California legislature tables bill addressing Chapter 9 bankruptcy

Although Stockton, San Bernardino and Mammoth Lakes have filed for bankruptcy since June, the state of California has tabled discussion on a revision to a state law that proposed changes for how municipalities could seek Chapter 9 bankruptcy protection, according to an aide to a top lawmaker.

United States Geological Survey photo of Mammo...

Mammoth Lakes, California

Public officials noted the bill needed to be tabled so Governor Jerry Brown and other lawmakers could focus their efforts to review the state’s public pensions.

The proposed legislation was supposed to give mediators increased powers to help the local city governments talk to creditors, increasing the difficulty of filing Chapter 9 Bankruptcy. The amount of negotiations which are required prior to filing bankruptcy was already increased in 2008. The changes to the state’s laws were supported by California’s public employee unions, who are considered an extremely powerful force in California.

According to Bloomberg, public unions contributed $76 million to California politicians and ballot measures in 2010, making them the single largest interest group that year. Unions argue that their contracts are damaged when cities declare bankruptcy, and city officials have generally opposed increased legislation.

Everyone is concerned that with the recent spate of filings this could be a fore shadowing of things to come. Critics argue that other municipalities may also be encouraged to file Chapter 9 Bankruptcy, especially since most of the state has struggled in recent years with high unemployment, a sagging housing market and rising cost of pension plans.

California Outlines Municipal Bankruptcy Guide


Also in the news is the recent development of a municipal bankruptcy guide which was published by California’s Legislative Analyst’s Office. According to the report, the first of its kind to outline the municipal bankruptcy process, it details whether the state is considered insolvent and how the mediation process should be done.

The parties in the bankruptcy process are most concerned about wages and benefits for government employees, which generally is a large part of the budget. In the bankruptcy process there are several issues which must be addressed before the wage contracts can be nullified including:

  1. Does the wage contract keep the city from achieving financial stability?
  2. Did the city negotiated in good faith with the employees but they were unable to reach an agreement?
  3. Would the employee group otherwise bear a disproportionately small burden of the locality’s bankruptcy?

California cities have been hesitant to use Chapter 9 Bankruptcy to change pension benefits for retirees, but more cities contemplate whether Chapter 9 Bankruptcy may help them regain financial stability and whether updating pension contracts may be necessary. This bankruptcy guide may help cities make this decision.

Keep in mind, a local government’s agreements with retirees to provide pension or health benefits are generally considered contracts which may be nullified under certain conditions during bankruptcy, but updated California laws have encouraged both sides to remain at the bargaining table and modify labor agreements before they can ask the court to nullify the contract.

State laws vary and there is insufficient case law to clearly determine how retiree benefits will be treated in future Chapter 9 bankruptcy filings and contractual requirements remaining after bankruptcy may continue to vary from state to state.

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Beth L. is a content writer for Better Bankruptcy. Good content and information is one of many methods we utilize to bring you the answers you need.