By Edward Krudy
ALBANY, New York (Reuters) - New York state's top financial watchdog will name "dozens" of local governments that are in financial difficulty in the coming weeks as part of a new monitoring system designed to head off drastic measures such as bankruptcy or external oversight.
The new system is being introduced by New York Comptroller Thomas DiNapoli as many U.S. towns, cities and counties face dire financial straits. Last week, a federal court deemed Stockton, California, fit for municipal bankruptcy. In Michigan, an emergency manager took over Detroit earlier this year.
Those are situations that DiNapoli wants to avoid with his Fiscal Stress Monitoring System. DiNapoli said the state has seen no local government bankruptcies despite the ravages of the financial crisis in 2007-2009 and he wants to keep it that way.
"Setting the bankruptcy precedent in New York would send the wrong message to the municipal bond market," said DiNapoli at a conference at the Rockefeller Institute of Government in the state capital, Albany, on Monday.
"Such a step could make investors think twice about lending to other municipalities, especially those already suffering from severe fiscal stress."
The first names of New York municipalities will be released towards the end of May, according to DiNapoli's office. The system will also monitor school districts.
There will likely be "dozens" of names in the "significant fiscal stress" and the "moderate fiscal stress" categories, according to a person familiar with the matter.
The list could include the names of known problem municipalities such as the town of Long Beach in Long Island, or Rockland County, as well as other municipalities whose fiscal problems are not widely known. Utica and Troy are other New York cities that have been in economic decline for years.
The system is designed as an early intervention mechanism with the Comptroller's office offering technical assistance, training and planning to problem municipalities and school districts, DiNapoli's office said.
The Comptroller's office found in an earlier report that over 100 local governments do not have enough cash on hand to pay 75 percent of their current liabilities. Almost 300 local governments ended 2010 or 2011, or both, with a deficit.
Ballooning pension liabilities are one of the major strains on local finances. To alleviate some of that pressure, the New York new budget allows local governments to push back payments into their pension systems into future years.
According to the new law, approved last week, local governments - which so far have been required to fully fund their pension system - will be allowed to make fixed pension payments over the next seven years that are lower than their annual required contributions. They will then be required to make up the deferred contributions in the subsequent 12 years.
Moody's, the credit ratings agency, has said the measure could increase the level of unfunded liabilities, especially if investment returns are below expectations.
"The positive short-term budgetary relief will outweigh the cost of increasing unfunded pension liabilities for only the most financially stressed local governments," Moody's said in a report issued on Monday.
DiNapoli said he does not recommend that municipalities use the options, known as smoothing or amortization, except in times of severe fiscal stress.
(Reporting by Edward Krudy; Editing by Tiziana Barghini, David Gregorio and Andre Grenon)