October 19, 2011
By: Meaghan Olson
California Governor Jerry Brown signed a bill into law this weekend that will add hurdles to municipalities filing for Chapter 9 bankruptcy in California. The bill was apparently the third of its kind that has been proposed in the three years since Vallejo's 2008 bankruptcy filing, according to the L.A. Times.
Also since Vallejo sought bankruptcy protection, several other California townships and cities have reportedly threatened similar action, citing unmanageable debts and unsustainable contracts with city employees.
One of the modifications Vallejo made in its bankruptcy case was to contracts with firefighters and other public employees in the city. By limiting their pay and benefits, the city was apparently able to save serious money. But the move rankled labor unions across the state, which spurred the introduction of bills similar to the one signed into law this weekend.
The new California bankruptcy law (known as AB 506 in the state legislature) requires municipalities considering Chapter 9 bankruptcy to complete a financial evaluation by a neutral third party. If the neutral body deems the city in need of bankruptcy protection, the city can file.
Alternately, cities may qualify for bankruptcy by declaring a state of fiscal emergency, meaning that they will default on their bills within 60 days unless they enter bankruptcy protection. According to Jerry Brown’s web site, the goal of the new law is to push cities to seek "less dramatic" alternatives to bankruptcy protection whenever possible.
Labor unions will likely be happy with the bill. In bankruptcy, many cities save money by renegotiating labor contracts, and unions' power in such negotiations is significantly diminished.
California's example may spark similar legislation elsewhere in the country - right now, eyes are on Pennsylvania. Harrisburg, that state's capital city, filed for Chapter 9 bankruptcy protection last week. Whether the case will have significant impact on regulations or legislation there remains to be seen.
Jefferson County in Alabama narrowly avoided bankruptcy in September by negotiating a debt settlement agreement with its creditors. If the economy slumps into a double-dip recession, the number of municipal bankruptcies and near-bankruptcies may well increase.
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