Municipal Bankruptcy Not So Easy Any More…




Steven Greenhut reports in his Register column this weekend that California Governor Brown has signed into a law a bill that places limits on the ability of cities and counties to file for bankruptcy and related reorganization.  Greenhut identifies this legislation as union-backed and concludes that this is yet another example of the Governor giving unions almost anything they want, and that this legislation reflects the goal of unions “ to make it impossible to abrogate those overly generous union contracts that are the source of the problem.”

I decided to look up a couple of things to better understand. So, I began with the word abrogate.  The definition I found was this Mirriam Webster definition – “to abolish by authoritative action.”  So, it is action taken by someone or some thing with authority to abolish something over which they have authority.  I guess an example would be a city council, or a bankruptcy court, deciding to abolish a union contract or maybe even a retirement system.

Next, I looked for the piece of legislation in question.  I found Assembly Bill 506 and a notation that it has been chaptered. That means signed into law. So, this must be the legislation in question.  An introductory paragraph in the bill itself reads “This bill would prohibit a local public entity from filing under federal bankruptcy law unless the local public entity has participated in a specified neutral evaluation process with interested parties, as defined, or the local public entity has declared a fiscal emergency and has adopted a resolution by a majority vote of the governing board at a noticed public hearing that includes findings that the financial state of the local public entity jeopardizes the health, safety, or well-being of the residents of the local public entity’s jurisdiction or service area absent bankruptcy protections.”

Then I found wording in the bill that I think is the crux of the problem for some folks:

“Filing for bankruptcy protection under Chapter 9 should be considered a last resort, to be instituted only after other reasonable efforts have been made to avoid a bankruptcy filing or otherwise appropriately plan for it. It is in the interest of the state, local governments, and the public that local governmental entities have sufficiently sound financial capacity to provide required services to the public and meet their contractual and other obligations during any restructuring or financial reorganization process.  Furthermore, it is in the best interest of the public, the state, and local governmental entities that employees, trade creditors, bondholders, and other interest-holders be included in an appropriate restructuring process and have an adequate understanding of the financial capacity of local governmental entities and their obligations, as a clear understanding of both is necessary for any restructuring or reorganization process.”

And, finally, here is wording that is a red flag for those who believe the financial stress that government is under today is in large part due to the salaries and benefits that have been granted to government employees: “To the extent financial relief granted through Chapter 9 could affect public employee compensation, employees have a direct interest in the Chapter 9 process, particularly prior to filing. Therefore, it is important for those parties to be able to participate in a prefiling confidential neutral evaluation process that could assist parties in reaching a settlement or otherwise lead to a prenegotiated, consensual plan of adjustment and avoid a Chapter 9 filing.”

If you have read this far and are still awake, the impact of this new law is pretty clear. No longer can local government abrogate its responsibilities by means of bankruptcy unless it first goes through a noticed public hearing, declares an emergency, and meets with creditors and its employees to assess the situation and explore alternatives to municipal bankruptcy.

There are more process-oriented details in the bill and of course the devil is often in the details.  But, setting that aside for the moment, this overview should give the reader enough to decide if this legislation – now law – is a good thing or a bad thing.  Had this law been in effect in 1994, I wonder if the County of Orange would have found it desirable to file for bankruptcy (as it did then) when the County Treasurer’s investment casino became upside-down.

About Over But Not Out

A retired Orange County employee, and moderate Republican. The editor seriously does not know OBNO's identity as did not the former editor, but his point of view is obviously interesting and valued.