The bill, which was offered by Assemblyman Bob Wieckowski, would address municipal bankruptcy has been decried as an attempt to inhibit the right and abilities of local governments to enter into Chapter 9 Federal Bankruptcy. In fact, the League of California Cities sees the bill in its current form as a non-starter in the dialogue of the future of municipal finance.
“The current draft of this bill is simply unworkable in its current form,” wrote Dan Carrigg, the League of California Cities legislative director in a letter announcing the League’s opposition. “Should this legislation be enacted, local agencies in fiscal distress will be effectively blocked from seeking the protections of federal bankruptcy court.”
The League wasn’t alone in its opposition to the bill. In a similar letter of opposition, the California State Association of Counties said “the current version of AB 506… has the potential to exacerbate the fiscal challenges of a local agency and jeopardize its ability to provide public services.”
This isn’t the first time legislation like this has been proposed. In the 2009-2010 Legislative session, local government organizations united to oppose AB 155, which similarly would have impeded the rights of local governments to manage their municipal affairs.
AB 506 proposes to require a state-appointed mediator to determine the solvency of a local government agency, and determine whether or not they have made a good faith effort to resolve their budget problems. Opponents of the bill say that describing the appointee as a ‘mediator’ is a misnomer. Because he or she would be appointed by a politician, who is subject to the forces of interest groups and their money, it is unlikely that they would choose an impartial “mediator,” instead that person would act more as an arbiter. This could leave the financial future of California’s municipalities solely in the hands of an unresponsive and unaccountable political appointee.
But not everyone sees it that way. California Professional Firefighters, who not only sponsored AB 506 but also sponsored AB 155, described the proposed reforms as “moderate.”
Carroll Wills, the Communications Director for CPF, pointed to Vallejo as an example of how municipal bankruptcy can be ineffectual. “I don’t think there are many people left who would look at the situation in Vallejo and say that bankruptcy-on-demand doesn’t have a definite downside for all concerned,” he said.
That experience has shown CPF that they need to be proactive in developing some ‘modest reforms.’
“We believe this is sensible policy for California and a very modest step away from bankruptcy-on-demand,” he continued.
The debate over municipal bankruptcy has resurfaced repeatedly in the last few years. Currently, California is only one of 12 states that allow municipal bankruptcies, and has since 1949. Since the state adopted its Chapter 9 laws, only two cities and one county have actually petitioned for bankruptcy protection.
But local government advocates seem to believe that just because municipal bankruptcy isn’t often used, it should be virtually eliminated. In fact, the its rarity is proof that the current system works appropriately. A scenario where there truly is ‘bankruptcy-on-demand’ is frightening, but if the demand amounts to one case every twenty-plus years, things are fairly stable here in California.
The bill will be heard before the Assembly Committee on Local Government today.