What would Atwater gain with bankruptcy?

October 6, 2012

Atwater, California voted at a special meeting on Wednesday to declare a common-law fiscal emergency. This is the first step toward filing for municipal bankruptcy. It makes Atwater the fourth city in California to publicly declare fiscal distress. The city must now go through a 90-day mediation period with its creditors, public employees, bondholders, trade vendors and CalPERS, the statewide pension provider.

The bankruptcy process is well established, but very little cost benefit analysis has been done to evaluate whether the benefits of bankruptcy outweigh the costs. Vallejo, CA spent $13 million on bankruptcy costs and Jefferson County, Alabama’s  large and very complex Chapter 9 case still has enormous legal costs to contend with. Jefferson County Commission President David Carrington explained what the county faced:

“People look at our side in the courtroom and see five or six lawyers, which seems like a lot,” Carrington said. “It is, but the other side has 45, 46 lawyers over there working against us.”

Lawrence LaRose, a bond insurer lawyer and partner at Winston and Strawn who has been actively involved in the Stockton, Harrisburg and Jefferson County bankruptcy cases, said at a recent conference that bondholders are “lawyered up and organized” during bankruptcies. The forces facing Atwater officials in bankruptcy will be strong.

Standard & Poor’s did an analysis of the costs and benefits of the Vallejo, CA bankruptcy, and found that bankruptcy was not a cost-effective strategy given what the city has gained (emphasis mine):

We think that evaluating the city’s bankruptcy solely on its fiscal merits, therefore, renders an equivocal verdict. When indirect and long-term costs are added to the equation, based on our estimate, it becomes even less likely that the benefits of bankruptcy will come near the costs.

Public officials in Atwater have to weigh all the issues they face, but they might want to consider options like disincorporation,which is allowed under California law. The key question for Atwater is how they can reduce their public employee costs, which Bloomberg reported on:

Atwater’s pension and retirement costs are rising…Under labor contracts, the city pays all of an employee’s eight percent mandatory contribution for pension costs and seven percentage points of the nine percent for police and firefighters. Health-care premiums for workers increased 15 percent in 2011 and are forecast to jump ten percent next year.

There are no easy choices for Atwater, but it’s important for city officials to weigh whether spending $10 to $12 million on legal costs for bankruptcy will reduce their costs adequately and get them to fiscal stability.


Atwater, CA Financial Statements year ending June 30, 2011 (from MSRB’s EMMA)

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