was able to balance its budget for 3

ears and improved its access to the credit markets. The New York
board continues to monitor the city’s budgets and financial plans.
The board’s period of active control can be reactivated if the city
fails to maintain its improvements, and certain statutory criteria
exist such as having a deficit of more than $100 million. Philadel-
phia’s board is to exist for no more than 1 year after all its liabil-
ities, including its bonds, have been paid. The board that oversees
Chicago’s schools is to be reactivated if the school district fails to
adopt a balanced budget by the beginning of each fiscal year or
achieve a balanced budget for 2 consecutive fiscal years.
the boards required certain financial reporting from their re-
spective city or school district. In general, the cities and the school
istrict were required to provide the boards with annual balanced
budgets and multi-year financial plans. The boards then either ap-
proved or disapproved these budgets and plans. If any of the cities
or the school district did not submit an acceptable financial plan
or meet the approved plan, certain enforcement action could occur.
For example, by law in Cleveland, failure to submit a financial
plan by the stated deadline could have resulted in the city’s spend-
ing being limited to 85 percent of the prior year’s spending. Cleve-
land’s spending was to be limited only until a new financial plan
was approved. Cleveland’s board was terminated in 1987. Philadel-
phia’s board will withhold State money and certain bond proceeds
from the city if the city fails to comply with its financial plan. New
York’s board can recommend that either the Governor or the
mayor, both of whom are board members, remove city officials if
they fail to comply with the board’s direction.
uring our visits, city and school officials acknowledged the
value of these boards in helping the cities and school district im-
prove their financial discipline in three ways: First, by requiring
adherence to approved plans; second, by providing leverage that
helped the cities or school district to negotiate cost reductions with
employees and contractors; and, third by increasing public disclo-


73

‘The Financial Control Board was slow to authorize non-property tax increases
which city officials wanted to implement. The Board did not favor increasing sales
or income taxes.

The City of New York's books are still kept in accordance with GAAP. As a result
of the reforms im during the 1975 fiscal crisis, it ia illegal for New York City
to have a deficit. The city is required to submit a four-year projections in the annual
financial plan prepared by the Mayor’s Office of Management and Budget (OMB).
‘These estimates are revised quarterly.°? The Financial Plan's projections of reve-
nues and expenditures are made on basis of current policies (not proposed poli-
cies that would ‘ire legislated changes) with regard to tax rates, tax bases, aid
formulas, or expenditure mandates. If any of the forecast yeara has a proj defi-
cit, then the mayor’s OMB must present a gap-closing program as of the finan-
cial plan.® There have been ex ante projected deficits for each fiscal year since 1982,
but had been closed ex post through FY 1993.

In a November 1991 report, the office of the State comptroller noted that in FY
1990, the city had refunded outstanding debt (including MAC debt) in a way that
reduced debt service costs for the firat two years, but increased aggregate debt serv-
ice costa over the life of the new bonds. The city continued this practice of seeking
short-term budget relief in its bond refundings during FYs 1991 and 1992. Appar-
ently neither the Contro) Board nor State comptroller’s office took steps to discour-
age or prevent this type of short-sighted practice by the city.

‘The Financial Control Board last met in July 1994 and projected a budget short-
fall of at least $1 billion, close to the actual year-end gap of $1.1 billion (out of a
budget of $31.6 billion) for fiscal year 1994: In January 1995, New York State
Comptroller, H. Carl McCall, proposed to the new Governor, George E. Pataki, that
a special meeting of the Financial Control Board be convened to review the city’s
budget for fiscal years 1995 and 1996. The comptroller felt that the city’s projected
budget gap of $450 million to $750 million for the fiscal year ending June 30, 1995,
called for the Control Board’s scrutiny. In response to this proposed review by the
Control Board, New York City Mayor Rudolph W. Giuliani, a Republican, criticized
the State Financial Control Board, labeling it “a partisan political operation” and
“an anachronism.” (The new Republican Governor had not yet made his new ap-
pointments to the Board.) Giuliani ed that the Board had approved budgets
submitted by the previous mayor, David Dinkins, a Democrat, which had increased
spending and helped to create the current deficits, and the Board was now criticiz-
ing parts of the Giuliani administration budget which cut spending.”

8. LEGISLATION

New York State Financial Emergency Act for the City of New York (1975). NY.
UNCONSOL. LAWS (VOL. 65) $$5401-20 (McKinney 1979 & Supp. 1994)

The legislation was passed on the declaration of a financial emergency (§5403 of
the Act) and was an assertion of the State's police powers typically reserved for such
serious events as war, civil unrest, or natural disaster.”!

NEW YORK CITY: FEDERAL ROLE

The Federal role in the New York City fiscal crisis of the 1970s had two parts,
sometimes referred to as New York I and New York II.

New York I. In December 1975, President Ford signed into law the New York City
Seasonal Financing Act of 1975 (P.L. 94-143). This provided for Federal short-term
loans (up to one year) to the city in an ate outstanding amount not to exceed
$2.3 billion. The loans were to be repaid by the last day of the fiscal year in which
they were issued, and they were. The Federal Government was in essence providing
the tax and revenue anticipation loans for the duration of the initial three-year fi-

©" Brecher, Charles, Raymond D. Horton, and Dean Michael Mead. Budget Balancing in Dif-
ficult aan ae ‘Case of the Two New Yorks. Public Budgeting & Finance, vol. 14, no. 2, sum-
mer 1994, .

‘* Drennan, Matthew P. The Present and Future Fiscal Problems of the Two New Yorks: What
Happened This Time. Public Budgeting & Finance, vol. 14, no. 2, summer 1994, p. 106

© Brecher, Horton, and Mead, Balancing in Difficult Times, p. 99.

TM Myers, Steven Lee. Budget Worsening, May Criticizes State Fiscal Board, New York Times,
January 13, 1995, p. B3.

7 Bailey, The Crisis Regime, p. 39.



58

The Authority does not have a financial analyst on staff but does appoint the chief
financial officer of the School Board.

The Authority also utilizes the services of outside consultants and professionals
including & general counsel, a financial advisor (in conjunction with the issuance of
its bonds and other financial matters), an accounting advisor (to assist the Author-
ity in reviewing the budgets of the Chicago Board of Education and in ing out
its other financial oversight responsibilities), and a trustee (under the bond resolu-
tions). In addition, the Authority may retain various other consultants to assist in
carnying out ita oversight responsibilities.

The Authority may est services and the transfer of officers and employees
from State agencies, the government, or the school district. The Board
is expected to provide services and the use of its facilities and resources upon the
Atte toeraline expenses of Ce Antho id from the | State school

operating expenses o! uthority are paid from neral State school

aid that would otherwise be payable to the Chicago Board of Education for school

purposes. The Authority must certify the budget for its operating expenses to the
ite Board of Education.

6. ENFORCEMENT AUTHORITY, MECHANISMS, AND PENALTIES

Under the School Finance Authority Act (adopted in 1980 and subsequently
amended) the Chicago School Finance Authority was given broad powers of over-
sight and control with respect to the financial affairs of the Chicago Board of Edu-
cation. Among the current oversight and control powers of the School Finance Au-
thority with respect to the Board of Education are:1¢

° Authority can either approve or reject the School Board’s estimates of reve-
nues; if it rejects them, the Authority may prepare its own estimates of the revenues
available to the Board, upon which the Board must base its financial plans, annual
budgets, and provisional budgets;

« the Authority must either approve or reject the annual budget of the School
Board for each fiscal year; the budget must contain detail prescribed by the Author-
ity and be based upon revenue estimates approved or prepared by the Authority;

‘in the absence of a balanced budget and financial plan approved by the Author-
ity, the Board is prohibited from ‘ing any expenditures other than for its debt
service obligations; (this means that the Authority can prevent the opening of
schools if the projected budget for the upcoming school year is not in balance;) the
Authority may approve a provisional budget if it determines that the School Board’s
appropriations for operations will not exceed an annual expenditure limitation es-
tablished by the Authority; the Authority may establish and enforce monitoring and
control measures to ensure the Board’s expenditures conform to any such expendi-
ture limitation;

¢ the Authority must either approve or reject financial plans of the Board which
must be submitted every two years, covering a period of two fiscal years; (the origi-
nal statute provided for a three-year financial plan; it was reportedly changed re-
centh to tes, years to avoid disclosure of information during and State an
election year;

all contracts and other obligations of the Board must be consistent with its
budget and the financial plan in effect; no contract or other obligation can be legally
binding on the Board unless it has been approved by the Authority; (this includes
collective bargaining agreements and contracts creating any obligation for borrowed

money);

* the Authority must approve or reject the annual staffing plan of the Board for
each fisca) year (this requirement was added in the 1993 amendments); the Author-
ity is required to monitor the Board’s compliance with statutory requirements which
limit expenditures for administrative, support, and other non-instructional services;

© the Authority is to initiate and direct a management audit of the Board and
its operations at least once every two years; this audit determines if the Board ie
utilizing and man: g its resources in an economical and efficient manner and the
cause of any inefficient or uneconomical practices;

the Authority approves the appointment of a chief financial officer of the School
Board and has the power to remove such officer;

3®The information in this section was drawn primarily from: Chicago School Finance Author-
ity. Official Statement of Chicago Schoo! Finance Authority Relating to $405,380,000 General
Obligation School Financing Bonds Series 1994A. Bond isnue prospectus, Febroary 17, 1954. p


6

Ms. Norton. Mr. Chairman, if I might suggest, since the bell has
rung, that perhaps we go to the vote first and then come back, if
that is agreeable?

Mr. Davis. All right. Is there objection to that among members?

All right. We will be in recess and reconvene here in about 15
minutes.

{Recess.]

Mr. Davis. The meeting will come to order, and I would like to
now recognize the distinguished delegate from the District of Co-
lumbia, Ms. Norton.

Ms. Norton. Thank you very much, Mr. Chairman.

May I thank Chairman Davis for calling this hearing so prompt:
ly, for putting the oversight board on a fast track, and for his ver
fair and collegial approach to what he has called a consensus bill.

We certainly do not want to risk the possibility that, despite no-
tice from our own investigation arm, the GAO, the capital of the
United States could default, nor should the mayor and the council
be left to shift accounts, draining the treasury until it is drained
dry, damaging and demoralizing residents and employees, and in-
jpring already fragile services while bringing grave harm to ven-

ors.

Thus, the chairman and I have agreed to try to come to some
agreement among ourselves, other members, and District of Colum-
bia officials after tightly scheduled hearings. The GAO testimony
we will hear today is important to help us sort through existing ex-
perience with oversight boards in other cities.

The District is unique, but attention to prior efforts can keep us
from not only reinventing the wheel but also from reinventing the
mistakes of others. I appreciate that Chairman Davis is quickh
trying to put together another hearing to get testimony from lead-
ers of similar boards. I have specifically requested that Dr. Bernard
Anderson, the former chair of the Pennsylvania board that saved
Philadelphia, be called as a witness. Dr. Anderson, now Assistant
Secretary of Employee Standards at the Department of Labor, is
right here in Washington.

As the Member who represents the District, I have been meeting
with local officials and others. Like Chairman Davis, I believe that
the careful preparation and participation of those who will be di-
rectly affected is necessary for this process to succeed. After all, we
are about to introduce an unprecedented entity into the life of a
city that has always had to struggle for the most elementary de-
mocracy freely available to every other American jurisdiction as a
matter of right. Staff and members owe District officials and resi-
dents sensitivity. I am very pleased by the mature and serious re-
sponses and suggestions of District officials and residents.

The Members involved in this process have been at pains to
avoid needless controversy and polarization. Nobody needs to force
anything on anyone. This process will continue to go well if we fol-
low the chairman’s collegial lead. I want to thank Chairman Davis
once again for his intelligent focus, his persistent courtesy, and his
participatory approach.

Thank you very much, Mr. Chairman.

Mr. Davis. Thank you very much, Ms. Norton.


29

tough decisions over the short term that were unpopular and may
jeopardize their reelection for the benefit of the long term.

It reminds me, in Virginia, of course, Patrick Henry, one of our
native sons, who fought against the principle of no taxation without
Tepresentation. We like to note that because they had never tried
taxation with representation, and if they had tried that, it might
have been a different result.

But to the extent that cities were unable to make those decisions,
these control boards basically, as I understand it, came in and
forced the local decisionmakers to make decisions, giving them po-
litical cover to make the decisions that they didn’t before have and
the courage to make them standing alone. Is that a fair analysis?

Mr. FincH. I think that is a fair characterization, Mr. Chairman,

yes.

Mr. Davis. Was there some resistance to making those decisions
with these control boards? What kind of clout does a control board
need to be able to force the local decisionmakers to make tough,
tough but solid, long-term decisions?

ir, FINCH. Again, I think the conditions varied all over the
board, and if I could draw an analogy it would be that the more
severe the crisis, the more authority given the board in terms of
what they did and what powers they had and that.

For example, when I think all of the boards—all of the boards
required annual budgets and multi-year plans. Now in terms of ac-
tions that the boards could take on those things, it would vary from
either approving and rejecting—approving or rejecting the plan, or
some boards were even given the power to modify the plan. You
know, if an acceptable plan was not submitted, the board could
modify the plan.

Mr. Davis. The board could, in essence, implement its own plan?

Mr. FINCH. Well, the plan had to be—you could probably say
that, yes, sir, given the implications of that in terms of the modi-
fication.

Mr. Davis. Was that ever used, or was it that they had the au-
thority to do so?

Mt Fincn. It was basically that they had the authority to do
that.

Mr. Davis. And that incited the local officials to come to grips
with the issues?

Mr. Fincu. Right.

Mr. Davis. I think one of the issues we get concerned about is,
trying to have some kind of standoff between the control boards
saying do this, and the local officials, whoever they are, saying,
well, we’re not going to do this, and all of a sudden nothing ts
done, and you have to be able to cut the heightening of the deficit
further and make some decisions. You want people to get paid, you
want the city to go on and operate, and I’m sure there is a balance
there somewhere, and that’s what I’m trying to get at.

Mr. Fincu. And it is the balance that is a very sticky issue, and
that is the decision that the Congress has to come to grips with,
and it is a difficult issue, it is not one that is easily reached.

Mr, Davis. Have the local control boards had the ability to hire
and fire people, or have they vested that with the local authorities?


65

1. EFFECTIVENESS

Cleveland was declared out of default just 13 months after the date that financial
emergency waa declared and the oversight commission established by the State, al-
though the Commission remained in place for an additional 6 years. The brief, one-
year duration of the financial emergency suggeste thet the problem may not have
required the effort, involved in setting up an oversight control board. In the end, the
Cleveland banks entered into a 15-year agreement with the city which required that
the city balance ite budget, keep accurate books and deposit pension funds into an
escrow account.

Bolstered by the, presence of the Commission, however, the city iteef took actions
to raise revenues in 1980 and 1981. Cleveland voters had turned down referenda
to increase taxes in November 1970, February 1971, and November 1974. In the ref-
erendum on February 27, 1979, Cleveland’s voters turned down the proposal to raise
the city’s personal income tax from 1.0 percent to 1.5 percent and to sell the munici-

electric power system to a private company. (Both measures had been opposed
y Mayor Kucinich in his 1977 campaign for election.)

Effective March 1, 1979, the city wage tax was increased from 1.0 to 1.5 percent
by city ordinance, following a State statutory waiver of the voter referendum re-
quirement. In November 1980, the voters rejected a proposal to increase the tax rate
an additional 0.5. nt, to 2.0 percent. city of Cleveland was again in finan-
cial distress. In Febru 1981, threatened by serious cuts in services and made
aware that, at the time, 75 percent of the city’s wage and salary income was earned
by suburbenites, Cleveland voters approved an increase in the city wage tax from
15 to 2.0 percent effective March 1, 1981. The increase solved the city’s immediate
problem, enabling the city to pay off accumulated debts without borrowing.

0.5 rate increase in the wage tax added $35 million in revenues, relative to
a city budget of $200 million. Provisions stipulated that half of the new revenue
would be committed to capital improvements instead of wages for city workers. At
the same time the city unions agreed to a total benelite increase of 8 percent for
that yee and the next, leas than prevailing rate of inflation.2”

In November 1979 Republican George Voinovich was elected mayor, while the city

predecessor

council remained Democratic. Voinovich was more cooperative than his
Kuginich in addressing the city’s financial probleme.

Cleveland’s schools are independently administered and have not been as success-
ful as the city in increasing the income tax for school purposes. In 1981, the city
rejected another income tax increase and the schools closed for two months,

8. LEGISLATION

“Local Fiscal Ei ncies,” OHIO REV. CODE ANN. Ch. 118 et seq. (Page 1990).
Enacted November 29, 1979.

APPENDIX C. NEW YORK CITY

To meet the New York City financial crisis of 1975, three levels of intervention
were required:

1) creation of the New York State Municipal Awsisiance Corporation forthe
City of New York, popularly known as "MAC or “Big Mac”

2 creation of the New York State Financial Contrel Board; and

3) firat, short-term loans and, later in 1978, loan guarantees from the Federal
Government,

The Municipal Assistance Corporation (MAC) was created in June 1976. From
Jane through September 1975, MAC was onl marginally weesafl in marketing
jts “moral obligation” bonds. Another default-threatening deadline led to the legisla:
tion creating the New York State Emergency Financial Control Board in September
1975. The new agency provided additional credit enhancement for MAC and, it was
ho would draw not only New York State assistance, but also Federal assistance
in the form of direct loans or loan guarantees.

In December 1975, President Ford signed into law the New York City Seasonal
Financing Aet of 1975 (P-L. 84-143) which provided for Federal short-term loans to
the city in an aggregate ouistanding amount nat lo exceed $2.9 billion. hie Act ex-
fired on June $0, 1978, On August &, 1976, President Carter signed into law the

lew York City Loan Guarantee Act of 1978 (P.L. 95-339). Under the 1978 law the
Federal Government gave New York City loan guarantees on principal and interest

2 Lippman, Thomas W. Cleveland's, New Commuter Tax. The Washington Post, March 9,
1981, p. Al, Ad. Because a large fraction is paid by suburban residents who work in the city,
Cleveland's wage tax is often referred to as a commuter tax.


67

Assistance Corporation (MAC).* The bankers wanted a separate borrowing author-
ity created which would have authority to collect revenues and would answer to the
State. Reflecting the urgency of the citys borrowing needs, the State created MAC
before the end of the city’s fiscal year (June 30, 1975).

2. DURATION OF CONTROL BOARD

The New York State Municipal Assistance Corporation for the City of New York
(MAC) was created by the State as a public benefit corporation (special district) on
June 10, 1975.55 MAC remains in existence in 1995. Unlike the New York State Fi-
nancial Control Board, MAC is considered a permanent agency. The statutory re-
quirements specify that MAC should continue as long as any MAC-guaranteed obli-
gations are outstanding. That should be at least until 2008.;

The MAC Act provided that no bond or note of the corporation should mature
more than thirty years from the date of the original issue of the bond, and in no
event later than July 1, 2008. No bonds or notes could be issued later than Dec.
31, 1984, unless the bond or note was a renewal or refunding of an outstanding
bond or note (see historical note under § 3033). (This cutoff date for new issues was
subsequently extended by amendments to the act. See examples in section 6, Ac-
tions Taken.)

3. BOARD COMPOSITION AND APPOINTMENT AUTHORITY

The board of directors of the Municipal Assistance Corporation consists of nine
directors (§ 3034), none of whom may be officers or employees of the Federal, State,
or local fpvernment, The board of directors is appoint’ by the Governor of New
York (§3011) with the advice and consent of the State Senate. Four directora are
appointed upon written recommendation of the mayor of New York City (§ 3034).

e designates one of these appointees to be the board chairman, who is
to preside over all board meetings. The first board members served staggered terms
(see §3034); directors appointed after these serve for four years. If a member is aj
pointed to fi a vacancy, he may serve only until the expiration of his predecessors
term 134).

4, STAFFING

In its earliest days, in September 1975, MAC had a staff of five, It had expected
that the staif would increase to 40 to cover the budgetary oversight functions con-
ferred in the founding legislation. However, with the creation of the Emergency Fi-
nancial Control Board to handle those functions, the staff was expected to remain
at five.

‘As of 1994, MAC staff officials included an executive director, deputy director/
treasurer, and counsel. MAC contracts with an outside auditing firm.

5. ENFORCEMENT AUTHORITY, MECHANISMS, AND PENALTIES

The statutory powers of MAC reflect the main functions it was designed to serve.
These were (1) to restructure the city’s debt, issuing longer-term bonds to repay ma-
turing short-term obligations, (2) to provide the State some facility to monitor the
city’s financial position, given the potential financial threat to the State itself, and
(3) to protect new as well as old creditors, including the State. This section de-

a number of the important statutory powers and provides some commentary
Cin parentheses) on how they were applied in practice

C is empowered to issue and sell bonds and notes and to pay or lend funds
received from such sales to the city. (In its early years, MAC released the money
to the city in small transfers rather than one lump sum in order to better monitor
the city’s finances.5*)

was empowered to exchange MAC's obligations for those of the city

(§3012.1(a-e)), (§ 3035.13), (Requiring this exchange was later ruled to be unconsti-
tutional. See farther discussion in section 6, Actions Taken.)

% Smith, The Appraisal of Municipal Credit Risk, p. 317-18.

35 MAC was created by the New York State Municipal Assistance C: ition Act, N.Y. 42
PUB. AUTH. LAW $3001 et seq. (McKinney 1981 & 1994) or 1975 N.Y.LAWS 168. Sec-
tion numbers cited in this discussion of MAC refer to this statute, as amended.

‘Bailey, The Crisis THs

37Ferretli, Fred. M.A.C. Forced into Role of Selling City, With Its Budgetary Functions Un-
imes, September 16, 1976, p. 81.

38 Bailey, The Crisis Regime, p. 27-29.

Bailey, The Crisis Regime, p. 31.



68

The State law gave MAC review power over each proposed city expense budget
and the revenue estimations on which it was based. If it found the budget not in
balance, MAC was to notify the mayor and review possible corrective action with
him. The MAC statute placed a new debt limit on total MAC and New York City
short-term obligations. MAC approval was required for any short-term borrowing by

e city.

"The State law also geve MAC extensive auditing and information-gathering pow.
ers. This provided an important alternative to the city itself as a source of informa-
tion about the city’s finances.

MAC was given advisory powers regarding the city’s finances, management prac-
tices, and budgetary processes.

MAC's financial enforcement powers, as the city’s refinancing agent, MAC
could ref to advance cash to the city and thereby force it into default, under cer-
tain conditions. These conditions were related to the city’s failure to meet predicated
standards, for example: lack of improvement in the cit s accounting system, failure
to remove operati: nses from capital t, and exceeding new aggregate
debt limit on tity short-term notes and MAC bonds. The nalty, Bhich hee never
b en exercised, consists of forcing the city into default and paying back MAC bond-

jolders.

Although, at the time of its creation, MAC's oversight powers were viewed as
harsh they, did not include powers later granted to the Emergency Financial Con-
trol Board. These included power to reject any budget, forecast, plan, contract,
or financial pattern of the semiautonomous agencies of the city government; impose
a wage freeze on city employees; and remove from office any official violating its
policies or regulations.4?

6. ACTIONS TAKEN

The Municipal Assistance Corporation set up special funds, with dedicated reve-
nue sources, to secure the payment of principal and interest on bonds of the Cor-
ition. A “Special Tax Account” was established under the State Finance Law, in
e custody of the State comptroller. The State legislature declared the city stock
transfer tax and the city sales tax to be State taxes, to be deposited in the Special
Tax Account.*? These monies are in turn transferred to MAC for deposit in the Cor-
poration’s debt service funds, capital reserve funds, and operating fund at such
imes and in such amounts as the chairman certifies are necessary to meet its re-
quirements as established by the Act and by the Corporation bond resolutions. In
addition, per capita State aid for New York City went into a special aid account
(within e Municipal Assistance State Aid Fund) dedicated to servicing MAC
ni

The amount of bonds that could be issued by MAC was limited by a ratio of reve-
nues from the sales and stock transfer taxes to the debt service requirements of
those bonds.*® The dedicated monies were to be first applied to the debt service and
administrative coats of MAC. Any surplus funds remaining can be turned over to
the city for ite regular expenditures # There has been a surplus in years when the

i d revenues were strong. Also, when interest rates fell and .C could refi-
nance its outstanding bonds at a lower interest rate, there was more likely to be
a surplus in ensuing years. In practice, MAC has put conditions on the city’s use
of these surplus funds.” As of 1996, MAC continues to allocate the surplus funds
for particular city functions.

