Three California Cities Target Public Sector Workers and Retirees in Bankruptcy Filings
Over a three week period in late June and early July, three California cities voted to authorize Chapter 9 bankruptcy filings – the City of Stockton, Mammoth Lakes, and City of San Bernardino. Each city has faced diminishing sales- and property-tax revenues, rising costs associated with existing and new loans, high unemployment, a lack of new construction projects, stagnant housing markets, and in Mammoth Lakes’ case, a large liability resulting from a lawsuit, but the public message from each has been, in whole or in part, focused on labor, healthcare, and pension costs.
Though no California city had filed for bankruptcy protection since City of Vallejo in 2008, the possibility has been used as an ever-present threat by cities up and down California since the start of the recession. Last year, in an effort to avoid a spike in bankruptcy filings, the state legislature passed a law requiring cities to enter a 60-day mediation period with its creditors before seeking bankruptcy protection. Both the City of Stockton and Mammoth Lakes entered the 60-day mediation period and were unable to broker solutions with creditors. San Bernardino, on the other hand, voted to bypass the mediation and declare a “fiscal emergency” that would exempt the city from participating in the mediation process before filing for bankruptcy.
While the financial management and decision-making of each of these cities has been a large factor in their current situation, rank and file public sector workers and retirees can expect to face hostile negotiations in the bankruptcy context. While City of Vallejo never ceased making its contributions to the Calpers retirement system, it dramatically reduced the retiree health care it provided, and targeted active public sector employees in other ways. Whether public-sector pensions that have already been earned and vested can be taken away is a question the City of Vallejo decided not to test in its Chapter 9 bankruptcy, though any of the three recent filers might. Retiree health coverage, on the other hand, has already been identified as a main target in the Stockton case, and is likely to be a focus of both the Mammoth Lakes and San Bernardino strategies for reorganization as well.
Unlike in Chapter 11 bankruptcies of companies, Chapter 9 does not have bankruptcy code protection for collective bargaining agreements. The bargained-for wages, benefits and contractual protections for public sector employees are therefore extremely vulnerable in Chapter 9 cases. Public sector unions need to be hyper-diligent in preparing for the prospect of a Chapter 9 bankruptcy filing by a signatory employer to be fully prepared to act swiftly and decisively to defend their members in the bankruptcy proceedings.
By Jordan Mazur