SAN FRANCISCO — California Gov. Jerry Brown has signed legislation imposing new requirements local governments must meet before declaring bankruptcy.
The new law forces municipalities to either enter mediation with creditors or to declare a fiscal emergency before going to federal court for Chapter 9 protection.
“Let’s be clear, this bill does not prevent a municipality from declaring bankruptcy or even throw roadblocks in its path,” Brown said in a signing message attached to the bill.
The original legislation would have made it harder to file Chapter 9, but the final bill was watered down in the face of local government opposition to language that gave mediators the power to decide if a municipality could declare bankruptcy.
Now local governments must meet with creditors for 60 days, which could be extended another month if a majority of creditors agree. Municipalities also may file for bankruptcy after declaring a fiscal emergency at a properly noticed public meeting.
The legislation, mainly backed by labor unions and professional mediators, was at least partly motivated by the city of Vallejo’s successful abrogation of labor contracts in the wake of its May 2008 bankruptcy filing. Similar bills were introduced in 2009 and 2010 but never reached the governor’s desk.
“The bill that the governor signed is considerably better than the ones that were in the pipeline until the very end,” said Marc Levinson, Vallejo’s bankruptcy attorney. “To me the biggest problem with the bill, is it is a solution in search of a problem.”
He noted that no California municipality has declared bankruptcy since Vallejo. Besides Vallejo and Orange County in 1994, the only other one to do so in state history was Desert Hot Springs in 2001.
Levinson, a partner with Orrick, Herrington & Sutcliffe, testified in state Senate hearings about the bill at the invitation of local government associations.
Vallejo, a San Francisco Bay Area city of around 120,000, filed for bankruptcy in May 2008 due to dwindling tax collections and what it called unsustainable labor contracts. The city would not have been affected by the legislation had it been in place during its struggles, Levinson said, because it went through 11 mediation sessions with its unions over three months before declaring bankruptcy.
“I think mediation is a good thing,” Levinson said.
He said the legislation could make it more expensive for localities because they may have to deal with more creditors and potentially delay seeking bankruptcy protection.
Vallejo has spent more than $12 million on lawyers’ fees during the bankruptcy.
The sponsor, Assemblyman Bob Wieckowski, D-Fremont, has said his goal with the legislation was to save taxpayers money by avoiding lengthy and expensive bankruptcy cases.