New York State legislature declared a “moratorium” on debts previously is-
sued by the City of New York. The 1975 Debt Moratorium Act denied use of the
State courte to note holders wanting to enforce their debt contracts with the City
of New York.*® Instead, the State offered those note holders a new MAC issue in
exchange. This was at some cost to the note holders, including a later redemption

43 Moody's Municipal and Government Manual, Vol. 2, 1994, p. 4116 and 4254.
“MAC bonds had no lien on the dedicated revenues, nor were the revenues pledged to the
‘bonds’ claim was against the special fund. Smith, The Appraisal of Municipal Credit

funicipal d Government Manual, Vol. 2, 1994, p. 4116.

ar ‘The $600 Million Man. Empire State Report, August 1988, p. 23-27.

“*New York State Emergency Moratorium Act for the City of New York, 1975 N.Y, LAWS:
874-875. McKinney's Seasion Laws, of New York (St. Paul: West Publishing Co.), 1975 Extraor-
gi ‘Seasion. Enacted in November 1975. Cited in Bailey, The Crisis Regime, p. 167, and note

, B. 209.

Pp

&
hy


26

Before I turn it over to Mr. Flanagan, let me just note for the
record our appreciation for Mrs. Jarvis and Ms. Mason from the
city council for being with us in the audience today and members

m the school board Karen Shook, Jay Silverman, and Valencia
Mohammed. We appreciate your presence in the room. Thank you
for being with us.

Mr. Flanagan.

Mr. FLANAGAN. Thank you, Mr. Chairman.

Being from Chicago and having witnessed the crisis that we
averted there, although we marched headlong toward it through
the late seventies and early eighties, perhaps there are many les-
sons that can be learned there in the context of an oversight board.
In the context of an oversight board, I believe what was the major
cause of the difficulty that Chicago experienced at the end was the
site, on needing immediate dollars and consequently taxing busi-
ness and then putting through. the odious head tax which chased
business into the suburbs and then taxed them for coming from the
suburbs to Chicago and chased them further away still.

I believe—and I think Chicago has learned this lesson well and
hard, and Mayor Daly in Chicago works very hard to make sure
their lesson stays remembered—is that private interest, whether it
be community interest in the neighborhood or whether it be indus-
try business or some other financial concern in Chicago, is the key
to economic revitalization of any great city. There is no other way
around it.

However many layers of bureaucracy, however many boards we
can set up, however we can structure a tax or a bond, whatever
else can happen, if you don’t have people working and living in the
community and taking an interest in the community, there is no
hope for it. Consequently, in that context I ask this question. In
coming to Washington, I remark constantly at the number of peo-
ple who live here and the absence of industry and business in the
District of Columbia and in the area generally. Is there a reason
for this apart from the enormity of regulation in the Federal Gov-
ernment and the heavy tax burden that continues to exist?

Mr. FincH. I think there may be—this gets back to Mr.
Gutknecht’s question before about what are the causes of the prob-
lem, and I think there may be a number of causes of the problem.
I am not sure exactly what they are or what priority I would put
those causes in, but I think we have touched on a number of those
causes today as to why the District has lost both jobs and individ-
uals.

Mr. FLANAGAN. And also in that light, community interests are
absolutely paramount in the revitalization in Chicago, the city of
neighborhoods.

ir, FINCH. Absolutely.

Mr. FLANAGAN. And certainly here in Washington where the in-
terests are diverse and eclectic.

Mr. FINCH. Right.

Mr. FLANAGAN. Because of the enormity of the transient popu-
lation of the District of Columbia and indigenous population that
has grown here, where their parents grew up here and their grand-
parents are from here, having that being somewhat diminished as
opposed to other great cities that you looked at, is that an impact


78
the PICA rescue effort was solving the immediate cash flow crisis by issuing long-
term debt.2>

8, LEGISLATION
Pennaylvania Intergoveramental tion Authority Act for Cities of the First
Class, Commonly knewn as “The PIGA Act,” 63 PA. CONS. STAT. ANN. 12720

(Purdon 1991). P.L. 9, No. 6. Enacted June 5, 1991.

Intergovernmental Cooperation Agreement by and between Pennsylvania Inter-
governmental Cooperation Authority and The City of Philadelphia. Dated as of Jan-
uary 8, 1992.

APPENDIX E. YONKERS, NEW YORK STATE EMERGENCY FINANCIAL
CONTROL BOARD FOR THE CITY OF YONKERS

1, SUMMARY OF INSTIGATING CRISIS

Yonkers had shown signs of financial difficulty since the mid-19608. Like New
York City, Yonkers had been rolling over expenses from one fiscal year to another
and paying some operating expenses from the capital budget, financing them
Ubrough the ele of short-term notes and bonds. A crisis finally rupted in Noveraber
1976. The municipal bond market would not refinance $16.8 million in maturi
notes or lend the additional $60 million in short-term debt that Yonkers would 1
within five months to cover current operations, even at a premium interest rate.

‘New York City and Yonkers were the only two, municipal corporations in New
York State with financial problems so severe in the mid-1970s that the standard
State deficit Tunding authorization did not apply. City ofcals, State aiden, and
officials of banks that normally underwrote obligations for Yonkers put together a
proposal for a G0-day “bridge loan” of $35 million, The State's helf of the loan was

come from State pension funds. However, Arthur Levitt, the State comptroller,
aloo responsible for the pension funds, rejected the proposal. (The default of the New
York State Urban Development Corporation in March 1975 and the concurrent dif-
ficulties in New York City and eleewhere in the State probably added caution to the
comptroller’s response.) Instead, et the insistence of the barks, on November 13,
7976, State legislation was sought for the creation of an emergency board similar
t, but simpler than, the one for New York City.” The legislation passed the next

y.

2, DURATION OF CONTROL BOARD
1976~78

The New York State Emergency Financial Control Board for the City of Yonkers
was first created by the New York State legislature effective November 14, 1975.9
However, the creation of the Control Board and a segregated debt service fund alone
were not sufficient to restore the investor confidence needed to complete the bond

les.

In June 1976 the State passed additional legislation that named the State com
troller as “fiscal agent” for the eity of Yonkers, with power to approve the city’s
budgets, control a special segregated debt service account with earmarked revenues,
segregate the bond proceeds, and approve the isgue of nates.” This legislation effec
tively transferred supervisory powers from the Control Board to the State comptrol-
ler. The powers of the fiscal agent (the State comptroller) were to remain in effect
until the bonds issued to cover the deficit were retired. (In subsequent years, powera
of the State comptroller have been expanded through provisions included in bond
covenants.) With the combination of the Control Board and the fiscal agent legisla-
tion, Yonkers was able to reenter the bond market in July 1976.9

®% PICA, Staff Report on the City of Philadelphia's Five-Year Financial Plan For FY95-09,

May 2, 1994,
US. Advisory Commission on Intergovernmental Relations. Bankruptcies, Defaults, and
Other Local Government Financial Emergencies. Washington, ACIR, Report A-99, March 1985.

33-34.
Pr Feren, James. Levitt Rules Out Loan to Yonkers. New York Times, November 13, 1975, p.

1.
“New York State Financial Emergency Act for the City of Yonkers. N.Y. UNCONSOL. LAWS
ch, 23 §§1-13 (Coneol. 1983) or 197 N'Y. LAWS 871,
‘Special Local Finance and Budget Act of the City of Yonkers, also known as the “special
fiacal set” o “fiscal agent ack.” 1976 N.Y. LAWS 488-489. Enacted dune 30, 1976.

*OACIR, Defaults, p. 34.


3

gossity, cutting back on the very pro ms that have caused munic-
ipal deficits to soar? I can think of nothing more heartless than
policies that subsidize bad practices, encourage dependency on gov-
ernment handouts, and abandons people once the addiction has
taken hold.

In the short time I have been chairman of this subcommittee, I
have pointed out on. several occasions that all Americans benefit
from a strong and vibrant National Capital City. While it is impor-
tant to all of America, the Capital City has an added importance
to the people of the Metropolitan Washington Region. All of us who
live within commuting distance of downtown Washington know
that the health of the surrounding suburbs depends on a healthy
inner city. Our interests are closely intertwined.

The citizens in my district—I have held three town meetings this
weekend—want to know that their Capital City will one day get its
finances in order. We want the Nation’s Capital to be worthy of the
strongest, freest, and greatest Nation on earth. They want to see
its streets safe, schools improved, and quality of life the envy of the
rest of America. They have a right to expect no less.

It is my pleasure to call upon this morning’s single witness, Mr.
Johnny Finch, Assistant Comptroller General, to explain to us how
cities get into this situation and some of the methods and markers,
those who have traveled this road before us, have left.
ne would like to now yield to our ranking minority member, Ms.

orton.

{The prepared statement of Hon. Thomas M. Davis follows:]

PREPARED STATEMENT OF Hon. THOMAS M. Davis, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF VIRGINIA

I want to welcome all of you to this hearing. Last week, this subcommittee, in
conjpction with the D.C. subcommittee of the Appropriations, Committe, held &
joint hearing on the financial state of the District of Columbia. The purpose of that

wearing and the one the Appropriations Subcommittee held last Friday was to ascer-
tain precisely how bad the Citys fiscal situation was.

'We discovered that the city's plight was worse than we had thought. The bottom
line, according to the General Accounting Office is thet the District of Columbia is
not only currently running en operating deficit of hundreds of millions of dollars,
is spending hundreds of millions of dollars in excess of its mandated budget cap,
but, in fact that the District will run out of eash to pay its bills this spring.

A number of thoughtful people have shown outstanding leadership by suggesting
ways to bring the Diatriet’s celtical situation under contrel and prevent its Teoccur:
rence. I will mention only two, On February 7, Councilman Kevin Chavous began
the discussion when he proposed the creation of the District of Columbia Financial
Review Board. My esteemed colleague, Ms. Norton, moved the discussion along even
further when, on February 16, she too called for the creation of a financial oversight
board and laid out many of the important criteria of such « body. Today our sub-
committee is teking the next step in the process. We are going to hear from a GAO
team about what other clin in evsis have done, ‘ewe

ir pul toe to ascertain precisely what options are available to Con;
as the hailon’s capital city struggles with this crisis. We also want to determine how
to end what has become an annual occurrence of overspending, poor service delivery,
faulty record keeping, and inept management.

Let me eay at the-outeet, that however unprecedented the District’s overspending
may be for a city of its size and however high the percentage of ite deficit is over
its entire budget, the Distriet’s financial and social problems are not unique. Unfor-
tintely, they’ parallel much of what urban Americw hes experienced inthe past wo
decades, In that time, New York City, Yonkers, Cleveland, Philadelphia, and Chi-
cago (primarily its school district) all teetered atthe brink of default. All found their
wey back, with the help and assistance of their respective state and regional govera-
ments.



2

Unfortunately, the District’s problems are not unique. The situa-
tion the District finds itself in, mirrors much of what urban Amer-
ica has experienced in the past three decades. In that time, New
York City, Yonkers, Cleveland, Philadelphia, and Chicago all tee-
tered on the brink of default. All found their way back with the
help and assistance from their respective State and regional gov-
ernments. It is Congress’s responsibility to fill the oversight and
assistance role for the District.

Before acting, it is incumbent upon us to consider what has been
tried elsewhere, which approaches have been most successful, and
how these remedies may be best adopted to the District of Colum-
bia’s special situation. We don’t want to take a “one size fits all”
approach, A plan that is effective in New York will not necessarily
be effective for Washington. Today’s hearings provide an important
opportunity to educate the Members of Congress and the people of
the District. This will also enable everyone to participate in this
process. This participation will occur in many different ways.

In the time since Delegate Norton proposed an oversight board
for the District, there has been much speculation in the press and
elsewhere as to what such boards do and whether and to what de-
gree they encroach upon the powers of home rule. I am not inter-
ested in eliminating home rule. A financial control board is not an
undercover attack on home rule. In fact, the greatest threat to
home rule comes from the city’s financial crisis. By successfully re-
solving this crisis home rule will be enhanced. A failure to act deci-
sively and responsibly on the part of the home rule government
will be the biggest threat to home rule that could ever exist.

Successful financial control boards must have real power. The
GAO will explain that they share two common characteristics
wherever they are attempted. First, the solutions they offered were
long rather than short term in nature. They recognized that the
city’s problems were not of 1 day’s or 1 year’s or even of one admin-
istration’s making. Usually they embarked on a strategy that first
replaced short-term debt with longer-term bonds so the cities could
catch their breath. Then they embarked on a course of serious re-
structuring of the city’s financial mechanisms. Once the immediate
crisis had been dealt with, they retained standby authority, mon-
itored city finances steadily, and established a mechanism through
which to intervene should the city revert back to its past practices.

Several of these bodies remain in operation years after the crisis
is abated. In New York, for instance, it will remain in place until
2008 when the last long-term bond issued under its hegemony is
retired. Philadelphia’s board will also remain in a monitoring and
standby mode until all of its debts have been repaid.

The second feature most control boards have shared was their
determination that “tough love” was a better means of breaking
cities of their deeply rooted habit of overspending than bailouts.
Like therapists who treat other forms of addiction, control boards
have figured out that the best way to discourage bad practices is
to make their continuance simply too painful.

Too much has been said about the tough side of this approach,
too little has been said about the love aspect. Have we really
helped the poor and the needy by making it too easy to gain access
to public assistance? Are we helping them now that we are, by ne-


15

sure of and confidence in the financial condition of the cities and
the school district.

In summary, either on their own or with the assistance of State
oversight boards, the cities all took actions to improve their finan-
cial discipline and their stability. They increased credible account-
ing numbers to clearly identify their financial situations and needs.
They also took immediate cost-cutting measures and began longer-
term efforts to improve management and operations. The cities are
also addressing their structural problems and finding them particu-
larly difficult to solve.

. Chairman, this concludes my statement. My colleagues and
I will be glad to answer any questions you or other members of the
subcommittee may have at this time.

(The prepared statement of Mr. Finch follows:]

PREPARED STATEMENT OF JOHNNY C. FINCH, ASSISTANT COMPTROLLER GENERAL,
GENERAL GOVERNMENT DivisiON, GENERAL ACCOUNTING OFFICE

SUMMARY OF STATEMENT

GAO visited five cities—Boston, Chicago, Cleveland, New York, and Philadel-
phia—that experienced problems similar to those faced by the ict of Columbia.

roblems were similar in that some were caused by the cities’ changing demo-
graphics, Others were due to the cities’ inability to make the hard financial deci-
sions needed to live within their means, The cities began defaulting on loans and
losing their ability to borrow. Eventually, each city was faced with such unstable
financial conditions that a financial crisis occurred or was imminent.

As conditions worsened, Boston and Chic: had sufficient financial discipline to
restore their credibility and their financial health without state aid or oversight.
However, Ohio, New York, and Pennsylvania wanted some assurance that, financial
discipline would be restored and maintained in Cleveland, New York City, and
Philadelphia. Mlinois wanted similar assurance for Chicago's school district, To
achieve such assurance, these states established oversight boards for the three cities
and Chicago's echool district; The boards helped the cities take actions that resulted
in the cities being better able to manage their financial affairs. In addition, the
cities ej an to improve city management and operations and address their struc-

ms.

‘The cities’ and the school district’s boards shared some common characteristics.
Each board contained from five to seven members. In general, board members were
(1) committed to the cities’ or school district’s future and (2) qualified, that is, had
a strong background in financial and business management. Often, the board mem-
bers included partners of law or accounting firms and business executives from the
private sector. In addition, state legislation tied changes to the boards’ duration or
power to specific improvements in a city’s financial condition.

All five of the cities have now improved their financial stability, management, and
operations. The cities are also addressing their structura) problems and are finding

em particularly difficult to solve.

Mr. Davis. Thank you very much, Mr. Finch, We very much ap-
preciate the work that you and the staff have done.

I am going to start the questioning if I can.

It looks to me like there is some good news here for the District.
That in point of fact, they are not the first city in crisis to have
gone through this. With some tough decisions, other cities have
worked themselves out of their problems and have gone on to much
greater things. The other good news is that Congress doesn’t have
to reinvent the wheel, that there is a lot out there in some of these
control boards that have already been established, a lot of prece-
dence, some trial and error that give us a good menu of activities
that we can consider for this board. Would you agree with that?

Mr. FINcH. I would agree wholeheartedly with each of those
points, Mr. Chairman.



5

cial mechanism. After the immediate crisis was dealt with, they retained stand
authority, monitored city finances steadily, and established a mechanism throu;
which to intervene should the city revert back to past practices.

Because of the deeply ingrained pattern of fiscal mismanagement and the control
board’s role in borrowing, financial control boards are in existence for the life of the
bonds they issue. This means these bodies can remain in operation for years after
the crises that created them have passed. In New York, for instance, it will remain
Jn place until 2008, when the last long term bond issued under its hegemony is re-

Just last year, when the City of New York approached an anticipated $450 million
to $750 million budget gap (which was less than what Washington now ex) ), at
least one powerful state official called for scrutiny by the Contro] Board. Now hav-
ing already cut more from his first year’s budget than Congress ordered the District
to do, Mayor Giuliani has proposed the deepest spending cuts since the 1930's. Pro-
claiming that the city had been “too generous for too long”, the Mayor proposed cut-
ting the city’s budget of $30.6 billion by $1.3 billion, a four percent reduction, He
also proposed eliminating the city’s sales tax on clothing that costs less than $100
and unveiled the first phase of a plan to reduce property taxes on co-ops and condos
and reduce business taxes in order to stimulate shopping, savings, and investment.
He also proposed cuts in virtually every city expenditure, including and especially

ledicaid.

The second feature most past and existing control boards have shared was their
determination that “tough love” was a better means of breaking cities of their predi-
lection to overspend than “bailouts.” Like therapists who treat other forms of addic-
tion, control boards have figured out that the best way to discourage bad practices
was to make their continuance simply too painful.

Too much has been said about the “tough” side in this approach. Too little has
been said about the “love” aspect. Have we really helped the poor and the needy
by making it too easy to gain access to public assistance. Are we helping them now

at we sre, by necessity, cutting back an the very programs that have caused mu-
nicipal deficits to soar? I can think of nothing more heartless than policies that sub-
sidize bad practices, encourage dependency on government handouts, and abandons
people once the addiction has taken hold.

In the short time I have been chairman of this subcommittee, I have pointed out
on several occasions that all Americans benefit from a strong and vibrant national
capital city. While it is important to all of America, the capital city has an added
importance to the people of the metropolitan Washington region. All of us who live
within commuting distance of downtown Washington know that the health of the
surrounding suburbs depends on a healthy inner city. Our interests are closely
intertwined.

Over the past weekend, I held three separate town meetings in my Congressional
district. In Burke, Fairfax City, and Woodbridge, I received many questions about
the District of Columbia and its problems. People want to know that their capital
city will one day get its finances under control. They want their nations capital to
be worthy of the strongest, freest, and greatest nation on earth. They want to see
its streets safe, schools improved, and quality of life the envy of the rest of America.
They have a right to expect nothing less.

[anticipate that shortly, Congress will take the first step of what will be a long,
hard, but worthy journey to assist our great national capital toward that destina-
tion. Once we have helped “stop the financial bleeding”, we can turn our attention
to often mentioned, but seldom tried long term remedies such as privatization, con-
tracting out of services, and some of the bold solutions to some of the social prob-
lems Speaker Gingrich, Jack Kemp, and other le of good will have identified.

I want to thank Cony man Joe McDade (R-PA) of the Appropriations Commit-
tee for requesting that GAO undertake this work presented here today and the work
they are yet to complete. If it had not been for his initiative as the Ranking Repub-
lican on the Appropriations Committee last year we would not be having this hear-
ing and this invaluable material would not have been gathered. He and the current
Appropriations Committee leadership have kindly shared thie information with us
and have allowed the GAO to testify on it here. | thank them for their courtesy.
T also want to thank the entire GAO team that has worked on this project.
should be commended for their diligence and their coordination with all the offices
involved and with the other GAO team working on District matters.

It is my pleasure to cal] upon this morning’s single witness, Charles A. Bowsher,
Controller General, US General Accounting Office, to explain to us some of the
markers some those who came before us have left.


80

5. ENFORCEMENT AUTHORITY, MECHANISMS, AND PENALTIES

In addition to the City of Yonkers, the Board has authority over “covered organi-
zations.” This includes the board of education and from time to time has included
the city housing authority. The Board may exempt a covered organization from re-
view if it feels that would not jeopardize the city’s ability to adopt and maintain

a dget.
According to the 1975 legislation, the Board was to develop a financial plan in

conjunction with the city for fiscal rs 1976 and 1977. The city’s o) ing and

cepital funds were to be balanced. ‘The aggregate principal amount ding

short-term obligations was limited to a dollar amount. act favored attriti

the primary way to achieve a stabilized work foree. The Board was to estimate city

revenues. ity was to prepare the financial plan and submit it to the Board for

approval or disapproval; if the city did not submit or adopt an approved financial
psy, the Board was to formulate and adopt one. The financial plan was to provide
for the payment in full of debt service requirements and to operate within the con-
straint of ite projected cash reasurocs. The anaual increase in aggregate expend|-
tures was based on the FY76 budget with an increase limited to 2 percent or addi-
tional increases to meet substantial inflation, if increased revenues permitted. The
Board was responsible for the revenue estimates. The revenue estimates were to
govern the amount of aggregate expenditures permitted.

"The 1976 legislation temporarily froze wages. In the 1984 legislation, those re-
sponsible for recommending wage increases were expected to take into serious con-
sideration the financial ability of the city or covered organization to pay the cost
of an increase in wages or fringe benefits. The Board was given the authority to
declare a fiscal crisis and order ail increases in salary or wages to be suspended if
it ined that a wage freeze was essential to the adoption or maintenance of
a city budget that was in compliance with the Emergency Act, The suspensions of
wage increases would last for one year and could be extended, if necessary, to no
later than the end of the emergency period.

"The city was not to borrow or spend, except in compliance with the terms of the
1976 or 1984 Financial Emergency Act, The Board can disapprove proposed con-
tracte if they are inconsistent with the financial plan. The Board can order the cit
to cut expeaditures which, in effect, means cutting the payroll. Because approxi-
mately 80 percent of the city budget is payroll, control over payroll and the number
of employees (hiring and firing ‘considered a moat important. power.

Both the 1975 and 1984 legislation created an “emergency financial control board
fund? for the City of Yonkers, This includes a “debt service repayment account.” For
the duration of the “emergency period,” all revenues received or to be received by
the city or any “covered organization” are to be revenues of the fund. Disbursements
from the fund are to be made by the Board in accordance with the approved finan-
cial plan. The Board can authorize the city to make disbursements of city revenues
from the fund. The legislation specifies the priorities of expenditures if funds are
Sneuificient 1) debt service; 2) Uabilities with statutory of contractual, priority; 8)
other obligations on an allocated or pro rala bans, determined by the Board ifthe

to specify.

1984 Financial Emergency Act laid out prohibitions and penalties for officers
and employees of the city who violate the financial plan or ordere of the Board. Pos-
nible diacipline includen suspension from duty without pay or remeval from office
by order of either the Governor or the city manager, and being convicted of a mis-

anor.

"The 1964 legislation provided that the Board should perform the following func-
tions: ) estimate revenues and consult with the city and ite covered organizations
on the financial plan, prescribe the form and information required, and approve, dis-
approve, or modify the plan; b) establish procedures with respect to deposit of reve-
nue to and disbursement of monies from the emergency financial control board fund
for the city; ¢) review operations, management, efficiency, and productivity; make
reports and recommendations; audit compliance with the financial plan; d) receive
and review financial statements, budgetary data, and management reports from the
tity and State comptroller, audit books and records of the city as necessary, e) a4
prove all contracts for compliance with the act and the financial plan; f) review ihe
ferme of each proposed long-term and shor.-ierm borroving of the ety: tarmawing
is not permitted without Board approval, g) receive quarterly reports from the State
comptroller setting forth the eity’s debt-service requirements; h) issue binding orders
to clty officials in order to accomplish purposes of the act and to implement an ap-
proved financial plan ina timely and satisfactory manner; the officials are subject
tb the penalties if they fail to comply; and i) coordinate with the State com
to review and monitor the city’s revenues and expenditures. In the event of any de-



83

given new veto powers over legislation and certain aspects of the budget. The posi-
mn of city manager was abolished. Three-way controversies among the city man-
carr a mayor, and city council were judged to have hindered efforts to deal effectivel

the budget. The current Mayor, Democrat Terence Zaleski, elected in 1991,
is the first ‘oe serve under the new rules.

Part of the city’s recent difficulties in obtaining the required certification of its
budget by the State comptroller stems from politi! differences between the Repub-
lican council and the Democratic mayor—which each propose their own version of
the city budget—and between the Republican council and the State Control Board,
Sppointed by the Governor—from 1982 to 1994 a Democrat, Mario Cuomo. After the

lovember 1994 elections, the city council’ P leader said that he hoped the new
board (to be appointed by newly-elected Rey ublican Governor got into Pataki) would

vaio abide by their Proper role in town, not politics and
management.” The outgoing chairman “of the Financial Control Board (sec-
rary of a state Gail S. Shaffer, irman from 1985 through 1994) dismissed that
mm and said the new Board would have to deal with the inherent conflict cre-
ated when an appointed body is in a position to review, and occasionally reject, ac-
tions taken by local officials. 15

8, LEGISLATION

New York State Financial Emergency Act for the City of Yonkers, N.Y.
UNCONSOL. LAWS ch. 23 §§1-13 Consol. 1983) or 1975 N.Y. LAWS 871, as
amended. Enacted November 14, 1975.

