The California Labor Federation, AFL-CIO, and the California Public Employees’ Retirement System last week asked U.S. Bankruptcy Court Judge Michael McManus to block Vallejo’s bid to reject its collective bargaining agreements.
Vallejo, a San Francisco Bay Area city of 117,000, sought Chapter 9 bankruptcy protection on May 23, claiming it could no longer afford to pay agreed salaries and benefits to its public workers. The case is the biggest municipal bankruptcy since Orange County’s 1994 filing.
Vallejo in June petitioned the court for permission to reject contracts of police officers, firefighters and other workers. The AFL-CIO said the federal court should not reject contracts that are valid under state law because of the bankruptcy.
Rejection of Vallejo’s contracts “invites other cities in California to attempt to solve their budget problems by shedding their labor agreements and by making the employees who work for the taxpayers carry the burdens of fiscal challenges,” the union said in a Dec. 11 filing.
“Public sector labor relations statutes show that labor agreements like those of the four unions here [in Vallejo] are not like any other creditor’s contract,” AFL-CIO attorneys wrote. “Rather, they represent the intentional exercise of the governmental power of the state to protect public employees and to regulate public sector labor relations.”
That argument aims at a fundamental tension in municipal bankruptcy law — the federal government and the courts are loathe to dictate policy or financial terms to municipal debtors the way they would others because the U.S. Constitution’s 10th Amendment protects state sovereignty.
CalPERS, which administers pension and health benefits for retired city workers, said the city should not be allowed to reject the collective bargaining agreements because the move would “implicitly” undermine the city’s contracts with the retirement fund.
Retirement benefits are governed by contracts between the pension fund, the city, and workers, not the collective bargaining agreements, but the benefits are conferred under the CBAs. And it is not clear how the contracts with CalPERS would be affected by the termination of the labor contracts.
If the court is going to approve any measures that impair retiree rights, it should do so under a separate motion and fully notify retirees of their right to be heard in the case, CalPERS lawyers said.
The pension fund also argued that state law, not the federal bankruptcy code, defines the terms under which a CalPERS retirement plan contract can be rejected, and the city has not taken the steps necessary under state law to terminate its CalPERS contracts.
Retirees are Vallejo’s biggest unsecured creditors. According to its bankruptcy filing, the city owed unfunded actuarial liabilities of $135.4 million for retiree health benefits and $83.9 million for pensions.
The bankruptcy court is scheduled to hear arguments on the rejection of the labor contracts in February.
