Bankruptcy Bill Stuck in Senate

A bill that would have made it tougher for California municipalities to declare bankruptcy stalled in the state Senate this week.

The bill’s author, Assemblyman Tony Mendoza, D-Norwalk, asked the Senate Local Government Committee to hold the bill. The move doesn’t mean the bill is dead, but it does suggest that Mendoza doesn’t think he has the votes to move it out of committee. The bill passed the lower house, the Assembly, on June 3.

The union-sponsored measure is a response to Vallejo, Calif.’s bankruptcy. The San Francisco Bay Area city of 117,000 declared bankruptcy in May 2008, and it has asked a bankruptcy court judge to allow it to reject public employee contracts that it says are no longer affordable.

Mendoza’s AB 155 would make it harder for local governments to declare bankruptcy by forcing them to seek permission from the California Debt and Investment Advisory Commission, which includes state fiscal officials, members of the Legislature and local government finance officers.

The bill would require that a local government exhaust all other options before declaring a Chapter 9 bankruptcy, require the municipality to present a proposed plan for adjusting its debts before the filing, and allow CDIAC to impose conditions on the filing, including barring the municipality from voiding contracts in bankruptcy.

Bankruptcy lawyers and local government associations argue that the bill would essentially prohibit municipal bankruptcy, which they argued can be a useful tool for turning around a troubled local government’s finances. Public employee unions say the bill would simply prevent unnecessary bankruptcies.

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