The Special Local Finance and Budget Act of the City of Yonkers, also known as
the | a ei ‘ial fiscal act” or “fiscal agent act,” 1976 N.Y. LAWS 488-489. Enacted June

New York State Financial Emergency Act of 1984 for the City of Yonkers, N.Y.
UNCONSOL. LAWS §$1-14 (Consol. Supp. 1990) or 1984 N.Y. LAWS 103, as
amended. Enacted May 2, 1984.

APPENDIX F. CONTACT DIRECTORY

Chicago School Finance Authority, 310 South Michigan Avenue, Suite 1440, Chi-
“Bet 60604, Phone: (312) 939-1
of Gleveland, 601 Lakeside Ave. NE, Cleveland, Ohio 44114, Finance Direc-
tor, urrer-Hyer, (216) 664-2536, Financial Reporting and Control, Mi-
Sibel Abo coer! 16) Bed Ses",
Municipal Assistance Corporation forthe City of New York. 1 World Trade Cen-
ter, 8901, New York, NY 10048, Phone: (212) 775-0010, FAX: (212) 775-0042
New York City: New York State Financial Control Board, roller’s O!
fice, New York ty Division, 270 Broadway, 23rd Floor, New York, 10007, T.
(218) 417. 44.
Pennsylvai mental Cooperation Authority (PICA), 1429 Walnut
Street, 14th Teor Philadelphia, PA 19102, Phone: (218) 561-9160, FAX: (212) 563-

poames Marrin, Acting Executive Director and General Counsel, New York State
mar cy Financial Control Board for the City of Yonkers, 45 So. Broadway, Yon-
ren gro. Phone: (914) 969-8206.
R. Thomas, Commissioner of Financial Services, City of Yonkers, Depart-
ment re Finance and Management Services, City Hall, Room 212, Yonkers, NY
10701-3889, Phone: (914) '3TE-6100, FAX: (914) 964-0417,

104 Pizzurro, Frank. The “Strong Mayor” in Yonkers. Empire State Report, August, 1991, p.
37-39.
108 Dentzer, Bill. City Awaiting New Faces on State's Control Board. The Herald Statesman.
December 1, 1994, p. 1A-2A.
O°


21

Court of the sity, the State took over the hospitals as a result of
the crisis, and the universities, the City University, as a result of
the crisis.

The revenue base problem is a much more difficult problem. The
cities are finding that much more difficult to address than the func-
tional part of the problem. Cleveland, I think, is a good example
of this. I think in the fifties Cleveland had a population of about—
I’m sure I can get some help up here from the panel—Cleveland
had a population of about a million, and they went into a decline.
They went down to about 500,000 by the seventies, and this was
part of what led to their crisis. They have been able to try to com-
bat that by creating some fairly innovative economic development
programs where the city has worked in cooperation with the pri-
vate sector to try to create some economic stabilization programs
in the poor areas and that sort of thing, and they have managed
to stabilize that decline. They are still now at about 500,000, but
they haven’t been able to start their trend upward, to increase back
to a million, so it is a very difficult issue.

Mr. GUTKNECHT. So you are saying that there is some hope that
this board ultimately can find some solutions to those kinds of
problems?

Mr. Fincu. I think—yes. What the board’s role really is, I think,
is to help the city get back on its feet financially, give it the oppor-
tunity to really make some reforms in the way it goes about its op-
erations and managing itself and to look for opportunities to try to
attack the economic development issue.

Mr. GUTKNECHT. But you see the board essentially as havin,
there are two phases, at least two phases in this discussion. The
first is, how do you solve the immediate problem and keep the —

Mr. FINCH. Right.
ke Mr. GUTKNECHT [continuing]. Keep the water running and so

forth.

Mr. Fincu. Right.

Mr. GUTKNECHT. But long term, it seems to me that this board
and maybe this Congr ss has failed if we don’t begin to look at
some of those underlying problems and find long-term solutions,
and part of what I’m really trying to say is, you can’t really solve
the problems until you properly define them, and if we just gloss
them over with, you know, terms such as “structural problems,”
“confrontational environments,” “overwhelming fiscal dilemmas,” I
mean those are all nice sounding words, but they don’t really get
at what the problems are.

Mr. Fincu. I would agree wholeheartedly that in order to solve
the problems, you really need to know what the underlying cause
is—you have to know what the underlying cause is.

fr, GUTKNECHT. Thank you.

Mr. Davis. Thank you, Mr. Gutknecht.

Ms. Norton.

Ms. NorTOoNn. I just want to note for the record that I have intro-
duced a bill to exempt District residents and business from taxes,
and I think if we did that we might really see this city come alive
with the stroke of a pen.

I want to also say that I think almost everybody in the District
has finally realized that taxing its residents and businesses has


ACTIONS TAKEN BY FIVE CITIES TO RESTORE
THEIR FINANCIAL HEALTH

HEARING

BEFORE THE
SUBCOMMITTEE ON THE
DISTRICT OF COLUMBIA

OF THE

COMMITTEE ON GOVERNMENT
REFORM AND OVERSIGHT
HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS
FIRST SESSION

MARCH 2, 1995

Printed for the use of the Committee on Government Reform and Oversight

ae

U.S. GOVERNMENT PRINTING OFFICE
20-994 CC WASHINGTON : 1996

For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

ZS ISBN 0-16-052163-7
SPO,



44

sion of what types of projections, cash-flow analysis, and projec-
tions of those kinds of things, but in addition to the financial por-
tion of a financial plan there was very long and detailed discussion
on what the city proposed to do to be able to achieve the plans that
they had, and oftentimes those would address the management-re-
lated issues on how they planned on reorganizing or restructuring
or re-engineering an organization in order to meet the plans that
they set forward.

Ms. Norton. I don’t know if you have copies of those plans.

Ms. CLARK. We do.

Ms. Norton. If you do, I would like copies included in our record.
I think that would be useful to us too.

{Due to the high cost of printing, the information referred to has
been retained in the subcommittee files.]

Ms. NorTon. Suppose the District did what one might expect it
to do in a crisis like this, and, even better, let’s say, downsized its
government, improved its operations, and the rest. With the growth
of Medicaid in the city, the concentration of poor People here, 80
percent of the poor of the region living here, could the District of
Columbia permanently solve this crisis without some relief on Med-
icaid, on prisons, and on pension?

Mr. FINCH. I’m not sure we are in a position to answer that, Ms.
Norton.

Ms. Norton. Mr. Hill, you have done a lot of work on the Dis-
trict. Don’t you come up blank?

Mr. HILL. There are a lot of other factors there. You know, one
of the things that we have found in all of the information that we
have looked at is that—the first thing that we would have to decide
is whether or not those services are being provided at the lowest
cost possible.

Ms. NorTON. No. Wait a minute. My hypothetical said that—as-
sumes that, quote, the District had done everything it should do.
Let’s say it reduced—it already: for example, has done it with
AFDC. Let's say it does it with Medicaid, and Medicaid is no high-
er than in the region, and we clean up Lorton because—because
the chairman is going to make us do so and take over some of the
costs—that the District does what it is supposed to do. After it does
all it is supposed to do as a city of under—of about 570,000, with
the tax base it has, using the single strategy of downsizing, put it-
self in a position so it can pay rising Medicaid costs, pension costs,
and prisons, after it has gotten itself in the position it by itself can
get itself in.

Mr. HILL. Well, let me give you some additional items that would
have been considered in looking at that question: What the impact
of an arena or convention center would be in terms of the revenue
base for the city, what additional business that would bring in ad-
ditional revenue. You would have to also know the amount of
money that you are talking about in terms of how much the Dis-
trict saved on its own in order to then add that in and find out
whether the revenues and the expenditures would balance.

Clearly there is a growing gap between revenues and expendi-
tures that, if the District does nothing, the problem only gets
worse. Whether you can close that gap by the things that the Dis-
trict does is a function of those developmental perhaps programs,


8

cities have endured because of our ability to watch the pennies,
permitting the dollars to watch themselves, the school system not-
withstanding, and it is nice to see that Chicago is held up as an
example for doing something right. I hope we can take lessons
learned from Chicago’s oversight board and apply them successfully
to the District of Columbia.

agree with many aspects of the oversight board set up in Chi-
cago to deal with our school system’s financial crisis. As you know,
our board was formed in 1980 and still operates today if a certain
threshold of budget performance is not achieved. All of our unpaid
board members are appointed, and none are elected officials. Each
member serves 3-year terms and is eligible for reappointment, and
frequent reportii Ad periods are routine.

TL also commend the dedication of all of Chicago’s board members
and would like to mention the five currently serving by name—
Chairman Martin Coledike, Don Hider, Cerus Berlack, Ramon Ro-
mero, and Christopher Gardner.

I want to thank everyone for contributing to this discussion and
to the subcommittee staff here for their tireless work on this effort
to revitalize Washington, DC, and I especially congratulate Chair-
man Davis and Ms. Norton for their leadership concerning the Dis-
trict’s future and the bipartisan effort and attitude that they have
taken thus far.

Thank you, Mr. Chairman.

Mr. Davis. Thank you very much, Mr. Flanagan.

The gentlelady from Michigan, Miss Collins.

Miss Couns. Thank you very much, Mr. Chairman.

First of all, I would like to commend you for holding these hear-
ings, and I would like to commend you for the sensitivity and the
compassion you have shown in dealing with this problem which is
not unique among urban centers of America. I think that it is very
appropriate and clever to call in the other cities who suffered the
same fate that the District of Columbia is now suffering, and I
hope not only that we find a solution to help the District of Colum-
bia but also to help the city of Detroit, and perhaps we can actually
build a framework of how to help the budget problems in urban
centers with low tax bases and high unemployment.

I thank you very much for calling this hearing.

[The prepared statement of Hon. Cardiss Collins follows:]

PREPARED STATEMENT OF Hon. CaRDIss COLLINS, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF ILLINOIS

Mr. Chairman, I wish to commend you and the Subcommittee’s Ranking Member,
Congresswoman Eleanor Holmes Norton, for proceeding with dispatch and in a col-
legial and bipartisan manner to seck an effective remedy for the financial crisis in
the District of Columbia.

Today’s hearing will clearly establish that the situation the District finds itself
in is not a unique one in America. Several cities, including my own home town, Chi-
cago, have confronted serious financial difficulties, but have worked through their
problems with the assistance of their respective state governments. What set
the District apart, however, is the fact that it cannot turn to a state government
for assistance.

The Federal government which, under the Constitution has exclusive legislative
authority over the District, must step up to the plate and provide the needed assist-
ance in this case. That assistance includes quick action on the legislation being de-
veloped by the Ranking Member and the Ehairman to establish a financial’ and
management oversight board, that is respectful of Home Rule, but sufficiently em-


7

It is our privilege now to recognize the distinguished gentleman
from Ohio, Mr. LaTourette.

Mr. LaToureTTE. Thank you, Mr. Chairman, and at the outset
let me add my voice to those that have already been raised today
in praising both you and also Delegate Norton for the bipartisan
manner in which you are proceeding in this particular issue.

Mr. Chairman, I want to thank you first for convening this hear-
ing to enable us to better determine how the Congress may assist
the District to deal with its current financial crisis and, second, let
me also thank Mr. Finch and the others from GAO who worked on
this project to study how other cities in similar situations have
been able to revitalize their economies. I look forward with great
anticipation to their upcoming testimony.

As a native of the Cleveland area, I have seen firsthand the dev-
astating effect that a fiscal crisis can have on a community. In the
late 1970's, because of years of hiding financial shortfalls by bor-
rowing bond funds, selling off city assets, and borrowing from con-
struction accounts, the city of Cleveland found itself faced with a
financial crisis much like the one facing the District of Columbia
today. Eventually the city defaulted on approximately $15 million
worth of notes owed to local banks when the banks refused to roll
the notes over.

However, I have also seen firsthand the manner in which a city
can pull itself up by its bootstraps and return itself to fiscal stabil-
ity. The Cleveland Financial Planning and Supervision Commis-
sion, one of the oversight boards that will be discussed here today,
went to work on solving Cleveland’s financial woes in 1980, anc
while the commission did not resolve every management and struc-
tural problem which faced the city, within a period of just 7 years
they had eliminated Cleveland’s deficit, balanced the budget, and
restored the city’s access to its credit markets. In fact, the commis-
sion did such a good job, it put itself out of a job. At this time,
Cleveland has eliminated all of its fiscal emergency conditions.

Cleveland did not rejuvenate its economy overnight, nor will the
District of Columbia. However, the sooner definitive actions are
taken to try and avert the financial crisis I believe we can all agree
is looming right around the corner, the sooner the District can
begin its own recovery. I would only ask, as we begin the delibera-
tive processes, with the words of the mayor of the city of Cleveland,
who took over following default, and is now the Governor of the
State of Ohio, Governor Voinovich. I think his words would be well
remembered by all participants when he said, “This is a tough job,
and I’m not going to submit to the political pressures that mayors
have in the past. If it means I don’t get reelected 2 years from now,
tough.”

k you, Mr. Chairman. I yield back my time.

Mr. Davis. Thank you very much.

The distinguished gentleman from Illinois, Mr. Flanagan.

Mr. FLANAGAN. Thank you, Chairman Davis. I have just a short
statement in the interests of brevity.

Lam happy to see today that the panel has chosen the great city
of Chicago, my home town, as one of the five cities it studied. The
city of Big Shoulders has a long history of fiscal soundness, and we
have not endured the agonizing pain of bankruptcy that other great


57

2. DURATION OF CONTROL BOARD}?

The School Finance Authority Act! provides that the Authority shall remain in
existence until one year after all bonds and notes are fully paid for and discharged,
or otherwise provided for.

The Authority has been in existence from 1980 to the present with three distinct
Phases: 198 1988-93 and 1993-present. The Authority was created by the Illi-
nois General Assembly in 1980 to assist in financing and to provide oversight of the
finances of the Board of Education of the city of Chicago. The original act was
amended in 1984, 1988, and 1993.

The initial mission of the Authority was to provide the School Board with access
to the credit market in order to retire its maturing short-term debt and cover its
continuing deficits amounting to $460 million. In subsequent amendments, the Au-
thority was empowered to finance construction and rehabilitation of school facilities
(1984), to provide oversight with respect to certain aspects of the Chicago School Re-
form Act of 1988, and to implement the borrowing in 1994 of $405.4 million author-
ized by the 1993 amendments (to cover the School Board's fiscal years 1993 and
1994) as well as to assume additional oversight of the Board’s operations.

‘The second phase began in 1988, Certain oversight and control powers of the Au-
thority were suspended when the Authority certified that the Chicago Board of Edu-
cation had completed six successive years of balanced budgets, in accordance with
the accounting and other principles that had been prescribed by the Authority (5/
34A-411(a)). For the period from 1988 to 1993, the Authority's review and approval
authority was scaled . It did continue to monitor, through annual reviews of the
Board’s budgets to determine that they were balanced, and to make sure that the
Board continued to pay. off the large, nded indebtedness incurred to bail out the
school system from 1980 through 1982.

‘Also, in 1988 the Authority was given a role in implementing Chicago's major
education reform effort, aimed at improving student educational performance and
decentralizing control from the district superintendent's office to the individual
schools. The 1988 Chicago School Reform Act required the Board of Education to
submit to the Authority and gain approval of an annual plan for reforming. the
school system.!¢ The Authority was not well equipped to handle this responsibility
and did not accomplish much in this area. The education reform function of the
School Finance Authority was repealed effective June 30, 1994.

The third phase began in 1993 when the Chi Schoo! Board failed to adopt a
balanced bus et for fiscal yer 1994 (Sept. 1, 1993-Aug. 30, 1994). As a con-

ence, the Chicago School Finance Authority had its financial powers reinstated
and enhanced, effective September 1, 1993.15 (5/34A—411(b))

3. BOARD COMPOSITION AND APPOINTMENT AUTHORITY

The Authority is administered by a board composed of five directors: two ap-
pointed by the Governor with the approval of the mayor of Chicago; two appointed
y the mayor with the approval of the Governor; and a chairman appointed jointly
by Governor and mayor. The directors may establish other offices and appoint
officers as they deem appropriate. Directors are appointed to serve three-year terms
and until their respective successors have been appointed. The directors serve with-
out compensation but are entitled to reimbursement for actual and necessary ex-
penses incurred in the performance of official duties.

4. STAFFING

The Authority has a full-time Executive Director and Administrative Assistant.
The Authority also has a Corporate Secretary. The 1993 amendments established
a new position of Inspector General, with a four-year term, to investigate allegations
of waste, fraud, and financial mismanagement by employees of or contractors with
the Board. The Inspector General has a limited staff of about three.

13 For the sake of consistency, the same section headings have been used throughout the re-
port, even though “control board” may not be the official name of the oversight authority for
that city. In the discussion of Chicago, the financial control board is known as “the Authority
and the word “Board” is used to refer to the Chicago Board of Education or school board. {n
section 3, “board” also refers to the board of directors of the Chicago School Finance Authority.

13 School Finance Authority Act, 105 ILL. COMP. STAT. ‘ANN, B34A-534B-16 (Michie 1933
& Lexis Supp.) or PA. 81-1221. Enacted January 16, 1980. Section numbers referred to subse-

augntly (in parentheses) refer to subsections of this statute
Heat, G. Alfred, Jr. School Restructuring: Chicago Style. Chicago Panel on Public School

Polis and Finance, 220 South State Street, Suite 1212, Cl cago I 4, March 1990. p. 10.
i#fitinate General Assembly's 1993 amendmenta to the Schoo! Rinance Authority Act


40

service to date. The following table shows the status of each of the city pension
funds as of December 31, 1993.

Table 1: Status of Chicago's Pension Funds as of December 31, 1993

(doltars in thousands}
‘vatunded (Under-—_Overtunded (Under-
Nat Assats Walia Total Pesion Geadit tungod) Panton Ob- funded) Pension Ob-

Enployen Peasion Fund for Banetits, at Cost Obi 1983 a) as
a cana eee etgcttes iam
Municipal Employees .. $2,800,810 $3,546,162 ($745,352) (2)
Laborers: 871,897 757,005 114,892 15.2
1,856,426 3.464.300 (1,607,874) (464)
623,192 1,266,795 (623,192) 49.2)
se 6,152,325 9,034,262 (2,881,937 G19)
‘Sauess: City of Chicago's Com ‘Aanant Financial Ropot for tha yar ended 23, 1983 ‘omputed by GND.

The Civic Federation, a civic group that represents Chicago businesses, has iden-
tified the city’s unfunded pension liability as an area of Federation concern. During
testimony before Chicago’s City Council in November 1994, the Federation President
said that the Federation was particularly concerned with the Policemens’ and Fire-
mens’ Funds, According to the testimony, these funds had remained below 60 per-
cent funding over the last 10 years (1983-1993).

To address this concern, the Federation President recommended that the Iinois
Economic and Fiscal Commission develop strategies for addressing the unfunded li-
ability. Specifically, he recommended that the Commission determine adequate lev.
els of contributions for local governments, the types of benefits which can be award-
ed retirees by local governments, and solutions to decrease outstanding unfunded
liabilities. At the time of our city visit in January 1995, no action had n taken
by the Commission.

NEW YORK CITY

The majority of employees for New York City are members of one of five major
pension systems that are maintained by the city. The five Pension systems are

‘¢ New York City Employees’ Retirement System (NYCERS), a cost-sharing mul-
tiple-employer public employee retirement system, for employees of the city not cov-
ered by one of the other pension systems and employees of certain component units
of the city and certain other rnment units.

» New York City Teachers’ Retirement System (TRS), a cost-sharing multiple em-
ployee retirement system for teachers in the public schools of the city and certain
other specified school and college employees.

« New York City Board of Education Retirement System (BERS), a cost-sharing,
multiple employer public employee retirement system, for non-pedagogical employ-
ees of the Board of Education and certain employees of the School Construction Au-

thority.
® New York Police Department Pension Fund (POLICE), a single-employer public
employee retirement system, for full-time uniformed employees of the Police Depart-

ment,
© New York Fire Department Pension Fund (FIRE), a single-employer public em-
ployee retirement system, for full-time uniformed employees of the Department.
lew York City’s pension systems provide benefits to retired employees based on
salary and length of service. Subject to certain conditions, members become fully
vested as to benefits upon the completion of 10 or 15 years of service. Under the
New York State Constitution, New York City guarantees the payments of benefits
to members of the retirement systems. For the city’s five major retirement systems,
table 1 shows the pension benefit obligation, the net assets available for benefits,
and the overfunded (unfunded) pension benefit obligation as reported in the city’s
Comprehensive Annual Financial Report for fiscal year ending June 30, 1994,



81

It, the Board is authorized to take any action as directed pursuant to Title 6—
A of Article 2 of the New York Local Finance Law and to direct the city to take
any action the city is therein authorized to take.

Board reviews quarterly financial statements submitted by the city (compar-
ing actual with previously projected revenues, expenditures and workload) and
meets with the city’s budget team in anticipation of actions to be taken by the State
legislature. For example, the City of Yonkers may request exceptions to specific cri
teria on terms of bonds issued, tax limits, local schoo! aid, and city budget expendi-
tures mandated by New York State law.

6. ACTIONS TAKEN

An emergency control board fund was created for the City of Yonkers to receive
all revenues collected by or accruing to the city or “coy organizations.” While
the disbursement from the fund was to be made in accordance with the approved
financial plan, the Board was authorized to and did delegate authority to the City
of Yonkers to make disbursements from the fund through most of the period since
1984. However, during the crisis in 1988 surrounding city council’s defiance of
a housing desegregation order, when fines were mounting, Control Board did
take over writ the city’s checks and, in late summer, ordered the city to fire all

emplo:
Ys '5 New York State legislation establishing the Yonkers control board au-
thorized a 1 percent increase in the city’s sales tax.

‘The Financial Emergency ‘Act froze all city government salary and wage levels as
of November 20, 1975. All salary or wage increases were suspended for one year,
later extended through FY 1977. The Board has ordered a wage freeze each year
that the budget was not in balance. (Wage freezes, however, simply defer payment
of the promised wage increase; they do not eliminate the obligation to pay it eventu-
ally.) Through its authority to review city contracts, the Board has disapproved
some collective bargaining agreements in recent years, and not permitted any wage
increase whatsoever. (That action provides some permanent saving.)

In 1976 State legislation liberalized Yonkers's ability to issue tax anticipation
notes.‘

In the 1984 Financial Emergency Act, the legislature announced its intention to
provide significant State assistance in cooperation and conjunction with significant
local actions. Yonkers was given a State appropriation and the State Insurance
Fund was authorized to assist the city in bonding out certain long-term obligations;
the Insurance Fund loaned the city $10 million.

Yonkers was also given new revenue-raising authority. Separate legislation au-
thorized Yonkers to impose an income tax surcharge at a rate of up to 19.26 per-
cent.°° However, since it began, effective January 1, 1985 (applicable to tax years
beginning after 1983), the city income tax surcharge on Yonkers residents has been
imposed at a rate of 15 percent of their net State income tax, below the maximum

ited. Nonresidents pay a tax of 0.5 percent on wages and net earnings from
self-employment within the City of Yonkers. The income tax is administered by the
State commissioner of taxation and finance and is subject to withholding. In Sep-
tember 1994, the surcharge, scheduled to expire on mber 31, 1994, was ex-
tended for another year.

New York State ion Laws of both 1993 and 1994 extended the authorization
for Yonkers to issue “negotiated sale” bonds and notes for another year.9” However,
the Financial Control Board directed the city to put up the bonds for “competitive
bid” during 1994. (Experience has indicated negotiated sales to be more advan-
tageous for financially troubled cities because private placement Brovides a more fo-
cased ‘opportunity to educate potential lenders about the city’s ability to repay the

x
£

“Conversation with Jamon Marrin, Acting Executive Director and General Counsel, New
York State Emergency Financial Control Board for the City of Yonkers, 22, 1994,

The layoffs were averted in early September 1988 when the council agreed to follow Judge
Sand’ order to approve the financial incentives required to begin development of the housing
remedy. Pizzurro, Frank. Judge Breaks 10-Year Deadlock on Controversial Housing Case. Em-
pire State Report, noe p. 38.

% ACIR, Bankruptcies, Defaults, p. 34.

& Effective Mar. 18, 1976, pursuant to L. 1976, c. 59, sec. 4; sec. 24 Local Finance Law.

