(April 27, 2009) -- Assemblyman Warren Furutani (D., Carson-LB) has signed-on as co-author on a bill that would make it harder for cities to seek bankruptcy protection that might free them (and taxpayers) from current contracts that city politicians made with public employee unions.

Ass'yman Furutani in file photo

AB 155, authored by Assemblyman Tony Mendoza (D., Norwalk), would prohibit local government entities from filing under federal bankruptcy law unless approved by the CA California Debt and Investment Advisory Commission (CDIAC)...which is comprised of the State Treasurer, and other members including the State Controller, the Governor, two members each from the Senate and Assembly, and two local government officials).

The City of Signal Hill, as well as the League of CA Cities (in which the City of LB is a dues-paying member) and multiple individual cities (listed below) oppose the bill. LB's City Council hasn't taken a vote on AB 155 specifically, but LB's Council is on record opposing "legislation that preempts the current authority possessed by the City and delegates that authority to the State or other government jurisdiction." The League of CA Cities and other cities oppose AB 155 on grounds it goes against local decisionmaking.

Other local governments opposing the bill are Cypress, Fullerton, Hermosa Beach, Huntington Beach, Newport Beach, Torrance, Tustin, Yorba Linda and the County of Orange.

AB 155 bill is sponsored by the CA Professional Firefighters Association, which has 170 local affiliates including the LB Firefighters Association (Local 372). It is also endorsed by multiple public employee unions (list from legislative analysis, below).

The LB Firefighters union's website has for several months taken an interest in the bankruptcy filing by the City of Vallejo, accusing that northern CA city of "using bankruptcy to break employment contracts with its employees. The City Council of Vallejo has intentionally created a budget that makes it appear as though it cannot pay its bills to justify selectively breaking commitments it made to its employees and retirees."

As previously reported by LBReport.com, the City Council voted in May 2008 to enter into a five year agreement with the LB Firefighters Association (8-1, Gabelich dissenting) despite City Manager Pat West's refusal at the time to provide a detailed answer to Councilwoman Gabelich's question, "How are we going to pay for this?"

In August 2008, city management and Mayor Foster answered the question by unveiling a proposed budget that included a roughly $17 million deficit (spending exceeding revenue)...of which $16.2 million was attributable collectively to the impacts of contracts with the LB firefighters, LB police officers and non-public safety employee unions.

City management and the Mayor proposed to span the deficit by (among other things) closing LB's Main Library; the Council rejected the library closure but did reduce its hours and eliminated funding for the Police Athletic League and other city-backed programs.

That was supposed to be a balanced budget, but within weeks, LB city management warned of a continuing deficit, that it attributed to the worsening national economy and a drop in oil prices.

On March 3, 2009 city management told the Council's "Budget Oversight Committee" that it now projects City Hall's deficit (spending exceeding revenue) to amount to $19.2 million in the current fiscal year (before Sept. 30, 2009) PLUS roughly $35 million more in the coming budget year (starting Oct. 1, 2009). It's currently unclear exactly how that gap will be bridged...by some combination of spending cuts, service cuts, layoffs, fee increases -- or possible adjustment or renegotiation of public employee contract terms. The decision will ultimately be made by a City Council majority between now and the end of September 2009.

In 2008, Mayor Foster bristled at a reporter's question asking about the City of Vallejo's bankruptcy as it might relate to the City of Long Beach. Mayor Foster acknowledged that what's happening in Vallejo is important, but said it had no application to the City of Long Beach. "We're paying our bills," the Mayor said.

AB 155 is authored by Assemblyman Mendoza; its principal co-author is Assemblyman Torrico; its co-authors are Assemblymembers Brownley, Coto, De Leon, Fuentes, Furutani, Ma, Nava, John A. Perez, V. Manuel Perez, and Yamada. Its Senate co-author is Pat Wiggins.

On April 22, the bill cleared the Assembly Local Government Committee on a 4-3 vote [Yes: Caballero (D, Salinas), Davis (D, Los Angeles), Krekorian (D, Burbank) and Skinner (D, Berkeley); No: Juan Arambula (D, Fresno), Stephen Knight (R, Lancaster) and Mike Duvall (R, Brea)]. The bill now heads to the Assembly Appropriations Committee (Perez, Price, Skinner, Solorio, Strickland, Torlakson)

[To read the full bill text (as amended March 27, most recent text publicly available as of this report), click here.]

The Assembly Committee's legislative analysis stated in part:

...AB 155 places conditions on how and when a municipality could seek chapter 9 relief under federal bankruptcy law. Current law authorizes municipalities to file a petition under the federal bankruptcy process without any prior state approval or state placed pre-conditions to filing. AB 155 creates "gatekeeper" provisions by granting a state entity - CDIAC - the authority to allow or disallow a municipality from exercising its rights to file a petition under federal chapter 9.

CDIAC under the purview of the State Treasurer's office, currently collects data on municipal finance, conducts research, and provides information and technical assistance to local public agencies and their finance professionals. Since CDIAC has expertise in the financial health of local governments, it makes sense to put the review process in their hands. CDIAC's Board is comprised of the State Treasurer as Chair, and other members including the State Controller, the Governor, two members each from the Senate and Assembly, and two local government officials with expertise in debt issuance.

...The author bases the justification for AB 155 on a California Law Revision Commission report from 2001, in which the commission studied California's municipal bankruptcy statute. The commission recommended that the Legislature revise the state law to conform to the federal provisions and what resulted was SB 1323 by Senator Ackerman. However, the Commission's report only suggested that California law be updated to provide explicit authority for municipalities, per the federal statute requiring states to have explicit authorization. The report did not recommend any other substantive policy changes or pre-conditions, or "gate-keeping" in order to access the federal bankruptcy process, and instead, commented that "there does not appear to be any general agreement on the best approach to reform, or even as to the need for additional protections or controls."

