Will Municipal Debt Adjustment Be Limited in California? Inching Toward an Answer.

Will Municipal Debt Adjustment Be Limited in California? Inching Toward an Answer.

Two prior posts on this blog (here and here) have traced the progress of an obscure – but potentially important – piece of California legislation designed to regulate the ability of local California governments to seek relief through the municipal debt adjustment process of Chapter 9.

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Relatively little-known California State Assembly Bill 155 would, if voted and signed into law, require local public entities to first seek approval from the California Debt and Investment Advisory Commission (which operates under the auspices of the State Treasurer’s Office) prior to seeking the federal debt adjustment relief presently available to them by local government decision.

Though ostensibly addressing the “debt” and “investments” of local governments, the bill is in fact aimed squarely at protecting public employee unions who – unnerved by the 2008 Chapter 9 filing commenced by the City of Vallejo, California – have backed the legislation since its introduction into the California legislature nearly 18 months ago.  According to analysis produced last July by the State Senate’s Local Government Committee, “labor unions and others want to require state oversight of local governments’ bankruptcy petitions.”

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The reason?  Public employee pensions and other employee benefits.

The details of public employees’ hiring and retention arrangements are typically governed by collective bargaining agreements (or “Memoranda of Understanding” in the context of public labor relations), brokered by the employees’ unions and their public employers.  As presicently noted in an article on municipal collective bargaining agreements authored 3 years ago, “Public sector unions have successfully obtained comparatively generous compensation and benefits packages even as the fortunes of American labor have continued to decline. In particular, municipal pensions may jeopardize the fiscal survival of many public sector employers.”

With perrenial state and local budget deficits, declining property values and a shrinking tax base, and significantly reduced revenues, many local governments are now in precisely the sort of “survival mode” suggested by this article . . . and the unions know it.  As a result, AB 155 has quietly made its way through the State Assembly and now appears poised to go to the State Senate floor.

Is “bankruptcy by committee” an appropriate balance between state interests and local government control?  Does it hamstring local govrenment officials from responding effectively to a local fiscal crisis?  Because municipal bankruptcies have always been used very sparingly, and only 2 such proceedings (including Vallejo’s) have filed statewide since 2008, is committee approval truly necessary?  Or is it merely a means by which public employee unions can improve their bargaining position outside of bankruptcy?  And what happens if a local government in financial crisis can’t get committee approval?

These questions appear, to date, unanswered.

But last week, AB 155 took a step forward, clearing the Senate’s Local Government Committee.  The bill will now go to the Senate Appropriations Committee for review.

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