98 1984 N.Y. LAWS 345.

°7 1994 Session Laws of New York, Ch. 414, City of Yonkere—Sale of Bonds and Notes (S.
8526) an amendment to section 54.40 of the local finance law.
%* Craig, Susan. To Bid or Not to Bid? Empire State Report, March 1989, p. 38).


28

cial health, the short-term problems, plus giving them a breather
so that they could start addressing those structural issues.
Mr. FLANAGAN. I want to thank you for coming here today. It has

been very enlightening.
I than! uu, Mr. Chairman and Ms. Norton, for calling this, and
I yield back.

Mr. Davis. Thank you.

Let me say, that was great, how you sidestepped that question.
I thought that was excellent.

Mr. FINCH. I learned to dance at an early age.

Mr. Davis. I had asked the same thing privately, and he didn’t
want to touch it.

You lay out the facts and leave the decisions to us, as we try to
work out a consensus bill.

If I could just follow up on one of Mr. Flan: ’s comments in
terms of looking over the long term instead of the short-term cash
infusion to solve the problems. In each of these jurisdictions, obvi-
ously, there were some short-term cash needs that had to be met.
Was this money put in escrow, and was it put out as a loan, or was
it a direct grant or appropriation? Or did it differ from jurisdiction
to jurisdiction?

ir. FINCH. I think it differed from jurisdiction to jurisdiction.

Fran, can you speak to some of the specifics?

Ms. CLARK. Sure.

In New York, Philadelphia, and Chicago, there was separate
bond issuing authority that came along with the establishment of
the board, and those bonds that were issued for the city, as Johnny
mentioned before, did come with dedicated revenue streams, and
there were escrow accounts set up as part of that bonding process.

In New York, there was also a direct loan from the State govern-
ment for a period of time. In New York, there was some Federal
support as well.

In Cleveland, there was no separate bonding issuing organization
that was established. Rather, they borrowed from city banks and
from the State. The State actually bought some of the city’s bonds
until they were ready to get it back into the national credit market.

So you saw a range of solutions, and in many cases they were
combinations of both new bond issuances, loans, the ability to raise
new taxes, and the cities mixed and matched to meet their particu-
lar needs.

Mr. Davis. OK. But no direct infusion of money without substan-
tial strings and hope of some payback?

Ms. CxarK. The closest to that was a loan that New York State
gave the city of New York for about $800 million.

Mr. Davis. And did the city have to pay it back?

Ms. CiarK. They were supposed to. I don’t know if they have yet
or not.

Mr. Davis. At least in terms of the structure, that gives us a clue
in terms of what the precedent was.

Ms. CLARK. This was not a grant.

Mr. Davis. I would like to follow up on one of Mr. LaTourette’s
comments, when he talked about the issue being local
decisionmakers, local elected officials, having the courage to make


45

the additional revenue that the District can bring in on its own,
and so forth, and I don’t know those numbers. I would have to
know those numbers to give you an answer on that.

Ms. Norton. Finally, I have one last question. You testified that
in each of the cities you investigated there was strong city leader-
ship. Does it take strong empowered city leadership in order for an
oversight board process to work?

Mr. FIncu. Yes, I think it does.

Ms. Norton. Thank you very much.

Mr. Davis. Thank you very much.

I again want to thank the GAO witnesses who appeared before
us today for their hard work and diligence. There is a lot more to
do on this project, and I know they will not be slacking in their ef-
forts. At the same time, I want them to know that they have al-
ready—what they have already done has been very invaluable to
this subcommittee, and we thank you and appreciate very much
the professional job you have done.

we have heard that the District of Columbia has followed
in the footsteps of other great American cities by overextending its
resources, in trying to do too much for too many. This generosity,
combined with outdated structures and systems and an oversized
work force, has finally caught up to the District. Today the District
of Columbia finds itself in a fiscal situation that it appears unable
to deal with effectively.

We will move quickly but calmly to consider what Congress can
do that would be of the most benefit to the District of Columbia
government in its efforts to solve its problems. Congress must be
willing to act on both the short-term and long-term basis. I know
we are prepared to do both. I know many others are as well. Noth-
ing that we do will be done in a vacuum. There will need to be a
continuum of activity both in Congress and by the city to success-
fully meet the challenges before us.

As we end today, I want to announce that this subcommittee will
hold another hearing next Wednesday, March 8, in this same room.
The subject will be the experience of working on financial oversight
boards and governing while one is actively in place. We do not have
a final witness list yet, but we do have at least tentative commit-
ments from Governor Hugh Carey of New York who engineered
New York City’s mechanism; Dr. Carl McCole who is the State
comptroller of New York; Ned Regan who is a former State comp-
troller; Mayor Rudolph Giuliani of New York; Mr. David Cohen, the
chief of staff to Mayor Rendell of Philadelphia; and Mr. Bernard
Anderson, the first chairman of the Philadelphia board. We are at-
tempting to obtain other representatives from the affected cities
from the board’s perspective, the local government’s perspective,
and the local citizens and business perspective. We will release a
witness list as soon as it becomes final.

Thank you all very much. The hearing is adjourned.

(Whereupon, at 12:42 p.m., the subcommittee was adjourned.]

[Additional material submitted for the record follows:]


27

particularly in the context of cost sharing ventures that you dis-
cussed i icago where the city will come in and spend a few hun-
dred million to rejuvenate literally billions in a neighborhood co-
operation with industry and local councils and people who have
lived there all their lives and grandparents live there? Is that
something that has diminished efficacy here, or is that some-
'g—

Mr. FINCH. Well, I think it is a special—I think it is a special
issue for the District of Columbia, particularly as compared to Chi-
cago or Cleveland for that matter, and Cleveland—Cleveland has
been able to do something in the economic area and has been able
to stabilize their declining population, but a lot of it is because of
the factors, the same kinds of factors that you just mentioned in
terms of Chicago. I think the structural problem is particularly dif-
ficult for the District of Columbia.

Mr. FLANAGAN. I agree, and the difficulty that I continue to have
with the discussion we make here is that we are all extremely well
intentioned and we want to do the best we can here, but I do not
believe that we have arrived at what the problem is yet, apart from
a short-term need for a huge pile of cash, and I think we have to
have a longer sight look at curing the problems of this great city
and the regional area, and I firmly believe that the only way we
are going to do that is with deep cooperation of private interest,
whether it be community, industrial, or whatever else it may be.

I find the number of high quality people here who are jobless
merely because they cannot—an employer will not come here or
has left here still is appalling, and I think that is something that
the Congress must address directly.

Mr. FINcH. OK, and I would agree with you completely that
there is both a short-term and a long-term problem and the short-
term problem is the cash needs and the cash-flow and trying to get
the financial health restored which will—which will help provide a
foundation for really getting at some of those structural issues, but
the structural problems are going to take a lot longer to fix, I
think, than is the financial health issue.

Mr. FLANAGAN. I agree, but I continue to be concerned as to
whether a near-term solution will exacerbate the long-term prob-
lem, and we must construct an immediate solution to this problem
right now that is not going to make curing a long-term ill impos-
sible, and so my last question and probably the one most directly
affecting to you, a board that could be set up—we have yet to hear
a recommended structure for it, for the District of Columbia—if you
could just take a swag at it and what you think it ought to look
at!

Mr. Fincu. I am going to back away from that one, sir. In fact,
Tm going to back away from that one very quickly. The work that
we did was really to go out and look at the other existing boards
in terms of the composition of this board and all of that. We can
share the information that we got.

But I am not sure that GAO is in a position now to recommend
a structure for the board or membership or any of those kinds of
issues. I think we are in a position to say that, given what we have
seen in the other cities, that boards did make a positive contribu-
tion to those cities both in terms of helping them with their finan-


64

tiate any departure from the approved level. The Commission may bring civil ac-
tiong, including mandamus, to enforce the provisions of the Loca) Fiscal Emer-
gencies Act. (118.07)

Annually during the fiscal emergency period the Commission is to make reporta
and recommendations to the 3; er of the (State) House of Representatives and
the president of the (State) Senate concerning progress of the community to elimi-
nate fiscal emergency conditions, failure of the municipality to comply with the
Local Fiscal Emergencies law, and recommendations for further actions to attain the
objectives of the law or to enhance revenue raising or financing capabilities of mu-
nicipalities. (118.07(E))

the municipality fails to submit a financia} plan by the deadline (within 120
days after the first seeting of the Commission, 118.06), expenditures from the gen-
eral fund of the municipality cannot exceed 85 percent of general fund expenditures
for such month in the ding fiscal year unless authorized by the Commission
based on justification of need by the municipality. No expenditures may be made
by the municipality that are contrary to the approved financial plan. (118.12)

revenue estimates are not to include revenues conditioned upon future favor-
able action by the electorate of the municipality or by the (State) General Assembly
or the (national) Congress, other than appropriations of moneys for existing and
continuing programe at current levels. The estimate of revenues for any month must
separately state and designate as “conditional” those revenues which are condi-
tioned upon the future issuance of debt obligations, transfers of funds, advances
from funds, payments or reimbursements from the sale of debt obligations, sale of
capital assets of the municipality, increases in utility rates and other charges, or
imposition or increase in taxes, and must be accompanied by documentation show-
ing that the council or official with authority to act has acted in time for realization
of such revenues in the month or months indicated. (118.13)

For bond anticipation notes issued during a fiscal emergency period, the Commis-
sion may approve a later maturity date than otherwise provided by law, a date the
Commiasion estimates to be not more than one year following the termination of the
fiscal e: nncy period. (118.16)

The Local Fiscal Emergencies Act lays out the conditions for a municipality to
issue “local government fund notes.” The principal and interest on these notes would
be payable solely from the portion of State aid to local governments that would oth-
erwise be apportioned to the municipality in question, for a period of no more than
eight calendar years. The notes would specifically not be payable from or require
the levy of any unvoted ad valorem property taxes or other taxes, and would not

‘any portion of the municipality's indirect debt limit. The notes could only be
used for a restricted set of purposes, basically to satisfy debts incurred in the
and not to finance future deficits. The local government fund distributions pledged
to the repayment of these notes would be deposited with a fiscal agent or trustee,
The amount so deposited would not be counted in the municipality's tax budget and
a ppropriation measures or its certificates of estimated revenues for that year.

The Act provides measures to make future debt obligations to be issued by the
municipality, with Commission approval, appear more secure to investors. In par-
ticular, the law provides the ability to pledge particular revenues, to designate a fis-
cal agent (who may be the purchaser of such debt obligations) and to deposit the
pledged receipts in separate account established with fiecal agent, who then is
responsible for disbursing the payments when due. (118.20) The law also provides
for the rights and remedies of holders of the municipality's debt obligations. (118.21)

The Local Emergencies Act makes special provisions for short-term borrowing by
a municipality during a fiscal emergency period. This includes current revenues
notes (a form of tax anticipation note), advance tax payment notes (whereby tax-
payers who pay in advance of a due date receive a certificate with interest), and
provisions for the State treasury to invest in the current revenue notes of the mu-
nicipality. (118.23, 118.24, and 118.25)

Officers and employees of the municipality must forfeit their office or employment
if convicted of knowingly violating certain requirements that they adhere to the fi-
nancial conduct required under the law. (118.29)

6. ACTIONS TAKEN

The Cleveland commission exercised mainly oversight functions. While the com-
miasion may not be identified with specific rescue actions, its presence purportedly
gave the mayor additional bargaining power that helped the city accomplis

anges on its own.



4

The District of Columbia's financial crisis is special; but, unfortunately, it is not
unique. The District is special because of the deep and abiding affection that all
American's have for our capital city It is, special because of its relationship to the
Federal government. Because the District lacks the normal state or regional govern-
ment to assist it with ita affairs, Congress does some of the things a state legisla-
ture would do. It is Congress's responsibility to fill this role. Before taking legisla-
tive action, it is incumbent upon us to consider what has been tried elsewhere,
which mechaniams have been most successful, and how these remedies may best be
adapted to the District of Columbia’s special situation. It is important that this be
done in public 80 that the people who will be most affected by the decisions we
make-those who reside and work in the Districtor visit it—have an opportinity
to participate in the deliberations surrounding the creation of a financial contro
board. None of the approaches that will be outlined today will succeed without the
cooperation and support of the public that has entrusted this body with the right
to act in the name of all the people of the United States.

The financial condition into which so much of urban America has fallen in the
last third of the twentieth century is rooted in a common cause and can be remedied
by similar solutions. The cause is best summarized in two titles, one of a book the
other of a newspaper column I encountered not long age. In 1980, Charles R. Morrig
called his detailed study of the New York fiscal crisis of the 1970's The Cost of Good
Intentions: New York City and the Liberal Experiment, 1960-1975. Just last month,
Pulitzer Prize winning jouraalist William Raspberry described Washington, DC as
the “City that Couldn't Say No.” In the column under that heading, he likened the
City’s spending practices less to those of a drunken sailor than to # poor- but com-
passionate mother with a credit card.

Both accounts described how various city administrations, acting out of concern
for the most disadvantaged of their constituents, enacted some of the most generous
social welfare and spending practices in the nation. As these programs attracted
poorer residents from other places, they drove away both jobs and middle clase resi-

ents, who felt themselves besioged by climbing tax rates. The cities accelerated this
rocess by raising taxes on well to do and other residents that remained and em-
arked on newer and newer schemes to increase revenues from newer and uncon-
ventional sources. However they tried and however successful they were, their
spending always managed to exceed whatever revenues they took in. Social sci-
enti and accountants who study this phenomenon refer to it as a city’s “structural
ficit.”

“Structural deficits” drove the cities to follow unsound financial practices. They
tended to finance their current spending by borrowing heavily. Deficits climbed and
expenditures continued to rise. The cities in question began. to cover their short
term borrowing with supposed “one shot” budget gimmicks designed to get them
through one year at a time. A favored practice in several places was to classify oper-
ating expenses as capital expenses and fund them with long-term borrowing.

Short term debt was rolled over and interest payments became a significant por-
tion of the operating expenses of the city. As the capital borrowing grew, short term
debt was further piled on to finance legitimate capital expenses so as to avoid
upfront cash expenditures required for long term borrowing. Situations like this con-
tinued until the state imposed debt ceiling waa reached or approached and creditors
began to dump city notes. Bond ratings were lowered and cities ran out of cash to
pay both its bills and the interest it owed on its debt. Each time, action by the re-
spective state government—and in the case of New York, the federal government
as well, was required to avert the dreaded “D word: “D-E-F-A-U-L-T.” More often
that not, the practice through which the states chose to head off disaster and begin
the necessary financial restructuring was through a control board,

In the time since Delegate Norton proposed an oversight board for the District of
Columbia, there has been much speculation in the pres and elsewhere as to what
such boards do and whether and to what degree they encroach upon the powers of
home rule. I am not interested in eliminating home rule. A financial control board
ie not an undercover attack on home rule. In fact, the greatest threat to home rule
comes from the City’s financial crisis. By successfully resolving this crisis, home rule
will be enhanced. The only real threat to home rule would be a failure by the home
rule government to act decisively to deal with this crisis, As we shall discover today,
they have varied greatly in scape, size, and power.

y did however share two common characteristics wherever they were at-
tempted. First, the solutions they offered were long rather than short term in na-
ture, They recognized that the city’s problems were not of one day’s or one year’s
or even of one administration's making. Usually, they embarked on a strategy that
first replaced short term debt with longer term bonds so the city could catch its
breadth. Then they embarked on a course of serious restructuring of the city’s finan-



18

(The information referred to follows:}

Co: must be careful in establishing a board to ensure that the composition
of the board, including the appointment and removal of members, when, viewed in
relation to the powers conferred on the board, is consistent with the principle of sep.
aration of powers e1 ied in the Constitution. A number of cases over the last
years have prohibited the Congress from participating on boards or commissions ex-
ercising significant executive, quasi-legislative or quasi-judicial functions. The prohi-
bition preclude members of congress or its agents from sitting on the boards or se-
lecting those who may sit on the boards. Simply stated, the cases stand for the prop-
osition that Congress or its agents may not exercise executive powers and Congress
may only exercise legislative powers in conformity with the Constitutional require-
ment of bicameralism and presentment to the president for approval or veto.

For example, in Metropolitan Washington Airports Authority v. Citizens for the
Abatement of Aircraft Noise, 501 U.S. 252 (1991), the Supreme Court held unconsti-
tutional a statute that required that the board of directors of the Metropolitan
Washington Airport Authority (MWAA Board) appoint a board of review composed
of members of se possessing a number of powers, including veto power over
the decisions of the [AA Board. Court held that if the review board’s powers
were viewed as executive in nature, the Constitution does not permit an agent of
Congress to exercise it. On the other hand if the review board’s powers were viewed
as legislative in nature, Congress was required to exercise it in conformity with
bicarmeralism and presentment, that is to act through legislation presented to the
President for approval or veto as set forth in INS v. Chadha, 462 U.S. 919, 959

Thereafter, Congress amended the law to permit noncongressional membership on
the review board and eliminate the review board's veto power over MWAA Board.
However, it_also required that review board members be selected from liats submit-
ted by the Speaker of the House and the Senate pro tempore and set qualifications
that few but members of congress could satisfy. It also expanded the the review
board's power to include contracts, authorized members to participate as nonvoting
members in meetings of the board of directors, and authorized the review board to
make recommendations regarding matters reviewed that if the board of Directors
failed to comply with, had to be presented to Congress for review. The Court of Ap-
peals for the District of Columbia Circuit struck these amendments down as a viola-
tion of the principle of separation of powers. Hechinger v. Metropolitan Washington
Airport hority, 36 F. 3d a7 (1), cert. den. court hel a that the review

was clearly an agent of Congress exercising significant federal powers that
failed for the same reasons as set forth in the Supreme Court's opinion.
ther in Buckley v. Valeo, 424 U.S. 1, 137-140 (1976), the Court ruled that the
Federal Election Commission, comprised of two members selected by the President,
two by the Senate and two by the House, with confirmation of all six members vest-
ed in both the House and the Senate violated the Appointment clause and the prin-
ciples of separation of powers with regard to exercising powers to flesh aut the stat-
ute ie, rule making and advisory opinions, and functions to ensure compliance
with the statute and rules, i.e, informal procedures, administrative determinations
and hearings, and civil suits.

Mr. Davis. All right. I just have one other question within my
allotted time. This goes to the borrowing authority of the city and
its bond rating which right now, as you know, has been down-
graded to a junk bond status. Have you looked at the District being
able to continue to issue bonds with a government ranty—or
would a control board be better, at this point given the precedent
in these other jurisdictions?

Mr. Fincu. I will defer that to my accounting expert.

Mr. Davis. OK. Mr. Hill.

Mr. HILL. We haven't looked at that issue, specifically whether
or not the District could continue to do borrowing with a guaranty,
but certainly from some of our discussions with people who were
in the market, they would definitely consider that guaranty in de-
ciding whether or not to provide money to the District. We could
specifically look at that and give you an answer.

Mr. Davis. That would be helpful. I think they currently have a
guaranty, don’t they, basically for the bonds they send out to some



82

The Contro] Board has rejected city labor contracts several times; in 1992, this
Jed to a riotous union demonstration at City Hall. In 1993 the Board disapproved
plans for a new city library because of it cost. In 1994 the city council
sued the Control Board for limiting the city’s application of surplus funds from one
year to close the following fiscal year’s budget re

Both the original 1975 and the sul ent 1984 legialation provided that the city
had the power to determine the specific pu1 of its own expenditures, withi
the agerogate limit on expenditures permit under the financial plan approved by
the Control Board. In recent years, ever, the Yonkers Financial Control Board
has been characterized as micromanaging the city’s finances, interfe with the
elected officials’ priorities.’ City officals would Prefer the | Control to get ag-
gregate parameters for revenues and expenditures rather than directing specific pro-
gram cuts or additions. City officials feel that having the Control Board pay atten.

to such detail may not be as necessary now that the city has a “strong mayor”
(see discussion of “exacerbat circumstances” in section 7).

Tn addition to the ers of the Control Board, Yonkers’s finances are subject to
other State controls. For example, under State rules, the city may not send out its
real property tax bills until its budget has been certified by the State comptroller,
acting as the city’s fiscal agent. (The property tax rate is calculated to make up the
revenue difference between projected expenditures and all other anticipated sources
of revenue.) The city’s projected revenues beyond fiscal year 1995 depend upon the
State legislature approving an extension of the personal income tax surcharge and
the mo recording tax.

7, EFFECTIVENESS OF BOARD

The Advisory Commission on Inte: mmental Relations (ACIR) concluded that
during the 1975-78 emergency period, the Yonkers Control Board had less direct
contra over the city’s revenues and contracts than the New York City Board and
thus had trouble enforcing compliance with any financial plans. Nonetheless, the
city succeeded in meeti: required conditions of a balanced budget and the Con-
trol Board was disbanded at the end of 1978,

ACIR also conchided that the State comptroller, as fiscal agent, did not exercise
political or institutional power comparable to the New York City Control Board, and
was unable to impose sufficiently strict financial budget discipline on Yonkers to
solve the city’s financial problems during the 1979-84 period,101

In May 1984 the city was found to be in sufficient financial distress that a State
Emer Financial Control Board was reimposed. Eleven years later, in 1995, the
Be remains in existence.

EXACERBATING CIRCUMSTANCES

Since 1986, Yonkers has been under a Federal court housing desegregation order
that required it to build subsidized housing in predominantly white neighborhoods.
In the summer of 1988, Yonkers wae pushed to the edge of bankruptcy when city
officials defied the judge’s order and the city was subject to steep contempt-of-court
fines that reached over $800,000. The city spent an estimated $7 million to $23 mil-
Hion in legal fees defending itself against discrimination charges.1°2 The mayor dur-
ing 1990 and 1991, Henry J. S) , focused on fighting the public housing re-
quirement and failed to deal with other issues, including the city’s troubled finances
and economic development needs. In 1991 his administration submitted to the
Emergency Financial Control Board a four-year financial plan with a $110 million
revenue shortfall 1°

In 1990, Yonkers voters approved a change to a “strong-mayor” form of govern-
ment, effective in 1992. Prior to 1992, the position of mayor of Yonkers was pri-
marily titular. The mayor was a member of the legislative branch, elected city-wide
as a seventh city council member. Real power over day-to-day operations was held
by a hired city manager. Under the new law, the mayor's term was increased from
two to four years and the mayor was given enhanced power over the budget and
political appointments, previously vested in the city manager. The mayor was also

® Dentzer, Bill. City Awaiting New Faces on State's Control Board. The Herald Statesman.
Degember 1, 1904, p. 1A-2A.

301 ACH ie, m4.
ws ACR, Be ror Prank, he “Serene Fiayor” in Yonkers. Also, Judge Breaks 10-Year Deadlock on
Controversial Housing Case. Empire Siate Report, August, 1991, p. 37-38.
. Yonkers Winner Benefits from Republican Split, New York Times, No-


55

to budget cuts from city employees or program divisions within the city bureaucracy,
the officials nay, find the presence of a financial control board helpful in providing
them needed additional bargaining power. In such cases, micromanagement by the
control board might be regarded as helpful. Micromanagement may also be more fa-
vorably received by the city if the control board and the city are dominated by the
same political party. Under the New York State law, the Financial Control
was prohibited from setting expense priorities for the city; MAC, however, is known
to have put conditions on the city’s use of surplus debt service funds.®

Finally, the finances of a city are influenced by the business cycle and shifting
voter attitudes toward taxation and spending. These in turn influence the ability of
the city to raise its own revenues and to receive assistance from higher levels of
government, particularly the State. A State is more likely to offer assistance to its
cities when the State itself is in better financial shape.

8. ENABLING LEGISLATION

This is a summary list of the major State statutes that created the financial con-
trol boards and defined their powers. There have also been numerous amendments
to these statutes in the ensuing years, but these are not listed.

CHICAGO SCHOOL DISTRICT

School Finance Authority Act, 105 ILL, COMP. STAT. ANN. 5/344-5/34B-15
(Michie 1993 & Lexis Supp.) or P.A. 81-1221. Enacted Janu: 16, 1980.
Chicago School Reform Act (P.A. 85-1418), adopted by the Illinois General Assem-
on December 2, 1988.
"A. 88-618, An act relating to education. Approved September 9, 1994; enacted
January 1, 1996.

CLEVELAND

Local Fiscal Emergencies, OHIO REV. CODE ANN. §118.01 et seq. (Page 1990).
Enacted November 29, 1979.

NEW YORK CITY

Financial Control Board

New York State Financial Emergency Act for the City of New York (1976). N.Y.
UNCONSOL. LAWS (VOL. 65) §§5401-20 (McKinney 1979 & Supp. 1994) or 1975
N.Y. LAWS 868-869. Enacted September 9, 1975.
Municipal Assistance Corporation

New York State Municipal Assistance Corporation Act, N.Y. PUB. AUTH. LAW
(VOL. 42) §3001 et seq. (McKinney 1981 & Supp. 1994) or 1975 N.Y.LAWS 168. En-
acted June 10, 1975.

