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Vallejo BK Offers Cautionary Tale to Cities, Unions

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Wed, May 26, 2010 at 5:28 AM

click to enlarge 080524_vallejo_bankrupt.jpg
Today's Times takes a look at Vallejo, which filed the second municipal bankruptcy in state history in 2008.

In Los Angeles and in other cities, the current chatter about bankruptcy is largely about looming pension debt. The story notes that while a bankruptcy judge allowed Vallejo to redo its collective bargaining agreements, the city did not touch employee pensions, because it wasn't worth a drawn-out fight over uncertain legal terrain.

The story doesn't mention that public employee unions were sufficiently freaked out by the Vallejo experience that they sponsored a bill, AB 155, that would make it almost impossible for cities to file for bankruptcy.


That bill, by Assemblyman Tony Mendoza, would require local governments to get the approval of a state board -- dominated by union-friendly appointees -- before they could file bankruptcy. Unions are strongly in favor of the bill, while local governments are adamantly opposed. (L.A. Councilman Bernard Parks took up a resolution to oppose the bill last year, but his labor-friendly colleagues voted it down.)

The California Constitution protects public employee pension benefits as a property right. But once a local government files bankruptcy, the Constitution is superseded by federal law. No local government, however, has even tried to back out of its pension obligations in bankruptcy court.

Why not?

Well, Voice of San Diego tried to answer that question earlier this year. Taxpayer advocates were calling for that city to declare bankruptcy to get out from under its pension obligations, Voice of San Diego talked to several people who said it would be a risky, even "foolhardy" proposition. Retired Judge John Ryan, who presided over the Orange County bankruptcy case in the 1990s, was asked why it had not been tried:

"I think probably politically as well as from a general fairness standpoint it would be very difficult to do that," Ryan said. "I think probably the reason we haven't seen the issue and haven't seen it attempted through a plan is that it would be a very tough sell."
Still, that's not an ironclad guarantee that it won't happen in the future, and unions would prefer not to have to worry.

After being held up for a year, Mendoza's bill was approved last month by the Senate Local Government Committee on a 3-2 vote, with the Democrats in favor and Republicans opposed. The bill was before the Senate Appropriations Committee on Tuesday. After the committee was told that the Schwarzenegger administration is opposed to the bill, the committee voted to suspend the measure, and its future remains uncertain.

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