The California State Legislature has a long history, dating back to the Orange County bankruptcy filing in 1994, of debating access to federal municipal bankruptcy laws every few years (see Comments under # 3 and #4), and ultimately in 2002, made the decision to seek the broadest authority for municipal bankruptcies that exists under federal law.

...The author argues that a municipal bankruptcy filing will have repercussions in terms of credit rating and spillover effects that will raise borrowing costs for other California municipalities and the state. Arguably, a municipal bankruptcy, depending on the size of the entity, could potentially affect other local agencies and the state as a whole. The author argues that the state government should have the opportunity to consider whether bankruptcy is the best approach to the problem, since municipal affairs are of interest to the state and should not be left to the sole discretion of the municipality.

...The League of California Cities, in opposition, writes that "[local governments] will use all means available to avoid bankruptcy" and even then it is strictly a last resort. They site the rare usage of the chapter 9 process under federal law - only three filings by cities and counties since the adoption of the state Bankruptcy Code in 1949 - Orange County in 1994 (See Comment #4), the City of Desert Hot Springs in 2001 because of a judgment against the city, and the City of Vallejo in May of 2008.

...According to the California Professional Firefighters (CPF), a co-sponsor of AB 155, "last year's bankruptcy filing by the City of Vallejo has only served to further devastate an already struggling community, including local businesses that were already feeling the adverse impact of a stagnant economy. Since the filing, Vallejo's litigation costs have escalated to over $5 million thereby further encumbering an already dried up general fund budget."

Additionally, CPF notes that "bankruptcy may appear to provide a municipality quick relief from certain [types] of debt obligations, but the municipality will ultimately end up paying in the financial markets."

...[T]he bankruptcy filing in Vallejo seems to be a situation created out of nightmare conditions, given the highly political and volatile nature of the ongoing bankruptcy proceedings. In a March 13, 2009, memorandum, Michael McManus, the U.S. Bankruptcy Judge assigned to the Vallejo case, addressed whether chapter 9 of the Bankruptcy Code permits a municipality to reject collective bargaining agreements with its public employee unions. He found that "if a municipality is authorized by the state to file a chapter 9 petition, it is entitled to fully utilize 11 U.S.C. 365 (Section 365) to accept or reject its executory contracts" and that "unexpired collective bargaining agreements are executory contracts subject to rejection under Section 365."

Supporters and opponents, listed in the April 22 Assembly Committee legislative analysis:

REGISTERED SUPPORT / OPPOSITION:
Support
          CA Professional Firefighters [CO-SPONSOR]
          CDF Firefighters Local 2881 [CO-SPONSOR]
          AARP
          American Federation of State, County and Municipal Employees,
          AFL-CIO
          Association for Los Angeles Deputy Sheriffs
          CA Alliance for Retired Americans
          CA Association of Highway Patrolmen (CAHP)
          CA Labor Federation, AFL-CIO
          CA Nurses Association
          CA Professional Firefighters
          CA Reinvestment Coalition
          CA School Employees Association (CSEA)
          CA State Employees Association
          CA State Firefighters' Association, Inc.
          CA Teamsters Public Affairs Council
          Consumer Federation of CA
          Glendale City Employees Association
          Kern County Fire Fighters Union, Inc.
          L.A. County Probation Officers Union
          Livermore-Pleasanton Firefighters Local 1974
          Los Angeles County Fire Fighters Local 1014
          Los Angeles Police Protective League
          Napa-Solano Central Labor Council
          National Nurses Organizing Committee
          North Bay Labor Council, AFL-CIO
          Organization of SMUD Employees
          Peace Officers Research Association of CA (PORAC)
          Production Strategies, Inc.
          Professional Engineers in CA Government (PECG)
          Riverside Sheriffs' Association
          San Bernardino Public Employees Association
          San Diego Municipal Employee's Association
          San Francisco Labor Council
          San Luis Obispo County Employees Association
          Santa Rosa City Employees Association
          Service Employees International Union (SEIU)
          State Building and Construction Trades Council of CA
          Individual letter

         Opposition
          Association of California Water Agencies
          CA Special Districts Association
          CA State Association of Counties
          Cities of:  Adelanto, American Canyon, Antioch, Arvin,
          Atascadero, Belmont, Benicia,
               Berkeley, Burlingame, California City, Calistoga,
          Chowchilla, Cloverdale, Clayton,
               Clovis, Coalinga, Concord, Cypress, Exeter, Fairfield,
          Fowler, Fremont, Fullerton, Guadalupe, Healdsburg, Hermosa Beach, Highland,
          Huntington Beach,
               Huntington Park, Huron, Kingsburg, Lemoore, Livermore,
          Fontana, Madera, Manteca,
               Merced, Mendota, Mill Valley, Modesto, Moreno Valley,
          Newport Beach, Norco,
               Norwalk, Palmdale, Patterson, Placentia, Pleasanton, Rio
          Vista, Reedley, Ridgecrest, San
               Luis Obispo, San Pablo, Santa Rosa, Shafter, Signal Hill,
          Stockton, Tehachapi, Torrance,
               Tracy, Tulare, Tustin, Visalia, Wasco, Walnut Creek,
          Woodlake, Yorba Linda, Yucaipa
          County of Orange
          League of CA Cities
          League of CA Cities, Inland Empire Division
          League of CA Cities, Orange County Division
          Regional Council of Rural Counties
          South Bay Cities Council of Governments
          Towns of Apple Valley, Danville, Mammoth Lake, Paradise, Windsor
          and Yountville
          Urban Counties Caucus
          

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