PHILADELPHIA

Pennsylvania Intergovernmental Cooperation Authority Act for Cities of the First
Class. Commonly known as “The PICA Act”, 53 PA. CONS. STAT. ANN. § 12720
(Purdon 1991). Enacted June 5, 1991.

Intergovernmental Cooperation Agreement by and between Pennsylvania Inter-
governmental Cooperation Authority and The City of Philadelphia. Dated as of Jan-
uary 8, 1992.

YONKERS

New York State Financial Emergency Act for the City of Yonkers, N.Y.
UNCONSOL. LAWS ch. 23 §$1-13 (Consol. 1983) or 1975 N.Y. LAWS 871, as
amended, Enacted November 14, 1975.

The Special Local Finance and Budget Act of the City of Yonkers, also known as
the ‘special fiscal act” or “fisal agent act,” 1976 N.Y. LAWS 486-489. Enacted June

New York State Financial Emergency Act of 1984 for the City of Yonkers, N.Y.
UNCONSOL. LAWS $$1-14 (Consol. Supp. 1990) or 1984 N.Y. LAWS 103,
emended. Enacted May 2, 1984.

See references in Appendix C.


79

In the 1975 law the “emergency period” was defined as the period of time from
the effective date of the act until the date when the Board determines that the oper-

ating and capital funds of the city have been in balance for one fiscal year in aocord-
ance with the accounting methods prescribed in the general municipal law. The
Board was to terminate six months after the end of the emergency period.

The 1976 legislation had planned that the city’s operating and capital funds would
be balanced for FY1977. Legislation in 1977 extended the period for submitting a
balanced operating and capital budget for an additional fiscal year, through June
90, 1978. The original Control Board remained in existence until December 31,

78.

1984-PRESENT

From 1979 to 1984 (while under the watch of the State comptroller as fiscal
agent) Yonkers was again having financial difficulty and needed State loans in order
to balance its budget. At the request of city officials and in conjunction with a State
financial bailout of the city, the State legislature reimposed a State emergency f fi
nancial control board as ofh ‘May 2, 1984.9! In the 1984 law, the “emergency period’
was defined as the of time from the effective date of the act until the date
when the board determines that (a) the operating and capital funds of the city have
been in balance for three fiscal years; (b) the amount of all loans made by the State
to the city to fund the operating deficits incurred by the city in FY84 or later have
been repaid in full; and (c) the city has presented a four-year financial plan that
projects operating and capital funds in balance. The Board again was to terminate
six months after the end of the emergency period.

‘The city of Yonkers recently achieved three years of balanced budgets: fiscal years
1992-94. However, its four-year prospective financial plan does not yet have a rea-
sonable expectation of being in balance. Consequently, the Control Board remains
in existence as of February 1995.

3. BOARD COMPOSITION AND APPOINTMENT AUTHORITY

The composition of the New York State Emergency Financial Control Board for
the City of Yonkers is currently as follows: three members ax-officio: State
com lier, the secretary of state, and the mayor; and four members appointed by
vernor with the advice and consent of State Senate. The four aj pointed
members serve at the pleasure of the Governor. The secretary of state a ap-
pointed by the Governor) serves as chairman. Both the secretary of state and comp-
troller ame etignate representatives to act in their place, but the members ap-
pointed by the Governor nor may not. These seven constitute the voting number, the
ms jority of which prevails.
During the 1975-78 period, the State comptroller served as the chairman of the
1984-85, the Lieutenant Governor held the slot subsequently filled
ber the Daring of state. Before 1991, the city manager was a fourth ex-officio mem-
ber of the Control Board and there were three, instead of four, appointed members.)
In addition to the voting members, six non-voting members intended to represent
the public (known as the “public representatives”) may be appointed by the follow-
ing New York State and county officials: the temporary president of the Senate, the
speoker of the House, the minority leaders of the House and Senate, the county ex-
ecutive of Westchester County, and a person designated by the Control Board to
sent Yonkers city employees.
members receive no salary or per diem allowance, but are entitled to reim-
bursement for actual and necessary expenses. The Board may delegate powers and
duties to one or more of its officers, employees, or agents.

4. STAFFING

During the initial 1975-78 period, the Yonkers Board relied heavily upon the staff
of the State comptroller’s office.

The Board is authorized to hire up to ten staff members, but has not had more
than six. Currently, those six positions include executive director, general counsel,
deputy executive di (who also serves as a financial analyst), financial analyst,
and two clerical secretaries.

SNew. York State Financial Emergency Act of 1964 for the City of Yonkers, N.Y.
UNCONSOL. LAWS $4 1-14 (Consol. Supp. 1990) or 1984 N.Y. LAWS.


62

hold out to pay city workers. The city wanted the authority to borrow long-term in
order to fund the cumulated deficits, thus avoiding the disruptive cutbacks that
would occur if it did not get credit within a short period of time. However, the hold-
ers of the city debt were not receptive to market reentry without additional evidence

of restraint by the city vernmental structure.
Gn December 15, 1978, the city defaulted on $15.5 million in short-term notes.
was the first default of a major city in the United States since Detroit de-
faulted in 1933.) This debt was owed to special funds of the city treasury and to
six local banks, which could have given the city more time to meet its obligations,
Neither the Governor nor legislature took action at the State level for another year.
Before the default, the mayor had proposed the appointment of a fiscal overscer
with strong powers over the city’s fiscal activities, as part of a larger financial pack-
age. The clty did nat have a strong exerstiveaysiom. Before the eriais the postions
of mayor and city councilmembers had only a two-year term. As part of the Te-

form, they were all changed to four-year terzas.

2, DURATION OF CONTROL BOARD

Prior to 1979, Ohio law for chartered cities prohibited the State from intervening
in local affairs without a formal invitation, Under another Ohio law, however, the
State can intervene if a municipality's action affects other communities. A new Ohio
statute governing all municipal corporations in the State became effective November

29, 1979.3

‘On January 4, 1980, under the terms of the State's new Local Fiscal Emergencies
law, the auditor of the State of Ohio announced that a financial emergency existed
in Cleveland and a Financial Planning and Supervision Commission was created for
Cleveland. Thirteen months later, by February 5, 1981, the city was declared out
of default. The Commission, however, remained in place until 1

Under provisions of the Local Fiscal Emergencies law, the Financial Planning and
Supervision Commission is to remain in existence until the municipality has met
the following three conditions:

“Q) Planned, and is in the process of good faith implementation of, an effec-
tive financial accounting and reporting system (in according with sec. 118.10 of
the Revised Code), and it is reasonable expected that such implementation will
be completed within two years;” (the progress of this implementation is to be
subsequently supervised by the State auditor);

“(2) Corrected and eliminated all of the fiscal emergency conditions deter-
mined pursuant to section 118.04 of the Revised Code, and no new fiscal emer-
sency condition has occurred.”

“(8) Met the objectives of the financial plan described in section 118.06 of the
Revised Code.”

(section 118.27 of the Revised Ohio Code)

The determination that these conditions have been met may be made either by
the State auditor or by the Commission. The Commission must prepare a final re-
port of its activities. All of the books and records of the Commission are to be deliv-
ered to the State auditor for retention and safekeeping. (118.27)

3. BOARD COMPOSITION AND APPOINTMENT AUTHORITY

A State-sponsored “Financial Planning and Supervision Commission” was created
for Cleveland, in accordance with the Local Fiscal Emergencies law. (A separate
commission is to be appointed for each Ohio city determined to have a fiscal emer-
gency.) There are four ex-officio members: the State treasurer, the director of budget
and management, the mayor, and the presiding officer of the legislative authority
(city council) or certain permitted designees. Three members are appointed by the
Governor from a list of five submitted by the mayor and the presiding officer of the
legislative authority. The appointed members must be approved ‘by the State Sen-
ate. The term of the appointed member is for the life of the commission, unleas the
person is removed by Governor “. . . for misfeasance, nonfeasance, or malfea-
sance in office.”

If the Governor does not find the five persons submitted by the mayor and city
council chairman to be qualified, he may request up to three more nominees. If the

Governor does not find among all the submitted nominees to be well qualified,
25 U.S, Library of Congress. C ional Research Service. Cleveland’s Financial E :
Description and Anal the ‘Term and Long Term Causes. CRS report no. 79-60 B,

lysis of
by Stacey M. Kean, Feb. 12, 1979, Washington, 1979.
Local Fiscal Emergencies,” OHIO REV. CODE ANN. Ch. 118 et seq. (Page 1990). Section
numbers cited subsequently reler to this statate within the Ohio Revised Gode.


35

ple of things. One is the powers that the local jurisdictions have:
Hospitals, Medicaid, prison system, and court system in some of
these cases. It could be a structural deficit, but also could it be the
taxes are just out of syne with the economic region, taxes are too
high, the high crime rate, schools that make it noncompetitive, and
you get into a cycle where you are getting a fleeing of the revenue

‘om the area? When you talk about a structural deficit, would you
include both of those?

Mr. Fincu. I would, both, the two parts, the functions that are
done and the declining revenue base resulting from the urban

light.

ir. Davis. That's fine. I think that squares with my understand-
ing of it, but I just wanted to understand your perspective, and I
think I will at this point call on Ms. Norton for any additional
questions that she might have.

Ms. Norton. Thank you, Mr. Chairman.

I am very interested in what you said happened to New York
City with a very rapid reduction, a huge reduction in employees,
that simply moved back again.

The District had a 50 percent, or almost 50 percent, increase in
the number of employees between 1962 and 1972 before home rule,
an increase obviously approved by, if not ordained by, the Congress
of the United States. It has about the same number of employees
it had at the time of home rule. In 1972 it had about 40,000 em-
ployees, and we are still piddling between 40, 42, and the rest of
it.

So essentially the District’s sin is in not reducing its employees
in keeping with the reduction in its population, and of course that
is something that cities perhaps don’t do as well. They get a great-
er concentration of poor people. But the fact is that the Base of tax-
payers is reduced and the number of employees have stayed about
the same.

Now in the case of New York City, the notion of in 3 years letting
off 60,000 employees is extraordinary 20 percent of the employees
is quite extraordinary. But your testimony, Mr. Finch, says that as
the conditions—as the economy of the city improved, they simply
grew back those employees, so there was no permanent downsizing,
and Mr. Giuliani is back to doing what his predecessor of the
1970's was doing. He is doing it, to Fear New Yorkers I know speak
about it, quite intelligently. Unlike the District of Columbia, he un-
derstood to go at buy-outs right away. Even tough unions in New
York compliment him for having early sense that the way to do
downsizing is to do buy-outs, and he is a Republican mayor who
hasn't had a lot of problems with his union.

But I’m interested in the fact that it grew back and wonder
whether permanent downsizing results from this process generally,
whether New York is an exception, and whether it was prudent for
New York to have its work force grow back, whether the control
board or the MAC board approved that I would just like your com-
ments on whether we are doing something that could just come
back to haunt us again.

Ms. CLarK. Yes, I'll take a stab at it.

I think in the other cities we visited we saw decreases in employ-
ment as well, maybe not quite as dramatic as the ones you saw in


xi)

All members of the Authority board should have had experience in finance or
management. All members of board should be residents of the Commonwealth
of Pennsylvania and, except for the secretary of the budget, should either be resi-
dents of the assisted City (Philadelphia) or have their primary places of business
or employment in the city.

4, STAFFING

The staffing is to be determined by the board, subject to a possible limit on oper-
expenses by the State General Assembly (secs, 206(b), 202 (g), 203(cX(14)

In 1994 the staff numbered six, including the executive director, deputy executive

director, senior analyst, analyst, and two administrative and support staff. There

are also outeide professional advisors: a legal counsel and independent auditors.”®

6. ENFORCEMENT AUTHORITY, MECHANISMS, AND PENALTIES

Among the specific powers of the Authority enumerated in the PICA Act are:

“(8) To exercise, while any bonds issued by the authority to assist the rity
remain outstanding, powers of review concerning the budgetary and fiscal af-
fairs of that City consistent with this act and the City’s home rule charter or
other optional plan of government.”

(21) To borrow money for the purpose of assisting a City, or in anticipation
of the receipt of income of the . . . assisted City; make and issue bonds of the
authority; secure the payment of such bonds or any part thereof, by pledge of
or security interest in all or any of its revenues, receipts, accounts, tangible per-
sont , and contract rights... . ;” and

(23) To enter into agreements with an assisted City that receives funds or
other financial assistance from the authority pursuant to which such City may
pledge assets, Tights, revenues and receipts, including tax revenues, to secure
the repayment of such funds or assistance by such City if such security is re-
quired by the authority.” (sec. 203(c)).

There must be an approved 5-year financial plan before the proceeds of the bond
ingue will be made avaliable to the eity (sec. 209).

ited revenues are to be paid into special accounts, and not to the city receiv-
ing assistance (sec. 314).

is a limit on the amount of tax and revenue anticipation notes that the city
may issue in any one fiscal year (sec. 402).

re is authorization for an optional local sales and use tax, including an excise

tax on hotel rents, of 0.5% or 1.0%, to be paid over to the Commonwealth of Penn-
sylvania (sec. 503).

There is authority to impose an Authority tax, to be collected by the Common-
wealth, to remain in effect until all the outstanding bonds are paid off (secs. 601—
Other provisions are detailed in the “Intergovernmental Cooperation Agreement

and between the Pennsylvania Intergovernmental Cooperation Authority and the

ity of Philadelphia,” dated January 8, 1992. The city is expected to submit a finan-
cial plan to the Authority, with projected revenues and expenditures for five fiscal
years (the current year and four subsequent years). This covers the initial plan as
well as the revised plan to be submitted at least one hundred days prior to the start
of each fiscal year, so long as any bonds of the Authority are outstanding. The finan-
ial plan includes the operating and capital budgets of the city plus other “covered

‘The mayor faces regular periodic reporting requirements. Within 45 days of the
end of each fiscal quarter (or monthly, within 30 days of the end of the previous
month, if a variance from the financial plan has been determined to have occurred),
the mayor must provide the Authority with a report describing actual or current es-
timates compared with budgeted revenues, expenditure and cash flows by covered
funds (excepting the grants revenue fund), for the previous quarterly or monthly pe-
riod and the year-to-date period of the fiscal year.

Atleast 60 days prior to the beginning of each fiscal quarter, the mayor. is to
vide the Authority a report certified by the city controller describing for the follow-

quarter the debt. service requirements on all bonds and notes of the city and
all lease payments of the city securing the bonds of other government agencies.

Philadelphia Intergovernmental Cooperation Authority. Staff Re; on the City of Philadel-
ia’ Phen Hieadcial Plan for Fieeal Year 1995-Fiscal Year 1909. Philadelphia, May 2,
. Frontapage.


36

New York, and they have stayed at the lower amounts. For exam-
ple. in Cleveland they have reduced about 1,500 people from the

eight of the crisis, and it has stayed about stable at 8,000 employ-
ees for a number of years.

I think in New York’s case it may be unique. The inflation of the
late seventies followed by prosperous economic times for the city in
the eighties I think allowed the city to mask its operational prob-
lems and some of its underlying structural problems.

Ms. Norton. But a control board was in place, you say, and the
MAC board has continued to be in place.

Ms. CLaRK. That is correct, but I think the boards themselves
are primarily focused on the financial aspect of the city and making
sure that the budgets balance. It then Becomes the city’s respon-
sibility to decide how it is going to balance those budgets.

Ms. Norton. I want to stop you, Ms. Clark, because this is very
important. What happened in the 1980’s was exactly the same
thing here in the District of Columbia. The tax base was fleeing,
and all of these underlying structural problems were there, but.
downtown was being rebuilt, and the economy was better. So the
District really did have a balanced budget. So if all you look at is
whether or not you can pay for the government you have at the
moment, then this could come back to the District of Columbia,
gen if we do something about it, the way it has come back to New

ork.

Mr. Davis. Can I just interject?

Ms. Norton. Do you want me to yield?

Mr. Davis. If you would yield for just a moment.

But most of these control boards put 5-year plans in, did they
not, have longer-term plans at the same time?

Ms. CLARK. That is correct. At the time New York had a 3-year
plan it was extended to a 4-year plan.

Ms. Norton. But they have been there forever. Still the fact is
that they have had these plans. Did the plans extend into the
eighties, or were they just monitoring in the eighties?

is. CLARK. They added a year, dropped a year, every year.

Ms. Norton. They did what, I'm sorry?

Ms. CLARK. With the 5-year plans, every year they would add an-
other year and then drop the one they were just in, so they were
kind of continuing 5-year plans.

But I think the role of—it is in how you design the control board,
and if the primary focus or the sole focus is to balance the budget,
you may get different results than if there are other objectives as
well in terms of reforming the way the government operates and
manages itself, and if the primary focus is just on balancing the
budget then it is up to the discipline and the—and the city govern-
ment to decide that they are going to improve the organization of
the city in order to get to a balanced budget, and the board itself
only has indirect control over that.

Ms. Norton. I just want to say for the record, I don’t know about
the rest of you all but I’m not going through this more than once.
The notion that at sometime—that the Democrats would come back
to power and we would have boom times again in the country
which would encourage the growth of the government again is very,
very scary to me. I just think that is something we have to look


51

the mayor with the approval of the Governor; the chairman is appointed jointly by
the mayor and the Governor, Of seven commision members in Cleveland, the three
appointed by the Governor and approved by the Senate came from a list of five sub-
mitted by the mayor and chairman of the city council. Of the four ex-officio mem-
bers, two were from the State and two from the city. The Cleveland commission
elected its chairman and vice chairman from among its own members.

At the other extreme, the Philadelphia board is almost entirely appointed by State
executive and legislative officials. The only representative of city is ex-officio,
the City Director of Finance. Of the five appointed voting members, one is appointed
by the Governor, and one each by the majority and minority leadership of State

louse and Senate. The members of the board select officers from among themselves.

In the three New York State cases, the State, particularly’ the Governor, main-
tains strong control, But the city is guaranteed some representation. For the
NYSFCB, o} three members appointed by the Governor with the advice and con-
sent of the Senate, two must be residents of or have their principal place of business
in New York City. Two of the four ex-officio members are from the city: the rr
and t the comptroller. The State Governor, an ex-officio member, is designated by law
as chairman.

For New York’s MAC, of the nine members appointed by the Governor, four are

inted upon written recommendation of the mayor. The Governor designates the
airman of MAC.
Under the Jaw governing, the Yonkers Financial Control Board, the secretary of
state—a State official appointed by the Governor and an ex-officio member of the
board-—ie designated as chairman. The four appointed members are all appointed
by the Governor with the advice and consent of the State Senate. The only voting
member representing the city is ex-officio, the mayor of Yonkers.

NON-VOTING MEMBERS

There are no non-voting members in the cases of Chicago, Cleveland, and New
York’s MAC. Two members of Philadelphia’s board are non-voting, but they are ex-
officio (the State secretary of the budget and the city director of finance).

The two financial control boards created by New York State allow for a large
number of nonvoting members: nine for New York City (compared with seven vot-
ing) and six for Yonkers (compared with seven voting). Exactly which State or city
official may appoint a non-voting member is specified in the legislation. The non-
Yoting members provide for representation of the minority as well as majority par-
ties of the New York State House and Senate. In addition, in the case of New York
City, both the minority and majority parties of the city council are represented. In
the Case of Yonkers, the county executive of Westchester may appoint a representa-
tive and the Board may designate a representative for Yonkers city employees.

LENGTH OF TERMS

In Ohio, a person named serves for the life of the board. The term for the Chicago
School Finance Authority is three years, and for MAC is four years.

IMPORTANT CHARACTERISTICS OF INDIVIDUAL MEMBERS

In the case of New York City, the role of a single individual, Felix Rohatyn, chair-
man of MAC, was of overarching importance in getting the various parties to work
toward a solution. Mr. Rohatyn, coming professionally from the investment banking
community, had then and still’ maintains an extremely high level of credibility in
the financial markets.

It is considered important that the individuals serving on a board be qualified in
terms of expertice and be committed to the endeavor. They shauld be effective both
in convincing the city to reform its financial practices as well as in representing the
interests before the State legislature, exocutive agencies, and other officials.
ral of the statutes specify that the appointed (not ex-officio) members of the
control board should have their residency, office, or principal place of professional
or business activity situated within the municipality.

4, STAFFING

The in-house staffs of oversight boards have typically been quite small—six posi-
tions or fewer, including eecreiarial and administrative support stall, The largest,
the New York Financial Control Board, had a staff of 25 in 1976, its first full year
of operation, and 27 in 1986, the year when most of its powers expired.

Each board typically has had ‘an executive director, a deputy executive director
who may also be « financial analyst, a financial analyst, and two administrative as-



24

tor. My question is—and it is based upon my understanding of the
congressional inquiry that took place after the default occurred in
the city of Cleveland. There was some discussion that obviously
shoddy financial handling of the city matters participated to the
situation. However, there was also consideration that people in
public life are sometimes put under such intense pressure that
there is an avoidance actually of the tough things that need to get
done to make sure that the—well, let me put it this way. There is
so much emphasis on covering your backside and not doing some-
thing unpopular so you can be reelected that it somehow impedes
the process for the very reason that you need a board to begin with.

My question and a rather, I have gone around the block to get
back to you t; of way is that—did you notice during the course
of your study that boards that had a more private flavor than pub-
lic flavor, remembering Ms. Montgomery’s prohibition as to who
gets to appoint people—that one worked better than another?

Mr. Fincu. I don’t think anything like that came to our attention
particularly, Mr. LaTourette. I think more what we saw was that
the board—the board’s objective was to help the city or the school
district or whatever restore their financial health, and their inter-
est in that regard was in creating the revenue that was needed to
do that. So the interest of the board was consistent with the inter-
est of the purchasers of the debt. Both had the same interest of
seeing to it that the debt was serviced.

Mr. LATOURETTE. Would it be a fair observation that, based upon
your studying the boards, that all of the boards, regardless of
where they came from, made the tough decisions necessary to get.
through the crisis in an expedient manner?

Mr. Fincu. I think, sir, that I would characterize the results of
what we saw along the lines of, we think each of the boards that
we saw made a positive contribution to the situation that they
faced.

Mr. LaTourRETTE. One thing that I recognized, that each city is
different; some of the problems may be different, there were some
common threads, however, in not only the situations you found in
each of these five cities but also the present crisis that now exists
in Washington, DC.

Are you aware, did you become aware during your study, that
any of these cities had some unique difficulty or problem that
wasn't shared with the others that may or may not exist in the
District of Columbia area?

Mr. Fincu. I think I would probably maybe turn that one around
and say there are more unique characteristics about the District of
Columbia than there are in the other cities.

Mr. LaTouretTE. OK. And the reason I ask that question is that
some of the experiences that may have led to the crisis in a Cleve-
land or New York City may exist here but they will be plus other
things here in the District.

Mr. FINCH. Plus other things here.

Mr. LATOURETTE. OK.

The last one, and maybe this is for Mr. Hill, and the observation,
even though Mr. Hill wasn’t the primary witness today, I do want
for the record to note that I have enjoyed every time Mr. Hill has
appeared before this subcommittee and that I found his testimony


54

Nevertheless, even without permanent financial recovery, it is still worth asking
whether the cities could have accomplished as much financial improvement on their
own, absent a financial oversight control

Still, it is not clear how much credit for financial policy chi should go to spe-
cific actions taken by the control board (nor how much blame for failure). What is
perceived to be the effectiveness—or lack of effectiveness—of the control board, may

ave been influenced to a lai gree by other accompanying factors.

The threatening presence of a control board and its stand-by powers may in iteelf
be sufficient to spur city officials into taking corrective actions on their own.

In the cases of New York and Chicago, in particular, the control board’s effective-
ness was enhanced by research or advocacy provided by watchdog groups to both
the oversight board and the city council or school board.

One oversight institution on its own may not be engugh. In the case of Yonkers,
New York, creation of the State Financial Control Board was not sufficient to
restore investor confidence. In addition, the State comptroller had to be Sppointed
as fiscal agent before Yonkers could reenter the bond market. Similarly, in the case
of New York City, creation of the Municipal Assistance Corporation was not
enough. The New ‘York State Financial Control rd had to be added before inves-
tor confidence was sufficiently restored. And, for a period, New York City also need-
ed Federal loans and loan guarantees.

