Bankruptcy isn't a four-letter word

Governor should call special session to enact municipal bankruptcy statute

By Geoffrey Lawrence
  • Thursday, March 27, 2014

Let’s face it: North Las Vegas isn’t bankrupt — it’s worse than bankrupt. 

The city is insolvent with no clear pathway for restoring solvency over any foreseeable time period. 

In June 2012, city officials stretched the “state of emergency” provisions that exist under Nevada law. By so doing, they thought, they could suspend pay raises the city had previously granted unionized municipal workers through collective bargaining contracts.  State law allows cities to declare a state of emergency in cases of extreme physical disaster, such as floods or earthquakes, but city leaders argued that their city’s fiscal position constituted a similar emergency. 

There’s no doubt that the city’s fiscal position should be cause for alarm, but — as District Court Judge Susan Johnson ruled in January — poor fiscal management is not among the conditions that legally allow city leaders to assume emergency powers and renege on contracts.

Johnson’s ruling, however, puts the city back on the hook for the $41 million in back pay and salary increases due under union contracts — an amount the city does not have and cannot pay.  Indeed, the city projects an $18 million deficit for FY 2015 and, over the next seven years, a $152.6 million deficit.  The city has $428 million in outstanding debt obligations — currently rated as junk bonds — incurred to construct a new, marble-floored city hall and other extravagancies.  Analysts at Fitch Ratings now openly state they expect North Las Vegas to “face insolvency or state receivership.”

That last option scares the pants off state leaders, but offers no real solution to the city’s problems.  At a March 7 meeting of the State Committee on Local Government Finance, state leaders gave North Las Vegas officials until May 1 to develop a comprehensive plan for bridging the city’s fiscal gap over the next year in order to avoid a state takeover of the city’s finances. 

State tax officials are obviously reluctant to assume management of Nevada’s fourth-largest city, but even if they do so, they lack the powers necessary to solve the city’s problems — foremost among them modifying those extravagant union contracts and other obligations to which city leaders committed the city.

State receivership basically allows the Department of Taxation to appoint a financial overseer to negotiate contracts on the city’s behalf and implement a debt-reduction plan through both tax increases and spending reductions.  Such receivership was last implemented for rural Storey County, but no local government of the size of North Las Vegas has ever undergone the process.  Furthermore, the state overseer lacks authority to suspend or modify existing union contracts or debt obligations.  As one state tax official told the Committee on Local Government Finance, “It’s no guarantee that structural deficits can be overcome.”

Sometimes, however, it is necessary for governments — just like businesses and individuals — to renegotiate their debt and structure it along different terms. This is why federal law allows municipalities to enter into a bankruptcy protection proceeding.  Chapter 9 municipal bankruptcy allows a municipality’s representatives to confront city contractors and creditors and present to court officials their finances so the court can determine what a city can realistically afford to pay and amend the contracts accordingly.

Sure, this option usually leads investors to chastise city leaders who’ve made unsustainable financial decisions by restricting their access to credit. But that function of markets is an important restraint on municipal leaders who too often try to buy votes with tax dollars.

Municipal bankruptcy, however, is available only to states that have enacted explicit statutory authority for its use. Nevada, instead, has relied on the state receivership option with the naïve hope that a city the size of North Las Vegas would never succumb to inflated union contracts and poor financial management and require third-party intervention. 

But now that time has come. A municipal bankruptcy statute is urgently needed to allow North Las Vegas to re-emerge from its current state of prolonged insolvency.  As former state budget director and current Reno City Manager Andrew Clinger says, “I don’t see a solution to this that doesn’t involve the state legislature.”

Few things should warrant a special session of the legislature, but the pressing need for a municipal bankruptcy statute is one.

The only thing scarier than bankruptcy is the need to enter bankruptcy without being able to do so.

Geoffrey Lawrence is deputy policy director at the Nevada Policy Research Institute. For more visit http://npri.org.


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