California Legislators Refuse to Change Municipal Bankruptcy Laws
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California Legislators Refuse to Change Municipal Bankruptcy Laws

August 28, 2012


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State legislators in California have refused to pass a bill that would make it more difficult for cities to file municipal bankruptcy, according to a report from Bloomberg Businessweek.

Sources say that the bill was pushed by labor unions in an effort to heighten protections for creditors, such as public-employee unions, who often see their contracts altered and pensions lowered in bankruptcy court.

The bill was presented after three California cities — Stockton, Mammoth Lakes, and San Bernardino — all filed for bankruptcy within a span of a few weeks earlier this summer.

Mark Hedlund, a spokesman for Senate President Pro Tem Darrell Steinberg, told sources that his boss has set the bill aside and will not push it any further.

Under current California bankruptcy law, cities and towns that are struggling with debt must first try to negotiate new contracts with its creditors and investors through mediation before filing for bankruptcy.

According to the law's critics, cities often go to mediation as an empty formality, and the mediation process is relatively weak. Under the proposed bill, the mediator would have much more power and deadlines for negotiations would be relaxed.

The bill was written by the author of the current state municipal bankruptcy law, state Assemblyman Bob Wieckowski, and it received strong support from a small group of other pro-union legislators.

Steinberg, however, believes that the state legislature did not need "another debate on municipal bankruptcy," which has certainly been a hot topic in Sacramento over the past few months.

According to the Legislative Analyst’s Office, a nonpartisan office that attempts to offer neutral advice on legal matters, California gives local governments "significant fiscal independence," which includes the freedom to file for bankruptcy with relative ease.

According to the office, "local governments in California are provided broad discretion over when to initiate a Chapter 9 case, as well as how to use the tools of Chapter 9 to adjust their obligations."

One of the primary advantages of municipal bankruptcy, according to the report, is that "Chapter 9 also does not interfere with a local government’s authority over its own affairs or alter its primary functions or governance structure."

Since Chapter 9 allows municipal governments to continue functioning while attempting to renegotiate their debt, state legislators view Chapter 9 bankruptcy as a crucial financial tool for struggling cities, and are not inclined to limit this power, at least not yet.

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