State legislatures may thwart the effectiveness of the financial control boards by
continuing to limit the options and flexibility that cities are permitted under State
law to solve their own fiscal problems. The State legislature may create the control
board and permit additional borrowing, but not address the underlying structural
and fiscal problems facing the city. State laws may severely circumscribe a city’s au-
thority to tax. States like Illinois and Ohio have been hesitant to grant authoriza-
tion for levying local non-property taxes without approval by local referenda.” Being
limited to property taxes and State aid is a particular problem for school districts.

cago School Finance Authority’s powers are seriously circumscribed by the
Illinois legislature. The State legislature has restricted the Authority’s ability to
raise additional revenues, has diminished the Authority's effectiveness in enforcing
spending cuts, and has not seriously addressed the underlying structural problems
facing central city school districts. It has not permitted either the School Finance
Authority or the Chicago School Board access to any new tax revenue sources other
than the property tax and has not significantly increased State aid. Chicago, lil
other Illinois school districts, still faces long-term fiscal problems. Part of the solu-
tion may be a new source of revenue other than increases in the local property tax.®

‘The cities in distress have frequently faced exacerbating circumstances emanating
from mandates imposed by the Federal or State governments or by court order.
Cities may have little control over the amount of State or Federal aid they receive,
or the mandated local percentage matching requirement for certain expenditure
functions. In New York State, local governments are responsible for 25 percent of
Medicaid and AFDC costs. Cities were under other outside pressures during the
1980s, namely court-ordered dese; gation of schools and, in case of Yonkers in
particalar, desegregation of housing. While protesting the housing court orders, Yon-

ers incurred substantial fines, exacerbating the financial distress. Chicago was
under the pressure of a school education reform effort enacted by the State of Illi-
nois in 1988 which mandated many changes in the delivery system.

The financial control board may represent an additional expense for the jurisdic-
tion in distress. The expenses of the Chicago School Finance Authority are paid
from the general State school aid that would otherwise be payable to the Chicago
Board of Fducation for school purposes. In Philadelphia, the expenses of PICA are
to be paid by the city. In contrast, in Ohio, expenses of the Financial Planning and
Supervision Commission for a city are “.. . payable solely from appropriations

ry by the general assembly.” . .

The al lity ‘to achieve financial reform may be thwarted by conflicts within a city’s
own political structure, or between the city and the financial control board. If the
mayor and city council are in serious disagreement, it appears more difficult to
make progress. If city officials have not agreed to the need for reform and if they
have an antagonistic relationship with the control board, it is more difficult to make

TO,
Pity officials tend to resent micromanagement of city affairs by the control board
more than macromanagement. City officials would typically prefer that the control
board set the total spending limit but let the city decide specifically where to cut

expenditures, In cases where city officials face intransigence in gaining agreement

TACIR, City Financial Emergencies, 1973.
Ree Feloroncee in Apperaiea”


63

he may appoint other persons who meet the qualifications enumerated in the legis-
lation. This includes an individual:

(a) Who has knowledge and experience in financial matters, financial man-
agement, or business organization or operations, including at least five years of
experience in the private sector in the management of business or financial en-
terprise, or in management consulting, public accounting, or other professional

vi

(b) Whose residency, office, or principal place of professional or business activ-

ity is situated within the municipality;

(c) Who has not at any time during the five years preceding the date or ap-
pointment held any elected public office.”

Nor shall an appoint member of the Commission become a candidate for elected
public office while serving as a member of the Commission. (118.05)

All seven Commission members may vote. Five members constitute a quorum.
Five votes are necessary for action. The Commission elects one of its members
as Chairman and another as Vice Chairman. The Commission may also appoint a
Secretary and any other officers, who need not be members of Commission.

The members of the Commission shall service without compensation, but shall be
paid by the Commission their necessary and actual expenses incurred while engaged
in the business of the Commission. (118.08)
ate pommission may delegate many of its powers to the “financial supervisor.”

4. STAFFING

The Financial Planning and Supervision Commission retains a “financial super-
visor,” defined as a firm of certified public accountants with demonstrated relevant
rofeasional competence. ‘The Commission may request the assistance of personnel
wm the State auditor office or from the administrative heads of any State agency
with skilled budget and accounting employees to temporarily assist the Commission
or the financial tupervisor. The financial muperviors (CPA's) salary a paid by the
Commission pursuant to « contract approved by the State Controlling Board. The
city is to provide office space for the Commission, in the principal building housing
the city government, (118,05).

snses of the Commission are payable solely from appropriations made by the

Ohio ‘General Assembly. (118.09)

5, ENFORCEMENT AUTHORITY, MECHANISMS, AND PENALTIES

The powers discussed in this section are selections from a longer list set forth in
the Ohio Local Fiscal Emergencies law. The same powers would be available to any
financial planning and supervision commission established to assist an Ohio city in
financial emergency. Not all of these powers were necessarily invoked in the case
of Cleveland.

The city mayor is required to submit to the Commission a detailed financial plan
to eliminate the fiscal emergency conditions, balance the budgets, avoid future Sef
cits, and restore the ability of the municipality to market long-term general obliga-
tion bonds, together with a time plan for accomplishing these cbjectives. If the Com:
mission rejects the plan, the mayor must submit a revised plan within 30 days.

The municipality must promptly bring its financial accounting and reportin; a=
tem into nnlelpality 1 vith "hove 117 of the Ohio Revised Code, under the reve
of the State auditor. It must supplement this with a system to report ite fecal
tivities in a timely manner in order to facilitate effective management of the mun
pality’s affairs and implement the financial pian. The State auditor may order the
municipality to take specific actions, (118.10) The municipality must cooperate in
providing information requested by the Commission relevant to the financial plan.

ning and Supervision Commission, or when authorized by the Commissi
financial supervisor. These include reviewing all tax and spending budgets; approv-
ing (118.15) and assisting in the issue of debt obligations; making recommendations
for cost reductions or revenue increases to achieve balanced budgets and carry out
the financial plan. During the fiscal emergency period, the Commission is to “review
and determine” the adequacy of revenues to meet expenditures. The Commission
may require the municipality to establish monthly levels of expenditures and en-
cumbrances consistent with the financial plan, The Commission may then monitor
those monthly levels of expenditures and require justification documents to substan-

_The legislation grants certain powers, duties, and functions to the Financial Plan-
, to





43

ing stricter investment standards and policies, and modifying the city’s pension
asset allocation stratagy.

In its Five-year Financial Plan for fiscal years 1995-1999, Philadelphia reported
that it had negotiated labor agreements that resulted in reducing its pension costs.
For example, by successfully holding the line on employee wagee—particularl:
through arbitration with the Police and Fire unions-—the city estimated that signifi
cant savings will be realized in the allocation the city makes to ite pension plans.
Tn fiscal year 1995, the total savings are projected to Ye $15.9 million dollars. Over
the next five years, the total savings due to the new labor agreements are projected
to be $139.6 million.

Another action taken by the city was the adoption of strict investment standards
and policies for the plans’ investments. Instead of requiring managers’ performance
to meet or exceed general benchmarks, such as Standard & Poor's index, city pen-
sion managers are now required to meet or exceed the performance of a pool of over
3,000 pension managers nationwide. These pension managers are responsible for en-
suring high growth of their pension assets.

Finally, the city, through its Pensions and Retirement Board, has modified its
asset, allocation strategy to favor small-sized companies and international equities.
In addition, the Board is taking steps to strengthen the weakest component of the
pension plans’ portfolio, the 6 percent of the pension funds invested in real estate
and venture capital.

With the help of increased state contributions and the above city pension reforms,
the city estimates that its unfunded pension benefit obligation should begin to de-
crease in the year 2003, and be eliminated by the year 2019.

Ms. NorTon. Could I ask another question? We have an arena
and a convention center that has been proposed by the good graces
of our own private sector. These are two miracles in the middle of
this crisis. I wonder if any of the cities where you investigated were
able to make investments in their long-term future to do long-term
capital borrowing to enable projects to go forward. Did they require
the board? Any light you could shed on that would be useful to us.

Mr. Fincu. I think there were some projects in Cleveland where
there was public and private partnership that got together to do
some things. I don’t think there was anything on the scale of the
convention center at that time—Cleveland’s convention center came
in a little bit later.

Ms. Norton. Do you think a board could help the District? The
District will have to have access to the bond market in order to
continue with these projects for long-term borrowing.

Mr. Fincu. Right.

Ms. NoRTON. you think that a board could be useful in that
respect?

Mr. Fincu. I do. I think a board would go a long way toward re-
storing the market’s confidence in the District.

Ms. Norton. Could you say something about how detailed these
multi-year plans were? Were they general outlines, or were they
long, detailed documents? And also how involved the local officials
were in designing the documents?

Mr. FINCH. Can you address that?

Ms. CiarK. Sure.

There were a number of components to the financial plans that
the city prepared, and it was the cities that prepared the plans, the
boards did not prepare the plans.

Ms. Norton, In every case the city prepared the plans?

Ms. CLARK. The city was the responsible party in preparing
plans. The board’s {ob was to review and approve those plans.

The plans would include the typical financial information that
you would see, revenue projections, expenditure projections, discus-



41

Table 1: Overfunded (Unfunded) Pension Benefit Obligation for the Five Major Pension Systems of New York
City Employees for Fiscal Year 1994

[llars in mitons)
Overtunded (Us-
Ovecunded (Une
‘i Tital Peasicn Bonet
Pe Stn cee Mica eRe ee
‘New York City Employees’ Retirement

$21,501 $22,789 $1,288 6
18,190 17,862 (328) 2)
316 856 (60) cu)
9,658 8,096 (1,562) (16)
Fire Department Pension Fund 4A 3,280 (1184) (Qn)
Combined 34,729 52,883 (1,846) 3%)

‘Seurea: The City of Wow York Comprohansive Aansal Fmancial Report of the Comptoir for the Fiacat Year Exded Jase 30, 1994; purent-
apes competed by CAD,

The city’s funding policy for its pension programs is to provide for periodic em-
ployer Sagtritatinns ob aituatiali: dotorisuned tates that tre designed tid eesonuiate
sufficient assets to pay benefits when due. The method used to determine pension
expense and the employers contributions to the five major pension systems is the
frozen entry age actuarial cost method. Under this method, the excess of the actuar-
ial present value of projected benefits of members of the retirement system, over the
sum of the actuarial value of assets plus the unfunded actuarial accrued liability,
is allocated on a level basis over the future earnings of members who are on the
payroll, Actuarial gains and losees are reflected in the employer normal contribution
rate. The employer contributions for the pension systems amounted to about $1.5
billion for fiscal year 1994.

Analysis of the changes in the pension benefit obligation over a period of years
may give an indication of whether the pension system has become financially
stl or weaker. Table 2 shows the changes in the combined unfunded pension
bene! obligation for the city’s five major pension systema from fiscal year 1990 to

Table 2: Combined Overfunded (Unfunded) Pension Benefit Obligation for the Five Major Pension Systems of
New York City Employees for Fiscal Years 1990 through 1994

‘(dollars in millions)
Overtuaded
ce ter Teal Pasion Bnet Wt sts nine MUNA (uel a Be
Obligation or Ganelts ste Obligation Obinain (as 8
46,805 40,708 ($6,097) (13)
ATAS2 43,289 (4,164) 3)
49,855 47,184 (2.671) 6)
52,490 52,005 (485) w
34,129 52,883 (1,846) 3)

‘Soarce: The City ol New York Comprehensive Annual Ficancial Report of the Comptroller fr the Fiscal Your Ended June 30, 1994; parcot-
‘ngs computed by AO.

According to New York City’s financial plan for fiscal years 1995 through 1998,
the city’s planned annual pension expenses are based on numerous factors including
the investment performance of pension assets and actual and planned staffing levels
of city emy . The city’s financial plan beginning in 1996 provides for annual
reserves o! million as a result of a recently published actuarial audit conducted
on behalf of the city. This audit of the city’s retirement systems included an evalua-
tion of various actuarial assumptions such as ‘phics, inflation, mortality,
and turnover. The audit concluded that additional city contributions may be re-

quired.

PHILADELPHIA
Philadelphia maintains three employer defined benefit plane for ite employees: (1)
the Municipal Pension Plan (Municipal Plan), (2) the Philadelphia Gas Works Plan
(PGW Plan), and (3) the Redevelopment Authority of the City of Philadelphi =
tirement Plan (RDA Plan). The State of Pennsylvania contributes about 3 to 3.5%


66

for long-term debt. The total guaranteed debt specified over four fiscal years, was
not to exceed $1.66 billion. pes yen
"These three interventions are now discussed in turn.

NEW YORK STATE MUNICIPAL ASSISTANCE CORPORATION FOR THE CITY
OF NEW YORK (MAC)

1, SUMMARY OF INSTIGATING CRISIS

New York City showed evidence of fiscal distress for at least ten years prior to
the crisis of 1975. During the 1960s and early 1970s New York City experienced
the flight of many affluent city residents to the suburbs, an influx ofthe diadvan-
taged, rising expectations for public services wl city provi a er
Tange and level than most American cities, The city borrowed heavily to finance its
operating costs and built up a large debt. Ultimately, the 1974-1975 recession
caused a substantial decline in city revenues from the sales and income taxes, while
the demand for social services rose.2®

Following the creation of MAC and the Financial Control Board by the State of
New York, the U.S. House Banking Committee asked the Securities and Exch
Commission (sec) to investi ite a 3g conditions epthat led to the withdrawal of

rowing privileges o! ity of New York. put, as the starting
point. This’ was shen the bond rating agencies lowered the city’s ratings by one
step. It was found that the city did not provide fall or complete information on the
ways in which the city balanced its budget. Operating expenses were classified as
capital outlays and funded by long-term borrowing. Short-term debt was rolled over.
Interest payments became a significant portion of the operating expenses of the

‘Between 1965 and 1975 at least seven major studies were undertaken by the cits
and the State of New York on various aspects of the financial situation in New Ye
City. The conclusion of all these studies indicated that the rate of growth in the
city’s revenues was far below that of the increase in the city’s expenditures. Adjuct-
ments were needed either from additional tax resources or a reduction in the 1
of public services.2°

Xt the end of fiscal year 1974, New York City faced the pro: of having to refi-
nance a large amount of short-term debt (bonds maturing within one year or less)
and other maturing serial debt. The city had used short-term debt in order to fi-
nance capital improvements outside of its long-term debt ceiling set by the State
constitution and had used bonds with maturities shorter than the statutory useful
life of projects to avoid the up-front “down payment” requirements that ot it

borrowing for capital improvements. Additional borrowing was also re-
qui smooth seasonal gay 2 between revenues and expenditures; this included
tax anticipation notes (T, is) for real property taxes; revenue anticipation notes
(RANs) issued lorgely due to the city’s need to finance welfare and Medicaid pay-
ments “up front” while waiting for reimbursement of the State and Federal shares;
and bond anticipation notes (BANs) for Mitchell-Lama housing projects.31 The city
also had deficits in its required cash reserve funds.

For the approaching fiscal year 1975, the revenue needs exceeded the amounts the
city could raise under its constitutionally set tax rate limit. Altogether, the city
wanted to borrow approximately $8 billion.*4 Investors, however, increasingly be-
came unwilling to purchase the city’s bonds, beginning in February and March of
1975.55 The perception of New York City’s borrowing needs “awamping” the munici-
pal bond market was an important element leading to the creation of the Municipal

28U.S. Library of Congress. Congressional Research Service. Overviews of the Lockheed, New
York City, and’ Chrysler Loan Guarantee Programs. CRS No. 80-97E, by James M.
Ki 29, 1 . 9.

Bickley, 980. Washi 1980. p.
U.S. , House of Representatives, Committee on Banking, Finance and Urban Af-
faire, Subcommittee on Economic Stabilization. Securities and Exchange Commission Staff Re-
port on Transactions in the Securities of the City of New York. 95th Congress, Ist Session, AU-
st 1977. Cited in: Feldstein, Sylvan G. and Fabozzi, Frank J. The Dow Jones-Irwin Guide to

lunicipal Bonds. Homewood, {Ilinois, 1987. p. 144.

‘SS Botley, Robert W. The Crisis Regime. The MAC, the EFCB, and the Political Impact of the
New York City Financial Crisis. Albany, ‘State University of New York Press, 1984. p. 3.
sec Smith, Wade S. The Appraisal of Municipal Credit Risk. New York, Moody's Investore Serv-
ice, Inc., 1979. p.
"Ga CRS, Overviews of the Lockheed, New York City, and Chrysler Loan Guarantee Programs.
(CRS Report No, 80-97E, by James M. Bickley, p, 9.

The New York State Urban Development Corporation defaulted on its bonds in February
1975, This made lenders more skeptical toward other New York entities trying to borrow.


li

helped the cities take actions that resulted in the cities being bet-
ter able the manage their financial affairs. In addition, the cities
began to improve city management and operations and address
their structural problems.

To help improve financial stability, Cleveland, New York, and
Philadelphia worked with their oversight boards to obtain needed

‘icago worked with the school district's oversight board to
obtain additional funding for the school district. Boston also ob-
tained State aid, although it did not require the assistance of an
oversight board. In addition, Boston sold a convention center and
a parking garage for $40 million in 1982. All five cities at times
through their boards obtained additional funds either by raising
taxes or issuing bonds. Cleveland, New York, and Philadelphia set
aside sources of revenue, usually new or increased taxes, to repay
the borrowed funds.

In addition, the cities took immediate actions to establish credi-
ble budgeting and accounting numbers. Getting credible numbers
generally with the help of independent accounting firms was essen-
tial for the cities and their oversight boards to determine the ex-
tent of the cities’ financial difficulties. Getting such numbers also
was essential for showing areas for cost reduction and the extent
to which existing financial systems needed improvement.

Once their financial difficulties were identified, the cities took
immediate cost-cutting measures. All five cities cut costs by reduc-
ing the number of their full-time employees. For example, by 1978
New York reduced its work force by about 20 percent, which
amounted to about 60,000 employees, primarily through involun-
tary layoffs. When it improved its financial health in the 1980's,
the city increased its work force to previous levels.

Philadelphia did not reduce its number of employees through in-
voluntary layoffs. However, Philadelphia negotiated with labor
unions which led to immediate reductions in benefits and a freeze
in wages. To quickly reduce costs, some of the cities also restricted
overtime, froze wages and hiring, and tightened controls over new
contracts. So a host of different actions were taken when you look
at the cities across the spectrum.

Another important action that each city took was to improve its
working relationships with others that had a stake in the cities’ fu-
ture. Local businesses offered managerial and technical support
and advice to improve city management and operations. City em-
ployees, through their unions, in general became more willing to
negotiate lowering wages and benefits. During the cities’ financial
difficulties, strong city leadership was essential to restoring finan-
cial health and promoting cooperation. For example, the new mayor
of Philadelphia worked with the president of the city council to
shape and implement an agenda of city reform.

ile improving their financial stability, all five cities realized
that if they were to avoid more financial difficulties they also would
have to improve the efficiency of city management and operations.
In fact, the cities realized that their periods of financial instability
could be used as opportunities to make some strong reforms. Ac-
gordingly, they began to restructure the way they did business.
They did so by improving their financial and work force manage-


53

* authority to require the city to improve its accounting practices, normally by
adopting Generally pted Accounting Principles (GAAP);® and
* authority to require the city to submit multi-year financial plans that are in
balance to the board for its review and approval.
Tn terms of forci the city to reform its behavior, some of the most important
powers for an oversight board seem to have been:
© authority @ over cont city’s as “fiscal agent,” col
thority to take trol of the city’s budget, as “fiscal agent,” collecting
all revenues (including withholding State grant monies) and making all disburse-
ments—power of the purse strings;
© power to override old contracts;
tract concessions from contractors;
© authority to review and approve or disapprove collective bargaining agreements
thority to revi id di lective bargaining agree
with the city workers’ unions; to achieve bargaining agreements with no automatic
cost-oF living. increases (or at least a wage freeze); to secure agreements that in-
crease the flexibility in union work rules;
© authority to order cuts in the number of staff; and
* authority to levy higher taxes on the city’s existing tax bases, without voter ap-
uthori to levy higher t the city’s existing tax bi ith .P:
proval.
In terms of getting help for the city from additional revenue sources, some of the
most important powers for an oversight board seem to have been:
authority to ask to State for increased State aid;
ant Authority to ask the State to approve new non-property tax revenue sources for
e city;
© getting the city to hold a referendum on increasing a local tax; and
@ getting the State legislature to adjust the rules concerning the city’s issuance
of long-term debt as well as the conditions applying to short-term tax and revenue
anticipation notes.

to negotiate or disapprove new contracts; to ex-

6, ACTIONS TAKEN

In terms of protecting the bondholders, a very important action has been estab-
lishing a specific revenue source dedicated to servicing the debt. In most cases, there
was an increase in the rate of an existing local tax (sales, personal income, or real
property). Revenue associated with that rate increase was deposited in a separate
account, maintained by the State or a private bank named as trustee.

‘One of the most important powers of the Philadelphia Intergovernmental Co-
operation Authority (PICA) is the ability to withhold State grant. monies and excess
monies from borrowing activity from the city, if the city is not in compliance with
the financial plan.

In most cases, the cities were required to submit to the financial control board
a multi-year financial plan, with the current year and each future year in balance.
This multi-year horizon preasured the cities to taking a more serious long-run ap-
roach to putting their finances in order.

The Chicago School Finance Authority prevented the opening of the schools when
the Chicago school district did not have a balanced budget and multi-year financial
plan approved by the Authority.

Several boards have ordered temporary wage freezes (New York City, Youkers).
Some have ordered layoffs of city workers,

‘The New York City and Yonkers Financial Control Boards have ordered indefinite
postponements or cancellations of popular capital improvement projecta like librar-
les,

1. EFFECTIVENESS

All of the financial oversight control boards examined can, at a minimum, be cred-
ited with accomplishing a temporary improvement in the financial situation of the
city (or school district) for which they were responsible. But none can be credited
with achieving a permanent solution. Witness the fact that financial control boards
have been reimposed on Yonkers and the Chicago School Board, New York City
again faces a huge budget deficit, Cleveland also faces budget woes, and the long-
term future of Philadelphia finances remains open to doubt.

“According to ACIR, charter cities (e., cities granted home rule either by constitutional or
tatutory provisions) have been slow to adopt lly accepted accounting principles (GAAP)
without State mandates to that effect. U.S. Advisory Commission on Intergovernmental Rela-
tions. City Financial Emergencies: The Intergovernmental Dimension. Report A-42. Washington,



59

© the Authority has the power to direct the Board to reorganize its financial ac-
counts and management systems in whatever manner the Authority deems appro-
priate to achieve grester financial responsibility and to reduce financial inefficiency;

« the Authority has the power to assume exclusive administration of, and to with-
draw funds for, the lawful expenditures of the Board from the cash accounts and
bank accounts of the Board; and

© the Authority prescribes an accounti: system and procedure for the Board ac-
cording to which the Board’s budget for e fiscal year must be balanced.

The 1993 Illinois amending legislation gave the Authority increased oversight
powers, including the power to initiate management audits of the school district. It
created a position of Inspector General at the Finance Authority to review th
School Board's spending practices. Tt moved up the date by which the Finance Au-
thority must approve a balanced spending plan for the schools each year, to August
16 from August 31.17 The Authority was directed to undertake a financial and man-
agement assessment of the Board's special education program and an analysis of po-
tential cost savings from its physical consolidation.

6, ACTIONS TAKEN
BONDS ISSUED

Under the School Assistance Bond Resolution, adopted April 29, 1980, the Chicago
School Finance Authority issued four series of school assistance bonds in 1980, pri-
marily to provide financial assistance to the Chicago School Board for its operating
and working cash needs. A fifth series of School Assistance Bonds was issued in
1984, primarily to provide financial assistance to the School Board for its capital
needs, Between 1984 and 1993 the only bonds issued were to refund previously is-
sued School Assistance Bonds.

In the 1998 Amendments to the Schoo! Finance Authority Act adopted by the Tli-
nois General Assembly and effective in November 1993, the Chicago School Finance
Authority was mandated to issue the 19944 bonds to provide the Board of Edu-
cation of the city of Chicago with money to defray a portion of the Board’s operating

nditures for ite figeal years ending August $1, 1994, and August 31, 1996. As
of February 1, 1994, the Chicago 1 Finance Authority announced @ new offer-
ing of $405,380,000 in general obligation echool financing bonds, a. series of bonds
(series 1994A) due from 1996 to 2009. The bonds are payable out of dedicated taxes
levied on all taxable property in the city of Chicago, and from certain funds and ac-
counts (from amounts on deposit in the Debt Service Fund). Upon collection, the
taxes are to be deposited with the Trustee (The First National Bank of Chicago).
‘The bonds ere issued pursuant to the School Financing Bond Resolution of the Au-
thority, adopted February 17, 1994 and the 1994A Series Resolution of the Author-
ity, adopted February 17, 1994.18

“DISCIPLINARY ACTIONS” TAKEN BY THE STATE AND THE SCHOOL FINANCE AUTHORITY

In 1980 the school system was forced to cut more than 8,000 positions. The cuts
fell disproportionately on teachers and other student contact staff, and not adminis-
trative staff.!®

One of the most potent tools of the School Finance Authority is the ability to close
the schools down if the Chicago School Board does not conform with the require-
ments of having a balanced budget approved by the oversight authority. As of Sep-
tember 1, 1993, when the School Board failed to adopt ‘a balanced budget approved
by the Authority, the Board was prohibited from making any expenditures. Follow-
ing provisions of the School Finance Authority Act, the school system was closed.
The Illinois General Assembly had to enact special financing arrangements in order
for the schools to reopen.

