Uncertainty lingers after ruling in Vallejo bankruptcy case

A federal judge made a groundbreaking ruling earlier this month that the labor contracts of the bankrupt City of Vallejo can be overturned, but he is pushing for a settlement that would avoid nullifying the contracts.

A lawyer for the city’s labor unions said this week that one of the sticking points in the ttalks is a city demand that new hires and retirees begin paying 25 percent of the cost of their health care.

Some think the ruling by U.S. Bankruptcy Court Judge Michael McManus in Sacramento on March 13 may prompt other cash-strapped cities to consider bankruptcy as a way to break costly labor contracts.

Vallejo is a waterfront suburb with 120,000 residents located on San Francisco Bay. Officials of two small towns up river from the bay, Rio Vista and Isleton, talked about declaring bankruptcy last fall.

A bill introduced in the Legislature, AB 155 by Assemblyman Tony Mendoza, D-Norwalk, which has a dozen co-authors, would make it more difficult for local governments to declare bankruptcy.

Approval would be needed from a new Local Government Bankruptcy Committee whose members would be the state controller, the state treasurer and the state director of finance.

A Mendoza aide said the bill, which has not yet been scheduled for its first committee hearing, will be “improved” through amendments and is still part of the assemblyman’s agenda this year.

What kind of precedent will emerge from the bankruptcy declared by Vallejo last May is not clear.

The city reached agreements on new contracts earlier this year with unions representing police and managers. McManus wants similar agreements with the remaining two unions representing firefighters and electrical workers.

If there is a settlement, McManus would not have to overturn the current firefighter and electrical worker contracts, almost certainly drawing an appeal from the unions. So a settlement would make his historic ruling an untested opinion.

In addition, a settlement might also end the unions’ appeal of a McManus ruling in September that Vallejo is eligible for bankruptcy. An appellate bankruptcy panel heard arguments Feb. 19, and then asked for briefs from both sides.

McManus said in his ruling on March 13 that federal law restricting the canceling of labor contracts in bankruptcy court applies only to companies covered by Chapter 11, not cities covered by Chapter 9.

As he issued the ruling, the judge scheduled a follow-up hearing to allow more time for a settlement and to get detail about how labor costs are split between the deficit-ridden general fund and 100 funds restricted to special purposes that have $116 million.

Vallejo was said to have begun the current fiscal year last July with $77.9 million in estimated general fund revenue, less than its $79.4 million cost for labor. By January, the revenue estimate had dropped to $72 million.

McManus suggested at the follow-up hearing yesterday (March 23) that the city and the unions try using an arbitrator to help them reach a settlement. He was told that a labor mediator failed before the bankruptcy, but a bankruptcy mediator could be a new option.
“I generally have a low opinion about the utility of ordering people to settlement conferences,” the judge said. “I’m just trying to see if there is anything you can agree on in terms of process.”

The judge allowed at least two more weeks for settlement talks. He gave the city lawyers a week to respond to his questions about labor costs, and the union lawyers a week to respond to the city.

“With or without a mediator you have to agree to something eventually,” the judge told the lawyers. He said the current contracts will either be rejected in bankruptcy or expire, and new contracts will have to be negotiated.

“Add a section on both of your briefs as to what process might be useful, if the parties are willing, to negotiate further — what process you would recommend,” McManus said.

The hearing began with a disagreement about the progress of settlement talks.

“There is no settlement. The parties have been meeting,” said Marc Levinson, an attorney for the city. “In the city’s opinion, we are not likely to produce a prompt and satisfactory conclusion.”

Kelly Woodruff, an attorney for the unions, said the likelihood is “extremely strong” that the city will be able to reach an agreement with the International Brotherhood of Electrical Workers.

“The only issue that remains outstanding is the city’s demand that IBEW agree that new hires and retirees contribute 25 percent of the cost of their health care,” she said.

Topping the city’s list of creditors is $135 million for retiree health care. A retirees’ committee formed for the bankruptcy is represented by its own city-paid attorney.

A governor’s commission estimated last year that state and local governments in California have an unfunded retiree health care obligation of at least $118 billion over the next 30 years.

Levinson said the city’s health cost proposal would have a “significant economic impact.” He also said there was a second unresolved issue in the talks between the city and the electrical workers, which he did not identify.

Woodruff said the city has made four demands in talks with firefighters: management rights, elimination of minimum staffing requirements, 25 percent of health costs for new hires, retirees and current employees, and “damages.”

A city news release when McManus issued his ruling on July 13 said bankruptcy costs, presumably mainly legal fees, had reached $3.5 million, diverting funds that could have provided “critical municipal services.”

Woodruff said firefighters have agreed to eliminate minimum staffing requirements, calling it “the primary focus of this entire bankruptcy.” She said the firefighters offered a health-cost alternative: an increase of 1.5 percent of salary in pension contributions.
The second biggest creditor listed by the city is the California Public Employees Retirement System with a future obligation of $84 million. An attorney has represented CalPERS in the Vallejo bankruptcy proceedings.

“We acknowledge there has been movement,” Levinson said of the firefighter offers. “But we are not there and are not likely to get there soon. We will continue to try.”

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Posted 24 Mar 09

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