Bloomberg News

Brown Signs Bill to Limit California’s Municipal Bankruptcies

October 10, 2011

Oct. 10 (Bloomberg) -- Municipal bankruptcies will face new hurdles under a bill signed by California Governor Jerry Brown in the wake of the Vallejo fiscal meltdown and the earlier Orange County debacle.

After the law takes effect in 90 days, municipalities in the most-populous state will have to submit to a neutral review of their finances, or demonstrate a fiscal emergency, before seeking Chapter 9 bankruptcy protection in federal court.

California had no such requirements in place during the 2008 filing by the city of Vallejo, the 2001 case of the city of Desert Hot Springs or the reorganization of Orange County that began in 1994 and remains the largest municipal bankruptcy in U.S. history. Municipal bankruptcies can harm a state’s credit rating, increasing its borrowing costs.

“We need to educate the creditors and the public entity about what Chapter 9 is, what are the implications,” said Assemblyman Bob Wieckowski, the Fremont Democrat who wrote the bill, in an interview Sept. 9. “There’s a misconception on the part of the cities that they should have unfettered access to Chapter 9.”

Under the law signed yesterday, a neutral evaluator would analyze a struggling municipality’s finances. The results wouldn’t prevent a bankruptcy filing. Municipal labor unions had pressed to make the evaluator’s approval a requirement before filing.

City or county councils and other elected bodies can bypass the evaluation process by a majority vote declaring a fiscal emergency. To qualify, the government would have to show that its financial situation “jeopardizes the health, safety, or well-being of the residents” or that it will run out of money within 60 days, according to a legislative analysis.

The number of local-government bankruptcy filings has declined nationwide. Five municipal entities sought protection in 2010 compared with 10 in 2009, according to data compiled by James Spiotto, head of the bankruptcy practice at Chapman & Cutler, a Chicago law firm.

--Editors: Pete Young, Ted Bunker

To contact the reporter on this story: James Nash in Sacramento at jnash24@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net


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