7, EFFECTIVENESS

The Chicago school district budget was returned to balance within two years after
the School Finance Authority was established in 1980. By 1988, the school district
had accomplished the six years of balanced budgets needed to ‘have the oversight
powers of the Authority relaxed. The budget continued to be in balance through fis-

naz Bepaley, Ann. Lawmakers Back Plan to Balance Chicago Schools Budget. Education Week,
18 Chicago School Finance Authority, Bond issue jus of February 1, 1994, p. 1-2.
Hess, Restructuring: Chicage Sle pela ad P


13

The strong reforms introduced by the cities such as more credible
information, reduced operating costs, and increased productivity
stabilized the cities and made them healthier financially. However,
these reforms did not eliminate the cities’ structural problems that
led _to their restricted and declining revenue base. The five cities
could no longer simply raise taxes for local residents and_busi-
nesses to pay for rising costs. New York, for example, reduced local
taxes by about $1 billion between 1978 and 1981 to keep residents
and businesses in the city. In addition, studies showed that raising
city taxes beyond a certain point in Philadelphia could cause some
residents and businesses to leave the city, thus resulting in a loss
of total revenue.

To address their structural problems, the cities adopted three
strategies: One, identifying new revenue sources; two, shifting city
functions to other sectors; and, three, establishing sound economic
development programs. To obtain new revenue some of the cities
introduced nontax alternatives. Boston and Philadelphia began re-
quiring certain tax-exempt institutions to make annual payments
to the city. For example, Philadelphia reported that the assessed
value of nonprofit property was $3.1 billion in fiscal year 1993. The
city estimated in June 1994 that by having nonprofit institutions
pay 40 percent of what they would have been taxed, these institu-
tions would pay the city and its school district more than $40 mil-
lion annually. Philadelphia subsequently implemented this pay-
ment for nonprofit institutions.

Cities also resorted to introducing or increasing taxes such as
hotel and motel and parking taxes. The cities also established new
or increased fees for certain city services. Further revenue was ob-
tained through more efficient revenue collections in Boston, Chi-
cago, and Philadelphia, operating efficiencies.

lowever, because the cities had few prospects of raising addi-
tional revenue on their own, they had either reached or were near
what one city described as revenue lock. The cities began to ques-
tion what should be the core activities of a municipality. When the
cities viewed their operations as being better provided by States,
counties, or the private sector, they sought to either have these ac-
tivities so transferred or to seek better cost sharing arrangements.
For example, the State of New York assumed the local cost of New
York City’s court system, City University, and Supplemental In-
come Security following the city’s financial crisis. New York has re-
quested that its State and the Federal Government reduce the
city’s share of Medicaid costs. According to city estimates, Medicaid
is expected to cost the city about $2.4 billion for the current fiscal
year. City budgets indicate that this program was a significant con-
tributor to the city’s escalating cost growth in the 1970's. City offi-
cials in Boston and Chicago told us that not have been responsible
for traditional State and county functions such as prisons, welfare
rograms, and universities has been a contributor to their cities’
improved financial health.

To better Prepare for the long-term future of the cities, the cities,
especially in Chicago and Cleveland, strengthened their economic
development programs to revitalize neighborhoods and to retain or
attract businesses. According to city estimates, Chicago leveraged
$150 million in city funds to provide more than $1 billion in eco-


CONTENTS

Hearing held on March 2, 1998 ..
Statement of:

Finch, Johnny C., Assistant Comptroller General, General Government
Division, General Accounting Office, accompanied by: John W. Hill,
Director, Financial Management Policy and Issues, Accounting Infor-
mation Management Division; Frances P. Clark, Assistant Director,
Federal Management Issues, General Government Division; and Jan
B. Montgomery, Assistant General Counsel, Office of General Counsel ..

Letters, statements, etc,, submitted for the record by:

Collins, Hon. Cardiss, a Representative in Congress from the State of
i statement of .... seve
mas M. 2 Representative in Congress from the State

i prepared statement of .... oe
Tohnay C. Assistant Comptroiicr General, General Government
Division, General Accounting Office:
Information concerning operating budgets
Prepared statement of ............
Montgomery, Jan B., Assistant General Counsel, Office of General Coun-
sel, information concerning establishing a vesestneneat eens
Noto, Nonna A., and Rymarowicz, Lillian, CRS Report for Congress—
Financial Control Boards for Citites in Distress ...... evens

a,

37
15

18
46


34

Mr. Fincu. Residents or business or have the primary business,
right, and in Pennsylvania residents—residents of the assisted city
or have their primary business in such city.

Mr. Davis. So that is almost universal?

Mr. FINCH. It was, yes.

Mr. Davis. I just wanted to understand that.

Were the members paid in any instance, or were all of the con-
trol board members unpaid positions?

Mr. FINCH. I believe all the members were unpaid, the staff was
paid.

Ms. Ciark. That is correct.

Mr. Davis. And could you just tell us how the staff was con-
stituted in these different cases? Were they contracted out for the
most part? Were they in-house staff? How many people were in-
volved?

Mr. FincH. I think each board with the exception of Cleveland,
had a small dedicated staff, but like in New York there was a spe-
cial State deputy comptroller named to assist the board, and the
board also has the authority to hire consultants to supplement its
sl le
In the instance of the Chicago school authority, staff was op-
tional, and really in practice in that one the school finance author-
ity relied very heavily on outside consultants to supplement a very
small core staff.

Mr. Davis. I am just trying to get a range for the record so every-
one understands what the experience has been in these other juris-
dictions.

Mr. Fincu. OK.

Mr. Davis. The criteria for lifting the control board or to moving
it into an oversight committee, is fairly standard in the sense that
you are looking at the bonds being repaid, having a couple of years
or 3 years of balanced budgets and those kinds of issues.

Mr, FINCH. They were all triggers—well, you are right, they were
all triggers tied to improvements in the city’s condition.

Mr. Davis. OK, ani in every case the city met those and moved

into an oversight mode?

Mr. FINGH. Right well, the boards are still in existence, all but
one.

Mr. Davis. They moved to oversight roles.

Mr. FINCH. Yes. As the city improved, the boards backed off in
terms of—in terms of hands-on control, if you will.

Mr. Davis. Exactly, yes.

Ms. CLARK. New York was the only one that had in legislation
a distinction between a control period and an oversight period.

Mr. Davis. OK.

Ms. CLARK. And in New York’s case the triggers were set to move
it from a control period where it had greater powers to an oversight
period where it had less powers, and those triggers were returned
access to the market, balanced budgets, those kinds of things. To
eliminate the board completely in New York, they have to retire all
the debt that they incurred as part of getting themselves out of the
crisis.

Mr. Davis. OK. Thanks. When we talk about structural deficits
in these different governments, it seems to me, they include a cou-


16

A “variance” from the financial plan is deemed by the Authority to have occurred
if 1) there has been a net adverse change in the fund balance of a covered fund of
more than one t (1%) of the revenues budgeted for the fund for that fiscal
year, and 2) if the actual net cash flows of the city for a covered fund are reasonably
projected to be less that ninety-five percent (95%) of the net cash flows for the fiscal
year originally forecast at the time of adoption of the budget.

‘The Authority may st any time issue recommendations as to how the city may
achieve compliance with the financial plan.

One of the most important powers of PICA is the ability to withhold State grant
monies and excess monies from borrowing activity (from the “City Account) from the
City ifthe City ig not in compliance with the financial plan. By the vote of a quall-
fied majority of its board, the Authority may certify to the State's secretary of the
budget the city’s noncompliance with a financial plan. If the Authority certifies that
the city is not in compliance, then each grant, loan, entitlement or payment to the
city by the Commonwealth of Pennsylvania, or any of its agencies, of Common-
wealth funds and payment to the city from the City Account, shall be suspended

ding compliance with such financial plan, When a alified majority of the Au-
thority’ = determines that the reasons for noncompliance have ceased to exist,
they notify the secretary of the budget who shell release State funds held in escrow,
together with interest; disbursements from the city account shall resume within one
business day following the secretary’ release action. (Section 4.12 of the Agreement,
withholding of funds) There are exemptions for funds for certain purposes which
the Commonwealth may not withhold from the city (section 4.13 of the Agreement).

6. ACTIONS TAKEN

Since its inception in 1991, PICA has issued a total of $1.419 billion in long-term
bonds, in four installments. The “Series of 1992” was for an original sate prin-
cipal amount of $474,555,000; the “Series of 1993,” $643,430,000; ies of
1993A” for $178,675,00; and the “Series of 1994” for approximately $122,000,000.

Of the total amount of issued as of June 30, 1994 & r to the 1994 series), $1.207
billion of special tax revenue bonds was specified for the following purposes: liq-
uuidate the general fand deficit ($332 million), refund (refinance) certain general oblt-
gation, debt (8476 million), and fund capital improvement projects ($400 million).

addition, some proceeds from the 1992 Bonds were also used to repay the Com-
monwealth of Pennsylvania for amounts advanced to pay the initial operating ex-
penses of the Authority, to finance a portion of the ‘Author ’s first fiscal year oper-
ating budget, and to pay the costs of issuing the 1992 Bonds. A portion of the 1992
Bonds was used for ts to the city of Philadelphia to reduce court backlogs and
accelerate the di ition of litigation pending against the city and for a grant to
enhence productivity in the operation of city government. A portion of the 1993
Bonds va for capital improvements to the city’s criminal justice and correctional

On December 1, 1994, PICA marketed another $122 million in 1994 Bonds,*! to
be used primarily’ for financing capital projects, The money was expected to finance
the renovation of a variety of city buildings, including fire stations, libraries, and
recreation centers. Because PICA’s bonding suthority for capital projects or deficits
other than cash flow ended December 31, 1994, this was expected to be the
Authority's last such issue for capital projects.2?

‘The bonds were issued in seri form, with maturities ranging up to 30 years. The
last maturity date in the 1993A series is 2022.

A PICA “authority tax” was approved by the Philadelphia city council effective
June 6, 1991 (Bill no. 1437). This is a 1.5 percent tax on wages, salaries, commis-
sions and other compensation earned by readents of the city tnd on the net profits
earned in businesses, professions or other activities conducted by residents of the
city of Philadelphia. e revenue goes into a Special Revenue Fund collected the
Commonwealth of Pennsylvania. A portion of the PICA tax is used to cover PICA
debt service and other Authority expenses, with the remaining revenues going to the
city through the “City Account.” At the same time, the rate of the wage tax other-
wise levied on city residents by the City of Philadelphia was lowered by 1.5 percent-

7 Dollar amounts from State of Pennsylvania, Office of the Budget, Bureau of Revenue, Janu-

ary 1995.
"Wo Series of 19994, Bond issue tua, August 19, 1993, p. 1-2.

9, bee, Vernon. BICA approves aale of bonds, saves’ money. Philadelphia Inquirer, December
a  P B2.
a

Pretto, Christina. Philadel) Issue Delayed as Players City Weak Market, Fed Meeting

Fears. The Bond Buyer. 16, 1994.


22

run its course, or more than run its course, but I do note that in
your testimony, Mr. Finch, that you note that New York City re-
duced local taxes by $1 billion in only 3 years and they did it be-
cause they wanted to keep residents and businesses in, accordin;
to your testimony, and I applaud that, but I note for the reco:
that New York has continued to lose middle-income residents in no
small part because there are many reasons that people decide to
leave the city and move elsewhere.

Nevertheless, I think that one thing we have basic agreement on
in the District is that the tax well is dry, and I note the interest
of the Speaker in my bill and in building upon that bill for tax pur-
poses and relief for the District.

Let me first ask, how quick have jurisdictions been able to set
up these boards? And then, how quickly to get into the market,
back into the market?

Mr. Fincu. I think the big the longest part of that timeframe,
Ms. Norton, was getting the boards set up, if it required legislation
and that sort of thing to do that.

Ms. NorTON. But I mean once the legislation is enacted.

Mr. FINCH. OK. Once the legislation is enacted, the boards come
together fairly quickly, and usually funding can be arranged within
a matter of weeks.

Ms. Norton. Within a matter of weeks.

Mr. FINCH. Yes.

Ms. Norton. Could the cities you looked at have reined their cri-
sis without the existence of a board, in your opinion?

Mr. Fincn. Well, that is a difficult question. I think—I think it
is safe to say that Chicago and Boston were—they were either
ahead of the curve in terms of recognizing their problem and tak-
ing action. They were proactive in terms of addressing that situa-
tion and taking action.

Ms. Norton. So they didn’t get boards at all, right?

Mr. FINCH. They did not get boards at all.

Ms. Norton. I’m talking about the cities that required boards.

Mr. FINCH. The cities that required boards, the legislatures of
those States made the decision that the cities really needed some
discipline in order to get them through the financial times, and so
it was a political decision to put those boards in place. I will say
that the cities that had boards faced the more severe crises.

Ms. Norton. Well, let me ask Mr. Hill as well, in light of—when
you compare the crisis in the District of Columbia with the crisis
in the cities you have looked at, do you believe that the District of
Columbia could pull itself back from this crisis without an over-
sight board?

ir, FINCH. Let me answer that first, and then I will turn it over
to John.

I would—I would put the District’s situation up in the most se-
vere category of the ones that we looked at.

Mr. HILL. I would agree with that. I think that if you compare
the criteria that brought the boards in, in those other cities, you
will find that the District probably meets most, if not all, of the cri-
teria that those cities used to bring in boards, and in some cases
there would be a more severe condition in the District.


COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT
WILLIAM F. CLINGER, JR., Pennsylvania, Chairman

BENJAMIN A. GILMAN, New York CARDISS COLLINS, Minos

DAN BURTON, Indiana HENRY A. WAXMAN,

CONSTANCE A. MORELLA, Maryland TOM LANTOS, California

CHRISTOPHER SHAYS, Connecticut ROBERT E. WISE, Jn., West Virginia

STEVEN SCHIFF, New Mexico MAJOR R. OWENS, New York

ILEANA ROS-LEHTINEN, Florida EDOLPHUS TOWNS, New York

WILLIAM H. ZELIFF, JR., New Hampshire JOHN M. SPRATT, JR., South Carclina

JOHN M. MCHUGH, New York LOUISE McINTOSH SLAUGHTER, New

STEPHEN HORN, California York

JOHN L. MICA, Florida PAUL E. KANJORSKI, Pennsylvania

PETER BLUTE, Massachusetts GARY A. CONDIT, Californi

‘THOMAS M. DAVIS, Virginia COLLIN C. PETERSON, Minnesota

DAVID M. MCINTOSH, Indiana KAREN L. THURMAN, Florida

JON D. FOX, Pennsylvania CAROLYN B. MALONEY, New York

ington THOMAS M. BARRETT, Wisconsin

‘gan GENE TAYLOR, Mississippi

GIL GUTKNECHT, Minnesota BARBARA-ROSE COLLINS, Michigan

MARK E. SOUDER, Indiana ELEANOR HOLMES NORTON, District of

WILLIAM J. MARTINI, New Jersey Columbia

JOE SCARBOROUGH, Florida JAMES P. MORAN, Virginia

JOHN B. SHADEGG, Arizona GENE GREEN, Texas

MICHAEL PATRICK FLANAGAN, Illinois CARRIE P. MEEK, Florida

CHARLES F. BASS, New Hampshire FRANK MASCARA, Pennsylv:

STEVEN C. LATOURETTE, Ohio CHAKA FATTAH, Pennaylvani
MARSHALL “MARK” SANFORD, South

Carolina BERNARD SANDERS, Vermont
ROBERT L. EHRLICH, JR., Maryland (Independent)

JAMES L. CLARKE, Staff Director
Kevin M. SABO, General Counsel
JupiTH McCoy, Chief Clerk
BUD MYERS, Minority Staff Director

SUBCOMMITTEE ON THE DisTRICT OF COLUMBIA

THOMAS M. DAVIS, Virginia, Chairman

GIL GUTKNECHT, Minnesota ELEANOR HOLMES NORTON, District of
SOHN) ue McHUGH, New vox Columbia

‘TOURETTE, O! CHAKA FATTAH, Penneylvani

MICHAEL PATRICK FLANAGAN, Hiinois BARBARA-ROSE COLLINS, Michigan

Ex OFFicio

WILLIAM F. CLINGER, JR., Pennsylvania CARDISS COLLINS, Hlinois
RON HAMM, Staff Director
ROLAND GUNN, Professional Staff Member
AL FLEZENBERG, Professional Staff Member
ELLEN BROWN, Clerk
CEDRIC HENDRICKS, Minority Professional Staff

ab


46
CRS Report FOR CONGRESS—FINANCIAL CONTROL BOARDS FOR CITIES iN DISTRESS

Nonna A. Noto, Specialist in Public Finance and Lillian Rymarowiez, Analyst in
Public Finance, Economics Division, March 3, 1995

SUMMARY

Financial control boards (FCBs) have been created by State legislatures to oversee
the financial recovery of several large U.S. cities since the mid-1970s, This report
reviews five such occurrences: the Chicago school district and the cities of Cleveland,
New York, Philadelphia, and Yonkers. The purpose is to identify general patterns
and guidelines that might be useful if a control board were to be established for the
District of Columbia or elsewhere.

In the cases reviewed, the critical event that most commonly led to the establish-
ment of a control board was the city losing access to borrowing from the municiy
bond market. The paramount concern of the FCBs has been establishing the credit-
worthiness of the new borrowing authority (created in 3 cases) and the associated
city. One or more revenue sources were earmarked to service the debt issued under
the auspices of the control board. This dedicated revenue was kept separate from
other city funds, in a State or trustee account.

A control board is intended to be temporary—to exist only so long as the city is
considered to be in financial emergency or, at most, as long as debt issued under
the Board’s auspices remains outstanding. However, experience suggests that an ex-
pected involvement of 3 years can turn into 10, 20, or more years. The board com-
position differed among the cities, for example, in the degree’ to which it was domi-
nated by State (versus city) appointees and ex-officio members, whether city employ-
ees were represented, and whether minority parties, in the State and city were rep-
resented. The in-house staff of the oversight boards has typically been quite small—
6 positions or fewer. The largest examined, the New York City FCB, had 27. Each
board typically contracts with outside accountants and auditors to review the finan-
cial accounts of the sity. .

Most of the FCBs focused on “macromanaging” by setting total spending limits
based on estimated revenues, rather than “micromanaging” details of the city’s
budget. Among the ways control boards have helped cities restore their budgets to
balance are by: requiring the city to prepare and adhere to a multiyear financial
plan that is in balance; restricting the amount and purpose of borrowing; providing
city officials with the political cover to cut expenditures; persuading city employee
unions to accept wage freezes, staficuts, and increased flexibility in work rules; over-
Tiding local citizens’ resistance to raising local taxes; getting the State to loosen its
restrictions on the city’s ability to levy taxes; and ol taining permission from the
State to restructure the city’s debt obligations from short to long term. The boards
have taken contro] of the expenditures to be made from State grant monies, new
borrowing, surpluses in dedicated debt service accounts and, in extreme cases, all
revenues.

The FCBs examined can be credited with accomplishing a temporary, but not per-
manent, improvement in their cities’ financial situation. same State legislatures
which created the FCB may have undercut long-term solutions by continuing to
limit the city’s ability to levy non-property taxes, mandating certain types of spend-
ing (eg. for specific schoo! programs), and setting local matching requirements for
welfare, Medicaid, and other programs.

FINANCIAL CONTROL BOARDS FOR CITIES IN DISTRESS

In an effort to identify general patterns and guidelines which might be useful if
a control board were established for the District of Columbia, or elsewhere, this re-
rt reviews the experience of five cities which had financial oversight control
ards imposed on them in the two decades since 1974, The five jurisdictions, and
their corresponding control boards, reviewed include:
A. Chic 100! District—the Chicago School Finance Authority;
B. Cleveland—the Financial Planning and Supervision Commissi
C. New York City—including both the New York State Financial Control
‘and the New York State Municipal Assistance Corporation for the City
of New York (popularly known as MAC or “Big Mac”);
wi Philadelphia—the Pennsylvania Intergovernmental Cooperation Authority
), ane
E. Yonkers—the New York State Emergency Financial (Control Board for the
City of Yonkers.



30

Mr. FINCH. I think there were—there was an example of one
where New York, I think, had the authority to—to ask people to
step down, if you will.

Mr. Davis. OK. So I guess there was one where, if the local offi-
cials didn’t do it, they could actually be removed by the State?

Mr. FINcu. Yes, there was at least one.

Mr. Davis. And you could talk in the aggregate about number of
employees, but you could never talk about specific employees. The
decision over specific employees and agencies would rest generally
with the—still with the elected body. Is that right?

Mr. FINCH. Still with the elected bodies.

What the boards would do, like in the instance of a renegotiated
labor contract or—let’s use that as an example, the way the boards
would get involved with that. It would be up to the cities to renego-
tiate the labor contract, but the board would look at and see wheth-
er or not the labor contracts made sense in terms of the budget and
the multi-year plans. They might get at the labor contracts or the
renegotiated contracts that way.

Mr. Davis. OK. Thank you.

My time has expired and I'll go to Mrs. Norton.

Ms. Norton. Thank you, Mr. Chairman.

In the cities that you studied, I gather that the elected officials
continue to do what they always were doing and that that was not
modified and their self-government powers remained intact.

Let me ask you a question that comes out of your own earlier re-
ports, the work of Mr. Hill. It is no secret, because the Members

ave said it in many different ways, that we have had enormous
difficulty convincing the Congress that the District has revenue
needs, this despite the fact that 1 in 4 people is on Medicaid, this
despite the fact that we alone pay for prisons, unlike other cities,
and there are a number of reasons for this.

One, the Congress is not convinced that the District has a reve-
nue problem, and the city is on a combined budget, if you take ap-
propriated and nonappropriated funds, of almost $5 billion for a
city that is—where there is no city that has anything like that, and
some States don’t have anything tke that. This has Been the tough
matter to get through, and I am now looking for whether or not the
board itself can be useful in straightening out that controversy that
exists between the District and this body.

Now Mr. Hill has testified that it is impossible to know anything
real about the District in data terms because of the absence of a
financial accounting and management system that is reliable and
up to date. In essence, it is garbage in when it goes in and garbage
out as far as the GAO and the Congress is concerned. Nobody be-
lieves any figure that comes up here unless it is verified by the
Ad, and the GAO tells us the shortcomings it has had in verify-
ing figures.

If that is the case, it would seem that we are not going to get
anywhere unless this board helps the District to establish some
kind of reliable financial management—accounting and manage-
ment system. But I have heard figures floated all around about the
cost of such a system. I recall a figure about $40 million and the
rest. I would like to know, one, what you think such a system


39

benefits earned during the year and (2) an annual contribution toward reducing the
unfunded accumulated pension obligations to zero by the year 2020. The City fur-
ther reduced its pension costs through a better return from its pension assets and
by a workforce reduction of about 2,000 employees. As a result of these efforts to
reduce its pension liability, Boston’s pension costs decreased from $130.5 million in
fiscal year 1988 to $112 million in fiscal year 1993, according to City estimates.

CLEVELAND

According to Cleveland's Comprehensive Annual Financial Report (CAFR), dated
December 31, 1993, Cleveland employees are covered by two state administered pen-
sion programs: (1) the Public Employees Retirement System (PERS) and (2) the Po-
lice and 0's Disability and nsion Fund (P&F.

According to the CAFR, Pension benefit obligation is a standardized disclosure
measure of the present value of pension benefits, adjusted for the effects of projected
salary increases and step-rate benefits, estimated to be payable in the future as a
result of employee service to date.

The Ohio Revised Code requires employees under PERS to contribute 8.5 percent
of their salary to the plan. The city’s contributions are determined by the state actu-

to meet normal costs and fund the city’s share of the ayatem's unfunded accrued
lial ‘lity over 37 years. The city’s contribution is currently set at 13.55 percent of
covered payrolls, of which 8.44 percent is used to fund the pension obligations with
the balance being applied towards the health care program for retirees.

Employees under P&FDPF contribute 10 percent of their salary to the plan. The
city’s current contribution to this fund is set at 19.5 percent of policemen salaries
and 24 percent of firemen’s salaries, with 6.5 percent of this contribution being ap-
plied toward the health care program for retirees.

Table 1 summarizes the status of the state of Ohio's pension liabilities under
PERS and P&FDPF as of December 31, 1993.

