Capitol clash over effort to curb muni bankruptcies

The fight is over a breathing space. With dozens of California cities and counties in deep financial stress, a labor-backed effort is under way to require a community to submit to confidential review and enforceable mediation before pulling the trigger on a municipal bankruptcy declaration.

“The rhetoric (about bankruptcy) is high, flying wildly around the state. We want to have an adult in the room explaining to folks what the consequences are of a Chapter 9,” said Assemblyman Bob Wieckowski, a Fremont Democrat and a bankruptcy lawyer.

Strapped cities believe Wieckowski’s plan, supported by organized labor, is not so much an attempt to provide them with a respite as to protect labor at the expense of the larger public. Cities, they say, know their own books better than outside arbitrators and are desperate to cut costs.

“You see a lot of contracts being renegotiated, significant changes and cuts in operations, contracting out of services that used to be provided by public employees and consolidating service delivery by putting two or three together. Cities and counties are forced to be extremely innovative,” said Daniel Carrigg, legislative director of the League of California Cities.

The problem is that cities and counties are getting squeezed ferociously by shrinking revenues, increased demands for social services, pocketbook obligations on pensions and retirees’ health care, and cuts in emergency and law enforcement services – just to name a few at the top of a long list.

But by going into bankruptcy, the locals can suspend payments – at least temporarily, pending renegotiation – on their obligations, including the MOUs they signed with labor, usually after an intense and bitter parley. In effect, bankruptcy gives them a free pass, regardless of the political fallout. To save money, cities may outsource services to private companies and order wholesale layoffs without first negotiating the issues – political cover for anti-union forces.

In effect what happened in Wisconsin with state government employment could occur in California with local government employment, labor believes.

Wieckowski seeks to thwart the locals’ ability to cut services, jobs, pensions and health benefits to balance the books without first doing a deliberative analysis. It would provide a “breathing space” to locals. Language that critics said allowed a politics-driven commission to rule municipal finances was removed from the bill.

“It’s a very modest interim step,” said Carroll Wills, a spokesman for the California Professional Firefighters, “so we will no longer allow bankruptcy on demand in California.” Wills’ group, backed by the California Labor Federation and the California Nurses Association is taking the lead in supporting Wieckowski’s AB 506.

“In California, unlike most other states, there is a no-holds-barred approach to bankruptcy. It is basically that approach that enabled Vallejo, in our view, to declare bankruptcy and there was nobody really there to stop it. Mediation is a familiar, time-tested procedure for a city before it drives off the cliff and declares bankruptcy,” Wills added.

Not surprisingly, AB 506 has run into fierce opposition from local governments, who say they need the leeway to make tough decisions that may include laying off government workers and public safety personnel, and severely reducing the level of services to the public. Those decisions often must be made quickly, they argue, and slowing them down could cost more money in the long run.

And because a Chapter 9 filing can allow a city immediate relief from its debts, the short-term pressure is off quickly, allowing for cooler heads to negotiate an exit from insolvency.
The clash reflects the latest in a series of high-dollar confrontations between local government and organized labor over jobs and money.

Wieckowski’s bill was prompted in part by the 2008 Vallejo bankruptcy, which resulted in bitter fight over jobs and benefits as the city slipped into insolvency. A bill dealing with a similar subject emerged last year from the Assembly but died on the last night of session as the Senate clock ran out.

The proposal also seeks to avoid potentially millions of dollars in legal and other fees that strapped communities can ill afford. In Vallejo’s case, legal and consulting fees reached $9.4 million as the city seeks to emerge from bankruptcy by the summer.  

Municipal bankruptcy is a rarely used device – only one county, Orange, and two cities, Thermal and Vallejo, have invoked it in more than 60 years.

But dozens of municipalities remain in severe fiscal straits after weathering two years or more of deep cuts.

Fresno, for example, eliminated 160 positions – a cut that followed earlier layoffs – as it grappled with an $80 million shortage over two years. During that time, the city eliminated more than a fifth of its authorized positions. In San Jose, officials say pink slips await 300 police officers by June 27 unless they agree to a 10 percent pay cut. Some 122 layoff notices were sent out last week – a first for the city.  

Oakland laid off 30 police officers last year and more city cuts are likely. In San Diego, the school district earlier eliminated more than 700 positions, and another 300 are on the chopping block. Meanwhile, that city – hit by the familiar twin whammies of pension obligations and the recession  – has laid off about 10 percent of its overall workforce since 2007, and more cuts are likely.  

In Nevada County, dwindling property values – a familiar condition in most counties – forced a $5.5 million budget hole and locals face still more woe. Santa Barbara County has begun issuing layoff notices to 130 employees to cut a third off a $72 million shortfall and Humboldt County intends to lay off 46 workers – including 40 in law enforcement – if state funding doesn’t come through. At cities and counties across the state, the picture is familiar: Local officials are considering a mix of cuts, early retirements and layoffs to balance the books.

Reductions of similar proportions at more than 70 cities and counties, large and small, have occurred or are looming, according to findings presented to federal bankruptcy judges in November. The findings were part of a larger report, prepared by Marc S. Cohen and  Julie A. Belezzuoli of Kaye Scholer Los Angeles, which was released in full in February.

“It provides an efficient answer to the budget problems facing many municipalities who are contemplating bankruptcy.  Mediation would allow the municipality to negotiate with the various stakeholders to restructure its financial obligations and hopefully avoid the myriad problems that we have seen in the ongoing Vallejo bankruptcy,” according to a labor-provided analysis.

A municipal bankruptcy under Chapter 9, with the agreement of a judge, gives the public entity breathing space from its obligations. The idea is to allow the entity time to recoup resources – including delaying payments on its obligations such as pensions, health care, salaries, services, building loans and the like – to make a gradual exit from insolvency.

The notion of third-party mediation in a bankruptcy dispute appears useful. But critics of the bill note that in conventional mediation, the mediator does have the authority to make binding decisions. In AB 506, the mediator is really a form of arbitrator and can make decisions that apply to both sides – including forestalling a bankruptcy filing.

And it’s that authority that draws the cities’ sharpest fire.

“What are the parameters here? How is the
mediator selected? Frankly, we are quite concerned that given the support on this bill this is going to be railroaded through the process and we are going to have a mess on our hands,” Carrigg said.

“There is an agenda in this bill that goes far beyond bankruptcy,” he added.

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