California Cities Face Bankruptcy Curbs

[ErickMontreal]

California Cities Face Bankruptcy Curbs

 

By BOBBY WHITE

MAY 28, 2009

 

As California seeks more funds from its cash-strapped cities and counties to close a $21 billion budget deficit, some state legislators are pushing a plan that could compound municipalities' pain by making it tougher for them to file for bankruptcy.

 

The bill would require a California municipality seeking Chapter 9 bankruptcy protection to first obtain approval from a state commission. That contrasts with the state's current bankruptcy process, which allows municipalities to speedily declare bankruptcy without any state oversight so that they can quickly restructure their finances. The bill, introduced in January, has passed one committee vote and could reach a final vote by mid-July.

 

The bill was sparked by the bankruptcy filing last year of Vallejo, Calif., just north of San Francisco. Vallejo's city leaders partly blamed work contracts with police and firefighters for pushing the city into bankruptcy, and won permission from a bankruptcy court in March to scrap its contract with the firefighters' union.

 

That spurred the California Professional Firefighters to push for statewide legislation to curtail bankruptcy, said Carroll Willis, the group's communications director. "What we don't want is for cities to use bankruptcy as a negotiating tactic rather than a legit response to fiscal issues," he said, adding that he worries cities may work in concert to rid themselves of union contracts by declaring bankruptcy.

 

If the bill passes, it could hurt cities and counties by lengthening the time before they can declare bankruptcy. That creates a legal limbo during which a municipality is more vulnerable to creditors.

 

The proposed state bankruptcy commission would be staffed by four state legislators, which some critics worry could politicize the bankruptcy process.

 

"This bill is impractical," said John Moorlach, a supervisor in Orange County, Calif., which filed for bankruptcy in 1994. "In many instances, haste is important. If you can't meet payroll but have to delay seeking protection, what do you do?"

 

California towns and counties face a catalog of troubles. Earlier this month, voters rejected five budget measures, sending the state deficit to $21 billion. To overcome the gap, Gov. Arnold Schwarzenegger has proposed borrowing $2 billion from municipalities, using a 2004 state law that lets California demand loans of 8% of property-tax revenue from cities, counties and special districts.

 

But that proposal lands as California municipalities are already facing steep declines in tax revenue because of the recession. Dozens are staring at huge deficits, including Pacific Grove and Stockton, which have publicly said they are exploring bankruptcy.

 

Assemblyman Tony Mendoza, a Democrat who introduced the bankruptcy bill, said the initiative is needed to protect the credit rating of California and its ability to borrow and sell bonds. Mr. Mendoza added that he wants to avoid bankruptcy's repercussions on surrounding communities by offering a system that examines all of a municipality's options before filing for bankruptcy.

 

"Municipalities should have a checks and balance system in place based on the fact that all economies are interconnected," he said.

 

Dwight Stenbakken, deputy executive director for the California League of Cities, a nonprofit representing more than 400 cities, said the group is lobbying against the bill because "there's nothing a state commission can bring to the process to make this better."

 

Write to Bobby White at bobby.white@wsj.com