By Justin Smith

The California Assembly recently approved AB 155 (Mendoza), a bill that prohibits cities and counties from filing bankruptcy without state approval and is headed to the Senate. The bill requires local governments and counties to get approval from the California Debt and Investment Advisory Commission (CDIAC) before filing for bankruptcy.

The California Debt and Investment Advisory Commission consists of the State Treasurer, the Governor or the Director of Finance, the State Controller, two local government finance officials, two Assembly Members, and two Senators.

The bill is backed by several unions and the most notable among them is the California Professional Firefighters and CDF Firefighters Local 2881, who are cosponsors of the bill.

What is conspicuously left out of this politicking, which neither side is willing to admit in public, is that AB 155 grants CDIAC the authority to limit changes to a labor contract and prohibit the abrogation of contracts. This is if the CDIAC approves the request for a municipality to file for bankruptcy. It is being sold as an added measure of economic security, and that California is one of the few states left without this protection but there is a difference between policy and politics.

Tony Mendoza’s spokesperson Richard Garcia said that the bill, “is intended to help protect the state’s credit rating on Wall Street”. Should the possibility exist that California be plagued with a less than stellar credit rating, it will increase borrowing costs for California municipalities and the state…that is should California’s credit rating be compromised by its budget problems. According to the League of California Cities (LCC) it has one of the worst in the country.

Vallejo, the latest and greatest city to file for bankruptcy in 2008, certainly has unions worried, enough so as to claim cities will abuse bankruptcy in order to get out of labor contracts. During a committee hearing on April 22, 2009, those in favor of the bill argued that cities would abuse filing for bankruptcy to “obstruct employee contract negotiations.” Vallejo Mayor Osby Davis retorted, “The bankruptcy courts are set with a criteria that keeps people from filing wily-nily bankruptcy petitions…There is no elected official on my council who says we want to break contracts and get out of bankruptcy.”

One argument put forth by Christy Bouma an Advocate of the California Professional firefighters (CPF), is that this will force cities to “facilitate good decision making at the local level so the devastating impacts experienced by Vallejo will not flow to other jurisdictions.”
Vallejo Mayor Osby Davis said, “For you to pass a bill like this is a slap in the face to every elected official locally.”

Given the economic crisis of the day, municipalities contemplating or indeed needing to file for bankruptcy could increase. As of May 11, 2009, 211 cities in California declared a state of severe fiscal hardship. The state has officially raided cities’ coffers to the tune of about $2 billion, and Sacramento alone gets to loan the state just under $12 million.

In a letter the League of California Cities addressed to Tony Mendoza on March 4, 2009, it was states that ”since the adoption of chapter 9 of the state Bankruptcy Code in 1949, only two cities that have petitioned for it use, City of Desert Hot Springs in 1994 and just recently Vallejo.” That amounts to one city every 30 years.

This letter also addresses the state’s credit rating that Mendoza’s staff put forward. Mendoza’s staff references a study done in 2000 and commissioned by the California Law Revision Commission. The letter states, “The state has one of the worst credit ratings in the nation not due to a city, but due to lack of confidence among major bond rating and financial institutions that the state can’t solve its own budget problems.”

It appears that one of the many problems facing the California debt is that labor unions seem to think they should be exempt from the financial burdens the state faces. They make cuts and compromises here and there, but with AB 155 they won’t have to anymore.

It’s no secret unions are the Daddy Warbucks in the California legislature, but with this they are creating and sponsoring bad economic policy. This bill not only perpetuates bad economic policy it takes even more power from cities and gives it to the state.

Vallejo was also subject to another union hijacking backed by the state in what is known as binding interest arbitration (BIA). BIA is what happens when labor negotiations reach an impasse, and a third party is engaged. This person is usually an attorney or judge. The parties bring a list of names, they agree on one and the third party decides who gets what. Vallejo was the first city to exercise BIA in 1970, and the only city other than San Francisco to cover non-safety employees. Vallejo just gets to pay the bill for decisions increasingly taken out of their hands.

In a recent court decision on April 29, 2009, the First Appellate District ruled in Sonoma Country v. Superior Court (Sonoma County Law Enforcement Association) that SB440, a labor negotiations interest arbitrations statute applicable to public safety unions violates the California Constitution.

The court decided that BIA violates “Home Rule” which is a constitutional provision that provides cities authority over their municipal affairs. The court noted that compensation of county employees is a local and not a statewide concern.

This court also found that this “impermissibly delegates to the arbitration panel the power to interfere with county money and to perform the municipal function of setting compensation of county employees.” To drive the point home, BIA is unconstitutional because it dethrones the “Board of Supervisors of the ultimate authority to provide for employee compensation.”

AB 155 and unions’ greed are poised to run cities into the ground, by forcing cities to pay for services with resources they don’t have. Should the Senate confirm this bill, and dip their nefarious tenterhooks where they don’t belong, millions of dollars, will no doubt be shoveled out in the courts on California’s tab.



Justin Smith can be contacted at [email protected]