Richard Ravitch and Richard Brodsky have experience with governmental fiscal trouble. Cities, counties and states continue to struggle with unfunded pension liabilities, prompting the question of whether pension obligations represent debt or values, a debate the pair recently engaged in.

“I don’t think pension benefits are a debt,” said Brodsky, a former New York State Assemblyman from New York City’s Westchester County suburbs. “We have to distinguish between debt and social and legal obligations we have to fill. It’s a complicated world out there. Who are you going to hit and who’s going to suffer?”

Brodsky, and other prominent New York leaders, including Ravitch, a former lieutenant governor, debated pensions, bankruptcy and other facets of municipal distress last week at the Benjamin N. Cardozo School of Law’s Samuel & Ronnie Heyman Center on Corporate Governance.

“We have massive problems, I believe, in this state,” said Jonathan Henes, a restructuring partner at Kirkland & Ellis LLP in New York, who moderated the discussion.

New York City and others face soaring pension, Medicaid and retiree health care costs. Yonkers is teetering. Suffolk County just declared a fiscal emergency. Its Long Island neighbor, Nassau County, is under a fiscal control board.

Communities and counties are borrowing to fill budget holes, and drawing harsh scrutiny from rating agencies. Yonkers, Rockland County, Long Beach and Utica last year received downgrades.

Long Beach declared a fiscal emergency in February, having received a five-notch downgrade from Moody’s Investors Service. It issued $6 million of revenue anticipation notes earlier this month to fund operations through June. Its administration is looking to plug a $10 million deficit.

The debate over pensions comes amid widespread legal uncertainty. “Pensions are getting more and more litigated,” said Ravitch, who was former Gov. David Paterson’s lieutenant governor in 2009 and 2010, and is known for his work helping New York City avoid default in the mid-1970s. His resume includes the chairmanship of the Metropolitan Transportation Authority, and three years as the chief labor negotiator for Major League Baseball.

“We’re dealing with enormous legal uncertainties if the political process does not work out some consensual agreement where everyone contributes,” Ravitch said.

Brodsky warned about overlooking social needs.

“I care about making decisions of social and political impact, not a technical, tactical decision over whether the big boys can take it,” he said.

Kathryn Wylde, president of the business-oriented Partnership for New York City, pointed out that nearly one-fourth of New York City's budget goes to pensions and health care. "There's not a lot left," she said.

Treating borrowed proceeds as revenue is the biggest red flag, according to Ravitch.

“This problem is structural, and not related to the economic events of 2008. It’s a dramatically under-discussed subject,” Ravitch said.

He cited the state’s sale in the 1990s of Attica prison to one of its own authorities, the New York State Urban Development Corp. — basically, to itself. The public corporation borrowed the $200 million through a bond sale, and is paying off the debt with money the state pays to lease back the prison.

Essentially, the state paid operating expenses with money borrowed over 30 years. The agency has frequently refinanced the debt.

These days, Ravitch and Brodsky are co-chairing a budget commission in Yonkers, a city of 200,000 just north of the Bronx. Yonkers Mayor Michael Spano, elected in November, appointed the two to run the commission, whose composition is comparable to that in Suffolk County.

The Yonkers commission earlier this month issued a preliminary report saying the city’s budget gap for fiscal 2013 is $89.3 million. The group projects the shortfall to widen to $102 million in 2014, $150 million in 2015 and $210 million in 2016, for a total of $462 million.

Yonkers lacks a four-year financial plan or a multi-year capital plan and should immediately create them, the commission said.

Ravitch said such a reform helped turn New York City around in the 1970s.

Brodsky, who served in the General Assembly from 1983 to 2010, wants the Legislature to require all communities to adopt such a plan.

Brodsky said budget problems are both structural and cyclical, but warned: “We ought to act as though it’s structural, because if we say it’s cyclical, we close our eyes and hope it goes away.”

The ability to file for bankruptcy is essential for a city that wants to restructure, the group said.

“Collectively, we were able to accomplish what we wanted to accomplish because the alternative was bankruptcy,” Ravitch recalled about New York City in the 1970s.

Ravitch said the turning point for New York City came on May 2, 1975, when financial leaders said they would no longer write notes and bonds for New York City.

“If you default on payment of debt, you lose access to the capital markets,” he said, echoing comments in Suffolk County last month by 1970s colleague Richard Halverson, who is now chairing Suffolk’s budget commission.

State provisions about municipal bankruptcy filings vary from not allowing them to not limiting them at all.

In 2011, Rhode Island passed a law giving bondholders first lien on revenue. That essentially set up Central Falls to file for Chapter 9 protection in August. Then the city’s receiver, Robert Flanders, invalidated pension agreements and finalized new settlements that cut benefits by 55%.

In Pennsylvania, however, a federal court invalidated a Chapter 9 filing by the City Council in capital city Harrisburg, citing a restricting law the state legislature had passed. That annulment is under appeal, and additionally, the city’s receiver — the position is now vacant — could file for Chapter 9 on July 1, when the state law sunsets.

Ravitch said oversight boards, such the one in Nassau County that has battled continually with county officials since imposing fiscal control in January 2011, are ineffective.

“It’s a joke,” he said. “Fundamentally, they haven’t changed anything. Nassau still can’t balance its budget.”

Brodsky cited the difference between control boards and bankruptcy.

“Control boards get their money out of the hides of the people who pay for their services,” he said. “Bankruptcy brings the banks back into play. There’s a hidden meaning behind which mayors favor bankruptcy and which mayors favor a control board.”

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