No one wants to go through bankruptcy. Whether you are an individual, business, city or county, going to a judge for protection from creditors so you can reorganize is the resort of last choice.
Now a bill that municipalities say would add insult – and expensive time – to injury has passed the Assembly with 43 votes in favor and 16 opposed. The bill, which received no Republican support, next goes to the Senate.
Assembly Bill 155 by Assemblyman Tony Mendoza (D- Artesia) requires local governments to obtain approval from a state-level Local Agency Bankruptcy Committee before going to a judge. The committee would include the State Controller, the State Treasurer and the Director of the State Department of Finance.
The bill drafted in the wake of Vallejo’s bankruptcy filing in 2008 is supported by the California Professional Firefighters, which argued in a statement supporting the bill that it is needed to protect against a weakening of the state’s credit that might potentially occur if a city were to declare bankruptcy.
“By retaining for municipalities the ultimate option of filing for bankruptcy protection, while protecting the state’s compelling interest in oversight and the option to intervene to assist prior to municipal default and bankruptcy filing, AB 155 provides the state an opportunity to be able to discourage frivolous filings and preserve the process for those municipalities who truly are insolvent and face no other alternative to bankruptcy,” as stated on the California Professional Firefighters Web site.
The League of California Cities said in a notice to members that blame for the state’s credit crisis is misplaced.
“The state today has one of the worst credit ratings in the nation – not due to a city, but due to lack of confidence among major bond rating and financial institutions that the state can’t solve its own budget problems.”
During arguments in the Assembly Local Government Committee, Assemblyman Paul Krekorian (D-Burbank) said that the bill would stop politically-motivated cities who just don’t want to pay workers what they are paying them from going to bankruptcy court to nullify contracts or use the threat of bankruptcy court to negotiate lower contracts.
“Obviously the unions are worried that more municipalities will follow Vallejo into bankruptcy in an effort to void labor contracts,” said Tim Yeung, an attorney at Sacramento-based Renne Sloan Hotzman Sakai LLP.
To show that bankruptcy is not a fad sweeping cities across the state, League literature pointed to statistics that show since Chapter 9 was adopted 60 years ago, only two cities have petitioned for its use: the City of Desert Hot Springs in 1994, and last year the City of Vallejo.
“Municipal bankruptcy is rarely used – and when it is used, it is a last resort,” said League Legislative Analyst Natasha Karl in the newsletter. “It is difficult, and certainly not popular with local voters – the ultimate decision-makers at the local level.”
Because bankruptcy is the last step before even more dire default, the California State Association of Counties pointed out in a letter to the bill’s author that delaying the stay of financial obligations in a bankruptcy and put the state at potential liability for damages.
Instead of micromanaging city and county financial decisions, the League encouraged the state to focus on quickly passing a balanced budget without borrowing, shifting or taking local revenues.
“Local agencies working to solve their own budget problems are greatly affected by the uncertainty of whether a state budget will take, borrow or shift funds from local sources.”
JT Long can be reached at firstname.lastname@example.org