Table 1: Status of Ohio's Pension Funds as of December 31, 1993

‘(oltars in thousands)
Overtunded (Under Overfunded (Under-
‘Nat Assets Available Total Pension Benefit
i Pension ObD- ft Peasion Ob-
Enotes Pin Fd ty be at ohn st eestor anes
dollars) Totad

PERS $20,783,200 $21,579,000 ($745,800) (3.5%)
PRFOPF .. 4,027,500 5,132,800 (1,105,300) (21.5%)
‘Total .. 24810,700 26,711,800 (1,901,100) (7.1%)
‘Sources: City of Cleveland's Comp anual Report for the year ended ‘31, 1983, by GAO.

Note: The tote! persion benstit obligation for PERS is as of Decamber 31, 1952 and for PAFOPF as of January J, 1993.

In addition to the above contributions, Cleveland is obligated to pay the state for
ite share of the $1.1 billion underfunded pension obligations for the P&FDPF. The
city’s allocated share of this obligation is $104,686,400, which is payable in semi-
annual installments of $2,696,243.50 through May 15, 2035. However, instead of
making these semi-annual payments the city and the P&FDPF have entered into
an agreement which permite the city to make a one time payment to eliminate this
liability. This was accomplished on June 2, 1994, through the application of the pro-
ceeds from a $74.5 bond million issuance.

CHICAGO

‘According to Chicago’s Comprehensive Annual Financial Report (CAFR), for the
year ended December 31, 1993, city employees participate in one of four pension
ans, These plans are: The Municipal Employees’, the Laborers’ and Retirement
rd Employees’; the Policemen’s; and the Fireman’s Annuity and Benefit Funds.
The funding policy mandated by Illinois law requires city contributions at statu-
torily, not ‘actuarially determined rates. The rates are expressed as multiples of em-
ployee contributions made in the calendar year two years prior, multiplied by a
fixed rate. This fixed rate ranges from 1.37 percent to 2.26 percent of employees’
contributions. The law also requires covered employees to contribute a percentage
of their salary, ring from 8.5 percent to 9,125 percent.

According the © unfunded pension iiabihty are based on two accounts: Net
Assets Available for Benefits and Total Pension Benefit Obligations. Total Pension
Benefits Obligations are a standardized measure of the present value of credited
projected benefits, estimated to be payable in the future as a result of employee


25

to be like a hot knife through butter, he always gets down to the
nub of things; and I have very much appreciated that, and it goes
back to the gentlelady’s question about the not-for-profit property,
understanding that there needs to be a consent agreement or vol-
untary payment and so forth and so on.

In any of your studies, and maybe it is just that I forgot from
when you were here the last time, but I know the mayor when he
was here was discussin; haps we need to look at—I think he
wanted to look at Federal Buildin , but it also—not-for-profit prop-
erty also was under discussion. Has there been any analysis to de-
termine what a 40 percent contribution from not-for-profit tax-ex-
empt properties would mean to the District?

Mr. HILL. We have not done that analysis ourselves. I do know
that there are some numbers where people have looked at what the
number of properties that are off the tax rolls, if they were on and
they were charged the same rates of other properties on the tax
rolls, what that amount would generate. I don’t have that number
in front of me, but we can certainly provide that information for
you.
nt LaTourette. If you would be so kind, I would appreciate

at.

{Due to the high cost of printing, the information referred to has
been retained in the subcommittee files.]

Mr. LaTouretrTe. And last, Mr. Finch, you were kind enough to
bring up Jacobs Field and Gund Arena in Cleveland, and I would
certainly agree with you that the introduction of those sports facili-
ties, if you will, into the greater Cleveland area—I don’t know
whether they are a symptom or a result of the economic revitaliza-
tion of downtown Cleveland—and just as an outsider, I guess my

uestion would be, do you have any thought as to whether or not
the proposed convention center and arena that are under discus-
sion for the District would be expected to have a similar revitaliz-
ing impact upon the District’s tax structure?
ir. FINCH. I would make one comment on that, and then I will
defer to John again.

The Cleveland arena was built after and those arrangements
were entered after the city had entered crisis and was on its way
out. I think we have kind of a different situation here, but I know
John has looked at the sports arena issue here, so let me ask him
if he has anything he wants to add to that.

Mr. HILL. Certainly the project plans for both the sports arena
and the convention center indicate that there would be substantial
economic growth as a result of those projects. However, those

rojects are in such an early stage of development that they don’t
fave many of the architectural studies that would be done. The
amount of development would be a function of the cost that would
be determined as a result of engineering studies and so forth, and
so it is really hard to say that they are going to produce the results
that they intend to, but the plans right now certainly show quite
a bit of economic development as a result of those projects.

Mr. LaTourette. Thank you, Mr. Hill.

I thank the chair.

Mr. Davis. Thank you very much.


9

powered to regain access the capital markets and restore confidence in the city’s fu-
re. By ful of Home Rule, I believe it is important that the people of the
District retain some form of representation on the board, and that the residents are
allowed to maintain their dignity.

The legislation should also include funding for the board and, if necessary, an in-
fusion of funds to put in place a state-of-the-art-financial management system, and
meet other critical short term needs.

‘The work done by GAO thus far on this matter has been extremely helpful to the
Members who serve on this Subcommittee. You are to be commended for it. All of
us share the desire to see the District put this problem behind and reclaim its de-
served prestige as our nation’s capitol. You have brought us very close to the point
where we can take action to make that possible.

Mr. Davis. Thank you very much.

Mr. Finch, now would you and those accompanying you at the
table please rise with me and raise your right hands. It is the pol-
icy of the committee here to swear in all witnesses.

{Witnesses sworn.]

Mr. Davis, Thank you. Be seated.

I wonder, Mr. Finch, before you start if you would please identify
those at the table with you. I know they have worked with you in
preparing this testimony, and I just want to say the committee is
yey impressed with the work that the GAO has provided us to

late.

STATEMENT OF JOHNNY C. FINCH, ASSISTANT COMPTROLLER
GENERAL, GENERAL GOVERNMENT DIVISION, GENERAL AC-
COUNTING OFFICE, ACCOMPANIED BY: JOHN W. HILL, DI-
RECTOR, FINANCIAL MANAGEMENT POLICY AND ISSUES,
ACCOUNTING INFORMATION MANAGEMENT _ DIVISION;
FRANCES P. CLARK, ASSISTANT DIRECTOR, FEDERAL MAN-
AGEMENT ISSUES, GENERAL GOVERNMENT DIVISION; AND
JAN B. MONTGOMERY, ASSISTANT GENERAL COUNSEL, OF-
FICE OF GENERAL COUNSEL

Mr. Fincu. Thank you, Mr. Chairman.

It would be my pleasure to introduce the people at the table.
They represent a wide range of expertise on the issues at hand
today. The gentleman to my right I think really needs no introduc-
tion to the committee, John Hill, who is Director of our financial
management and policy issues in our Accounting and Information
Management Division. To my left is Ms. Frances Clark. Ms. Clark
is an Assistant Director in our General Government Division, and
Ms, Clark was responsible for the day-to-day work that was done
on this particular project. She managed the whole project, so she
has real y, detailed knowledge that she can provide. To her left is
Ms. Jan ymery, who is Assistant General Counsel in our Of-
fice of General Counsel.

With that, Mr. Chairman and members of the subcommittee, we
are pleased to be here today to discuss the actions taken by five
nearly insolvent cities to improve their financial health. Recent
congressional hearings and GAO reports have identified severe fi-
nancial management and structural problems in the District of Co-
lumbia similar to those in the five cities. Such problems include in-
adequate financial systems, inefficient city operations, and chang-
ing demographics.

'o identify actions the District government and Congress might
take to improve the District’s financial health, we reviewed past ac-


61

had been previously required. Little ss was made in modifying union work
rules, contrary to Winatwome had haved the iegislation authorized the Chi
School Board or City Council to place a property tax referendum on the ballot

1995.

The State General Assembly has not yet adopted a permanent financing plan for
either the school district or the School Finance Authority, The 1996 nesdion in ex.
pected to act on recommendations submitted by various “watchdog” organizations,

8. LEGISLATION

The Chicago School Finance Authority (CSFA) was created by Article 34A of the
School Code of the State of Illinois, known as the School Finance Authority Act (P.A.
81-1221), effective January 16, 1980. Article 34A applies only to school districts
in cities with population over 500,000— in effect, only Chicago #2

In 1984, the Finance Authority Act was amended to authorize the Author-
ity to provide additional financial assistance to the Board with respect to the con-
struction and rehabilitation of school facilities.

In 1988, the School Finance Authority Act was amended again, effective May 1,
1989 (reenacted effective Jan. 11, 1991, but subsequently repealed).

Under the 1988 amendments, the Chicago School Finance Authority was given
primary responsibility for approving and monitoring the development and imple-
mentation of the Chicago School Reform Act (P.A. 8E-1418) that had been adopted
by the Illinois General Assembly on December 2, 1988.7" Briefly, the schoo! reform
is an effort to improve student achievement and to decentralize financial resources
and authority within the Chicago school system from central administration towards
the individual schools. The statute authorizing the School Finance Authority's in-
volvement with the implementation of the Chicago School Board’s school reform
plan was repealed effective June 30, 1994.25 In 1988, certain oversight powers of
the board were suspended because the School Board had met the condition of six
successive years of balanced budgets.

In 1993, the Act was amended to require the Authority to provide additional fi-
nancial assistance to the Board through new bond issues and to provide the Author-
ity with additional oversight powers with respect to the Board's financial and aper-
ational affairs.

APPENDIX B. CLEVELAND: FINANCIAL PLANNING AND SUPERVISION
COMMISSION

1, SUMMARY OF INSTIGATING CRISIS

The city of Cleveland started to show signe of financial difficulty in 1971 when
a temporary property tax levy expired and the revenue was not replaced. The State
permitted the city to issue five-year general obligation bonds in 1972 to cover the
shortfall in the operating budget. The State did not demand corrective action on the
expenditure side, nor did it expand the city’s revenue-raising powers. The cit;
stayed afloat in the mid-70s by shifting money from special accounts and capital-
improvements to operating expenses and selling off city assets such as the park sya-
tem, 200, sewer system, and transit system to suburban systems.

Cleveland eventually reached its State-imposed debt limit. As of early summer
1978, the bond market was closed to Cleveland. The city’s financial accounts were
in such disarray that the city was unable to meet disclosure requirements and pro-
vide the timely and accurate information required for refinancing. The controversial
Mayor, Dennis Kucinich, and the city council disagreed on how to solve the fiscal
dilemma. The State passed legislation that allowed distressed cities like Cleveland
to pay up to 10 percent interest and take advantage of special financing provisions
in order to help sell their bonds in the municipal market.

The city finance director said that the city would have been able to meet its obli-
gations until January 1979, but it was unclear how long the cash reserves would

School Finance Authority Act, 105 ILL. COMP. STAT. ANN. 5/34A-101 (Michie 1993). Also
referred to as, 1981 ILL. LAWS 1221.

31 Other parts of the illincis School Code desl with the establishment, by the State Board of
Education, of Emergency Financial Assistance and “Financial Oversight Panels” for school dia-
tricts in juriedictions with less than 600,000 ulation. (105 ILCS 5/1A and 1B.)

Chicago School Reform Aet, 1985 ILL. LAWS 1418.

23106 I] 5/34A-201a.

2% For Cleveland, the general obligation debt limit is up to 10.5 percent of assessed valuation
on voter and non-voter approved bonds; however, nonvoter approved bonds cannot exceed 5.5
percent of assessed valuation.


17

age points (from 4.96 percent to 3.46 percent).® In effect, city residents pay the
same amount of tax, but a portion (corresponding to the 1.5 percent tax rate) is now
dedicated to PICA instead of the general funds of the city. (Note that the authority
tax is not levied on non-residents earning income in Philadelphia. The city wage tax,
however, is levied on nonresidents, or “commuters,” at a rate of 4.3125 percent—
lower than the 4.96 percent combined rate paid by city residents.)

addition, @ 1 percent local sales tax was adopted in FY92, though not by action
o -

Under the terms of the Intergovernmental Cooperation Agreement between PICA
and the city, a “City Account” was established with a private bank. This is consid-
ered a trust fund for the exclusive benefit of the city. The account receives the pro-
ceeds of taxes or other revenues pledged by the Authority or the city to secure any
bonds of the Authority or secure any payments due from the city to the Authority,
in excess of amounts due to the Authority as enumerated in the Agreement. These
excess amounts are to be disbursed {upon request by the city and agreed to by the
Authority) to the city’s general fund for the general expenses of the city’s govern-
ment,

The Agreement also provides that the city will not reduce the Authority Tax until
the pineal amount and interest of all bonds of the Authority secured by the tax
are fully paid or provision for payment is made. The revenues from this tax are rev-
enues of the Authority and not the city.

With regard to collective bargaining agreements and arbitration awards, any al-
ready in effect at the time the financial plan is approved can remain in effect until
its term expires. However, after a financial plan has been approved, the city must
execute collective bargaining agreements in compliance with the plan. Neither a col-
lective bargaining agreement or arbitration award is to be considered void or void-
able solely by reason of noncompliance, but the city is required (no later than 15
days after such agreement or receipt of arbitration award) to submit to the Author-
ity a proposed revision to the financial plan which demonstrates to the reasonable
satisfaction of the Authority that revenues sufficient to pay the costs of such collec-
tive bargaining agreement or such arbitration award will be available in the affected
fiscal years of the financial plan (sec. 5.07(b)).

Any determination of the board of arbitration providing for an increase in wages
or fringe benefits of any employee of the city under the financial plan (applying to
collective bargaining for policemen and firemen) is to “take into consideration and
accord substantial weight to” the approved financial plan and the financial abilit
of the city to pay the cost of such increase in wages or fringe benefits without ad-
versely affecting levels of service (sec. 5.08).

One of the supporting documents to be submitted by the city with the financial
plan is a schedule that will help the Authority understand the implications of the
city’s bargaining agreements with its employees. This includes the number of au-
thorized employee positions (filled and unfilled), an estimate of wage and benefit
levels for various groups of employees, and an analysis of the financial effect on the
city and its employees of changes in compensation and benefits (sec. 4.04(h)).

general, within the limits of the funds available to it, the city retains the abil-
ity to determine the purposes for which expenditures are to be made by the city and
the amounts of such expenditures permitted under the financial plan.

1, EFFECTIVENESS

The beginning of the city of Philadelphia’s financial rehabilitation is marked by
the first five-year plan (the FY92-FY96 Plan), approved in 1992. Two years later,
when the FY95-FY99 plan was submitted (and modified with PICA approval on
May 2, 1994), it was expected that the city would report a substantial operating sur-
plus for F¥94 and that the FY95 budget would be balanced.

Philadelphia’s audited general fund surplus as of June 30, 1993, was approxi-
mately $3 million. The unaudited preliminary general fund surplus as of June 30,
1994, was approximately $15.3 million.

Credit for this turnaround is given to tightened managerial control by the city.
There is still a threat of deficits in future years, because external forces continue
to drive up future expenditures faster than revenues. In addition, a major part of

® Series of 1993A, Bond issue prospectus, August 19, 1993, p. 4.
% State of Pennsylvania, Office of the Budget, Bureau of Revenue.


47

The analysis is based upon a review of the State statutes which created the con-
trol boards and some subsequent information about the actual experience with these
boards.! This does not purport to be an exhaustive study of financial control boards.

‘The body of the report highlights major aspects of the financial oversight control
boards established in these five cities. This is followed by five appendices describing
the experience of each city (in the alphabetical order listed above) in somewhat more
detail. The final appendix, F, lists an address and telephone number to contact for
further information about the control boards in these five cities.

The analysis focuses on eight aspects of financial control boards:

1, summary of the crisis that prompted the establishment of the board;

2. duration of the board;

3. board composition and appointment authority;

4, staffing;

5. enforcement authority, mechanisms, and penalties;

6. actions taken by the board, with special note of actions that overturned or
amended policies proposed by elected officials;

7. effectiveness of the board in placing the jurisdiction on a sound financial basis;
pros and cons of establishing a financial oversight control board;

8. enabling legislation.

To facilitate cross-references, both the summary overview and the appendix on
each city are organized in this numbered sequence.

1, SUMMARY OF INSTIGATING CRISIS
CITY LOSES ACCESS TO THE BOND MARKET

In this survey, the event or circumstance that most often led to the establishment
of a financial control board was the city (or school district) losing access to the mu-
nicipal bond market. That is, the city was no longer able to borrow money on its
own in the private capital markets. In most cases this occurred when the financial
market decided that the city was no longer creditworthy.

When the private market refused ta refloanor notes or, bonds coming due, a de~
fault occurred on the old issues, as in the case of Cleveland. In other cases, the mar-
ket refused to finance new issues for capital improvements or to fund operating defi-
cits with long-term debt. The latter has been the more common situation and de-
scribes the experiences of New York City, Yonkers, Philadelphia, and the Chicago
School District. In any case, without access to borrowing to cover shortfalls in ite
cash or operating budgets (whether revenue anticipation notes, bond anticipation
notes, or Borrowing to sover fiscal year deficits), the eity was financially paralyz

In his study of New York City, politcal scientist Robert W. Bailey distinguishes

i of “financial crisis” (referring to borrowing and cash flow) from @ “fiscal
crisis” (the imbalance between expenditures and revenues) or an “economic crisis”
(the deterioration of the employment and tax base).* Bailey also refers to the “poli-
tics of creditor intervention” as a distinguishing feature of this type of crisis.>
point is that underlying economic and fiscal fundamentals of the city may not have

much in nature, although they may have worsened in degree. What
changed was creditors deciding to draw the line on the city’s ever-increasing depend-
ence on borrowing and unrealistic revenue estimates.

SITUATION DEEMED AN EMERGENCY; UNDERLYING PROBLEM OF SEVERAL YEARS’ DURA-
TION; LITTLE OPPORTUNITY FOR THE CONTROL BOARD TO INTERVENE PREVENTIVELY

It is considered highly unusual for a State to intervene in the affairs of its
gubjurisdictions. Intervention is typically reserved for situations that can be classi-
fied as emergencies or disasters. In all five of the cases examined, the State waited
until the crisis in the bond market occurred before taking steps to intervene by es-
tablishing a financial oversight control board. In retrospect, signs of the underlying
problem were evident for three to ten years before the crisis erupted. Because they

it is an “authority,” in the case of Cleve-
fork’s MAC, it is a “corporation.” These enti-
ties, in t refer to their own boards in the sense of board of directors. Finally, the case of
Chicago involves the Board of Education or school board.

Hey, Robert W. The Crisis Regime: The MAC, the EFCB, and the Political Impact of the
New York City Financial Crisis. Albany, State University of New York Presa, 1984. p. 3-5.



49

‘THE CITY'S DEBT IS RESTRUCTURED, FROM SHORT TO LONG-TERM

‘A common component of a financial rescue plan has been to convert short-term
into long-term borrowing to save the city money in the short run. This debt restruc-
turing, | ywever, may require special permission from the State under the terms of
the financial rescue agreement.

It is generally considered fiscally imprudent to use long-term debt to finance cur-
rent operating deficits. Long-term debt is instead usually reserved to pay for capital
investment projects which pay back benefits over numerous future years. In the spe-
cial case of a city in fiscal distress, exceptions were sometimes made to “buy time”
to get the city’s finances back in order. Because the repayment of principal was
stretched out over more years, the annual carrying costa of a long-term bond could
be lower than for a short-term note of similar principal amount, and more so if long-
term rates were lower than short-term rates. (However, cumulative total interest
costs are likely to be higher with a longer payback period.)

REASONS MOTIVATING THE STATE TO GET INVOLVED

Two main types of concerns have motivated and been used to justify State inter-
vention into the affairs of their cities. One was the fear that the city’s poor credit
rating would spill over to the State itself or to other subjurisdictions and agencies
in the State. This could lower the credit rating and thereby raise the interest rate
that those entities have to pay on their own borrowings. In the worst case, access
to the bond market might be closed for them aa well.

‘The other was the State's responsibility for the health and welfare of the citizens
of both the distressed jurisdiction and other jurisdictions in the State. Negative eco-
nomic ramifications from the distressed jurisdiction could hurt the economic well-
being of other parts of the State.

2. DURATION OF CONTROL BOARD

ACTUAL EXPERIENCE,

In terms of duration, the financial control boards examined fall into three groups:
short term (three to seven years); long term (10 or more years); and interrupted
term (terminated or suspended once but later reimposed).

‘Short term. Cleveland's oversight board was in existence for seven years, from
1980 to 1987. Philadelphia’s, the newest contro! board, established in June 1991,
has now been in place for three and a half years; the city administration hopes that
the board can be terminated within two years.

term, For New York City, the Municipal Assistance Corporation, established
in 1975, remains in existence twenty years later, albeit with reduced duties. The
New York State Financial Control Board (FCB), also established in 1975, had most
of its powers expire eleven years later, in 1986, but remains on standby authority.

Interrupted term. The Yonkers control board existed for three years, from 1975 to
1978, when it terminated; the control board was reinstated in 1984 and remains in
existence as of February 1995. The Chicago School Finance Authority can be charac-
terized_as both long term and interrupted term. First established in 1980, it re-
mains in existence in 1995, fifteen years later. For the period from 1988 to 1993,
however, while it continued to monitor, its review and approval authority with re-
spect to the school district’s financial affairs were substantially reduced; the Author-
ity was given added duties related to implementing the State’s educational reform
P

in (these school reform duties were later repealed, effective June 30, 1994). But
In September 1993, when the school board failed to’ adopt a balanced budget, the
financial powers of the School Finance Authority were reinstated and enhanced.
Thus, its two terms of active involvement were 1980-88 and September 1993-
present.

GENERAL PROVISIONS FOR EXPIRATION OF BOARD

The conditions that will permit a, control board to expire, are typically set forth
in the enabling legislation. ‘The expiration date of the board has often been set, as
six months or one year after the end of the “emergency period” or after all the liabil-
ities (bonds and notes issued or loans taken) have been fully paid and discharged.

‘The end of the emergency period is defined as the city meeting one or more finan-
cial conditions, One condition is that the city’s budget has been in balance for a
specified number of years: for example, the requirement was one fiscal year in, the
1976 Yonkers legislation, revised to three fiscal years in the 1984 Yonkers legisla-
tion, and six successive years of balanced budgets in the case of the Chicago School
Finance Authority. Another condition is that the city has presented a multi-year


12

ment and by introducing productivity initiatives throughout the
city government.

e cities often hired new financial managers and gave them au-
thority and responsibility to strengthen the cities’ accounting,
budgeting, and cash management operations. In addition, the cities
installed or upgraded their financial management systems and im-
proved their financial reporting. The cities also introduced or
strengthened budgeting of their capital accounts. In addition, Bos-
ton_and Chicago included reports in their annual budgets of how
well city departments performed against preestablished perform-
ance measures.

In general, these improvements provided the cities with new and
better financial information so that they can actively monitor their
cash balances and their outstanding debt. The cities also were able
to monitor differences between budgeted and actual spending
among their departments. This monitoring enabled the cities to ex-
amine how costs, such as a multi-year labor contract, for example,
could affect future budgets in the out years.

The financial improvements permitted the cities to identify areas
in city operations where costs could be reduced. The cities made
their most significant cost reductions in the area of work force
management. Personnel costs generally represented about 40 to 75

ercent of the cities’ operating costs. The cities reduced these costs

yy such actions as voluntary and involuntary layoffs, transfer of
staff, changes in work rules, and better controls over overtime,
leave, and Workmen’s Compensation. For example, between 1990
and 1994 Chicago reduced the cost of its health benefits by a total
of $225 million.

In addition, the cities that administered their pension pro-
grams—Boston, New York, and Philadelphia—reduced their pen-
sion costs in various ways. In 1988, Boston began to eliminate its
unfunded pension liability by establishing an updated funding
schedule that based payments to its pension fund on independent
actuarial estimates. The city reduced its pension costs through a
better investment return from its pension assets and by a work
force reduction of about 2,000 employees. As a result of these ef-
forts, according to city estimates, Boston’s pension costs decreased
from $130.5 million in fiscal year 1988 to $112 million in fiscal

ear 1993. New York reduced pension costs by requiring increases
in employee contributions. In addition, Philadelphia raised retire-
ment ages.

Cities also began to implement productivity initiatives often with
help from their local businesses. For example, in Philadelphia a
group of executives and managers from 130 businesses worked
with the mayor’s task force on productivity to identify and track
productivity initiatives. In its fiscal year 1995 to 1999 financial

lan the city estimated that it had saved a total of about $450 mil-
ion in fiscal years 1993 and 1994 through these initiatives. Accord-
ing to the plan, Philadelphia increased productivity across city op-
erations thro More contracting out, better use of technology,
and consolidation of previously fragmented services such as build-
ing, fleet management, and information services. Boston, Chicago,
Cleveland, and New York identified and implemented similar pro-
ductivity initiatives.