SAN FRANCISCO — A bill that would force California municipal governments to undergo mediation before allowing them to file for bankruptcy is moving through the Legislature.
The measure, now in committee, would make struggling local governments, agencies or special districts weather a mediation process in “good faith” before seeking protection in federal bankruptcy law.
The California Debt and Investment Advisory Commission, which provides information and assistance on bond sales to local governments, would oversee the process, according to the proposed bill.
“The bankruptcy filing in Vallejo was an abject failure for all concerned and really an indictment of bankruptcy on demand,” said Carroll Wills, a spokesman for the California Professional Firefighters Association, a co-sponsor of the bill. “Our primary concern is that there are other Vallejos lining up to basically use bankruptcy as a means by which to eviscerate collective bargaining.”
Wills said the law would also prevent unnecessary bankruptcies that tarnish the state’s economic reputation and raise borrowing costs, while saving cities from the high cost of bankruptcy.
“There has just been a lot of tension over the issue,” said Dan Carrigg, legislative director for the League of California Cities, which opposes the legislation. “In one way or another the effect of the bill would be limit the public agency’s ability to go to Chapter 9 bankruptcy.”
He said one likely result from the legislation would be debt holders taking the brunt of the haircut through mediation because many employee-related costs would be untouchable.
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 filing is the largest municipal bankruptcy in California, and one of the biggest in the country, since Orange County’s in 1994.
The city has spent more than $9 million on lawyers’ fees during the bankruptcy and has no plans to return to the bond market.
The Vallejo bankruptcy also forced unions to renegotiate contracts. Most creditors are likely get paid only 5 to 20 cents on the dollar while the main bondholders are set to take a 40% haircut, according to the proposed bankruptcy exit plan.
Besides Vallejo and Orange County, the only other municipality to file for bankruptcy in state history is Desert Hot Springs in 2001.
The bill’s author, Bob Wieckowski, D-Fremont, did not respond to repeated calls for comment. AB 506’s opponents say it would hobble localities and benefit unions by allowing a committee of politicians beholden to labor to oversee the process.
James Spiotto, a bankruptcy law expert at Chapman & Cutler LLP, said it is important that states come up with a neutral and objective approval mechanism for bankruptcies.
“The devil is in the details,” he said. “States have normally come up a with a unique mix of remedies and procedures that seem to work, and it is something that keeps on changing.”
California, according to Spiotto, is one of 15 states that give localities permission to file for Chapter 9, while more than half have some type of approval process.
Iowa and Georgia explicitly restrict Chapter 9 bankruptcies. He said Rhode Island, Michigan and Indiana have or are working on bankruptcy approval laws.
This is not the first bid by state lawmakers to limit municipal bankruptcies; such bills were introduced in 2009 and 2010 but never reached the governor’s desk.
Public employee unions, including the California Professional Firefighters, began pushing for the legislation after Vallejo successfully abrogated its labor contracts during bankruptcy.