Again We Lead

George Rebane

Harbingers of the coming wave of city bankruptcies just keep popping up.  No one will have an excuse when we all march into the sunset merrily singing ‘On the Way to Vallejo’.  A recent three-way email exchange with two local leading and knowledgeable citizens – who prefer to remain nameless – started with highlighting the recent WSJ article ‘California Cities Face Bankruptcy Curbs’, and concluded with an informative paragraph on Chapter 9 that covers how municipalities go bankrupt.

In the exchange, my reaction to the WSJ piece was –

When I read this last night (all this stuff comes online first), Jo Ann and I had a good laugh.  This is like passing a law saying you can’t die until you get permission from the county coroner.  It doesn’t really matter who gives you permission or not; if you can’t make your payments, you’re broke whether they give you a good housekeeping seal of bankruptcy or not.  A timely declaration of bankruptcy could at least allow you to dispose of, or protect assets in an orderly manner.  Only from the mind of government.

The exchange concluded with the following explanation from one of the correspondents (reformatted for readability).

Here is a little background.  In a normal bankruptcy, a company will have creditors and assets.  Assets can be liquidated to pay off creditors or, alternatively creditors can agree to take a haircut in the expectation that with a lower debt load the company can repay the lower amount and survive.  However, in the case of a municipality or a special district, the value of their assets relative to demands on cash is often insufficient to generate cash to repay debt and, if liquidated, would result in no longer providing service to the public.

The language for Chapter 9 of the Bankruptcy code suggests that congress understood this, and wanted a process that would allow municipalities to restructure their debt swiftly, without interruption in service.  On average, 60 to 75 percent of their budgets consist of salaries and benefits. If you can bring salaries and benefits into line with cash flow, the municipality (or special district) can survive.  Under Chapter 9, the legislative body (city council, board, etc) has the power to force a renegotiation of salaries and benefits.

Chapter 9 is very different than Chapter 7 or 11 which requires a judge to referee the process.  (Chapter 9 is short, and worth a quick read.) The judge's role under Chapter 9 is far less than under 7 or 11.  In effect, under Chapter 9 the power is in the hands of the legislative body.  Of the four bargaining units in Vallejo, two agreed to the restructured salary and benefit programs and two are fighting it in court.

This (new) law would interpose a state commission that would apparently have review authority over the action of the local council or board.  In effect, this would throw the problem back to the State level and expose it to all the political pressures and union influence at that level.  Not a good outcome.

Please put this together with Supervisor John Spencer’s comments under ‘California Dreaming’, and ‘US Declares Bankruptcy (updated)’ with the table of some San Francisco salaries.  Nevada County CEO's message on the budget can be downloaded here - Download 5 29 09 Attach -Budget Message.

Comments

[Aaron]

George: Exactly my reaction when I read the same story. Bankruptcy is often viewed as an action. It is most certainly not an action, but a status.

Next, the legislature will require a state agency to approve the sun to rise in the east every morning...