In the wake of three cities’ recent bankruptcy filings, California’s Legislative Analysts Office has published a municipal bankruptcy guide. Authored by Brian Uhler, the report gets down into the nitty-gritty of Chapter 9 municipal bankruptcy proceedings. To my knowledge California is the first state to detail the mechanics of federal bankruptcy law as it applies to its own municipalities.
I think this is an excellent report, but I imagine it was intended for members of the California legislature as much as city officials coping with distressed finances. There are swarms of bankruptcy attorneys circling weak municipalities, willing and able to establish an hourly relationship and give advice. But California legislators have a lot of constituencies to placate, and every muni bankruptcy affects public unions and their retirees. Public unions have long been a powerful force in Sacramento. Bloomberg reported that public unions contributed $76 million to California politicians and ballot measures in 2010, the single largest interest group that year.
The report provides the mechanics for assessing whether a municipality qualifies as “insolvent;” how California’s mediation process, AB 506, works; and what happens after the bankruptcy paperwork is filed. For most municipalities the largest area of spending is wages and benefits for employees, and the report addresses both. Basically, wage contracts can be broken in Chapter 9 if the city can show:
(1) the agreement hinders its ability to achieve fiscal stability
(2) the employee group otherwise would bear a disproportionately small burden of the locality’s bankruptcy
(3) the locality negotiated in good faith with the employee group but no resolution was reached
As to the bigger, more complex issue of benefits for retirees (emphasis mine):
A local government’s agreements with retirees to provide pension or health benefits are generally considered contracts which may be subject to rejection under Chapter 9. However, Chapter 9 cases addressing retiree benefits have been rare. In its Chapter 9 case, Vallejo became the first and only California locality to use a plan of adjustment to significantly reduce health benefits for its retirees by decreasing its payments to a flat rate of $300 per month.