U.S. News

Bankruptcy talk spreads among Calif. muni officials

SAN FRANCISCO (Reuters) - Two years after Vallejo, California, filed for bankruptcy protection, officials in nearby Antioch are also tossing around the ‘B’ word.

Antioch’s leaders earlier this month said bankruptcy could be an option for the cash-strapped city of roughly 100,000 on the eastern fringe of the San Francisco Bay area.

Antioch’s fiscal woes are standard issue for local governments in California: weak revenue from retail sales and property taxes is forcing spending cuts, layoffs and furloughs.

But cost-cutting measures may not be enough to keep Antioch’s books balanced, so its city council is openly discussing bankruptcy.

“We just want to alert people to the possibility,” Antioch Mayor Pro Tem Mary Helen Rocha said.

Orange County Treasurer Chriss Street would not be surprised if more local governments across the Golden State sound a similar alarm.

Street expects more talk of municipal bankruptcy across California because local government finances are in such dire shape -- a situation underscored on Wednesday when a top finance officer for Sacramento County projected a worse-than-expected shortfall for the county of $181 million, which could force more than 1,000 layoffs from the county’s payroll.

“You don’t have the easy out of increasing revenue and you have a lot more call on services because of the economy,” Street said. “There’s no such thing as entertaining bankruptcy; there’s ending denial.”

Orange County, California’s third most populous county, declared bankruptcy in 1994, at the time marking the biggest municipal bankruptcy in U.S. history, after suffering $1.7 billion in losses from bad investments. The county emerged from bankruptcy in 1996 and its credit rating has since recovered from its post-bankruptcy “junk” status. Fitch Ratings earlier this month affirmed its ‘AA’ rating on the number of the county’s long-term obligations.

Marc Levinson, a lawyer with Orrick, Herrington & Sutcliffe LLP who is representing Vallejo in its bankruptcy proceeding, agrees that California’s hard times and lean local budgets are forcing local leaders to weigh bankruptcy.

“It’s a topic on everyone’s lips because cities and counties and local governments are hurting,” Levinson said.


Municipal officials, however, are unlikely to pile into bankruptcy court in search of relief from their financial woes, Levinson said.

Chapter 9 bankruptcy filings are rare to begin, in part because many states limit them and, more important, their consequences include harm to credit ratings that determine borrowing costs, said Jim Spiotto, a partner at the Chicago law firm of Chapman & Cutler, who works on municipal finance matters.

A filing for Chapter 9, the part of U.S. bankruptcy code that applies to municipalities could also result in being locked out of the municipal debt market, adding to fiscal trouble.

“We take that very seriously,” Amy Doppelt, a managing director at Fitch Ratings, said of how talk of bankruptcy could affect credit ratings.

Bankruptcy could also scare away investment and new jobs at time when California’s unemployment rate is in the double-digits -- 12.6 percent in April -- and payroll growth is critical to bolstering the consumer spending and property markets that fill the coffers of local governments.

Ron Loveridge, the mayor of Riverside, California, and president of the National League of Cities, called bankruptcy a last resort.

“It becomes a description of who you are,” he said.

Despite its stigma, bankruptcy has paid an important dividend for Vallejo: It has forced public employee unions to the negotiating table, providing city leaders an opportunity to rein in compensation, which city officials said accounts for more than three-quarters of Vallejo’s general fund spending. City Councilwoman Stephanie Gomes said the effort has led to concessions from three of four city unions.

Like Vallejo, Los Angeles is suffering from weak revenue at the same time the cost of its pensions and other retirement benefits are rising. Former Mayor Richard Riordan said those factors put the government of the second largest U.S. city on track to declare bankruptcy between now and 2014.

Riordan sees bankruptcy as a necessary tactic for squeezing concessions from the city’s public employee unions. It could also pave the way for 401(k) retirement accounts for new city workers instead of defined pension benefit plans with escalating costs, he said.

“The threat of bankruptcy is really the only way you’re going to get them to make major changes,” Riordan recently told Reuters.

Los Angeles officials dispute Riordan’s bankruptcy outlook, published earlier this month in an opinion piece in The Wall Street Journal. City Administrative Officer Miguel Santana said Los Angeles does not want its “brand” tarnished by bankruptcy and that the city can avoid it by continuing to cut spending, by reducing its work force and by handing off some services to the private sector and nonprofits.

“Bankruptcy is what you do when you run out of options. The city has a lot of options and has been exercising those options,” Santana said.

Talk of municipal bankruptcy has not escaped California’s politically powerful public employee unions. A number of them are pressing the legislature to pass a bill that would require local governments to get the approval of a state board before filing for bankruptcy. Since the board could be stacked with union-friendly appointees, bankruptcy pleas could be rejected or delayed.

“It’s a horrible bill,” Levinson said. “If you don’t have the bankruptcy outlet, what do you do? If you can’t pay your bills what do you do?”

Editing by Kenneth Barry