AB 155 Prevents Cities From Filing For Bankruptcy Protection

statecat.pngBy 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 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 had stated 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 is a freelance writer based in Sacramento.

About The Author

David Greenwald is the founder, editor, and executive director of the Davis Vanguard. He founded the Vanguard in 2006. David Greenwald moved to Davis in 1996 to attend Graduate School at UC Davis in Political Science. He lives in South Davis with his wife Cecilia Escamilla Greenwald and three children.

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  1. Greg Kuperberg

    AB 155 is a good example of how dangerous it would be for UC to lose autonomy to the state government. It’s worse than that the state legislature is all thumbs and can’t put its affairs in order. It’s that the state is using all available influence to spread a cancer.

  2. Be Careful What You Wish For

    “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.”

    Please explain your statement: “will not doubt be shoveled out in the courts on CA’s tab”. Not sure what you meant here.

    I agree that this piece of legislation is an abomination. If it were to pass, the unions can keep getting their fat salaries, but at some point, the money will run out. Unions cannot get blood out of a turnip. The taxpayers are all but tapped out right now. If you overtax the public, they cannot make house payments, which results in a round of foreclosures, which drives the value of housing down, which means less tax revenue in state coffers, which means another round of layoffs – layoffs of firefighters and police. The unions had better be careful what they wish for…

  3. martin


    “Wilmington Trust Co. senior municipal credit analyst Gary Ellis points out in a report that California is constitutionally mandated to pay off GO bondholders next after K-12 education and California State University and University of California but before other expenses. Moreover, he adds in a report, there is no provision in U.S. bankruptcy law for a state to declare bankruptcy. “The odds of any permanent payment impairment are near zero,” Ellis concludes.

    Fitch Ratings, for its part, earlier this week lowered its rating of California’s GOs two notches, to triple-B, or two levels above junk. Standard & Poor’s is keeping its rating at single-A while Moody’s Investors Service is maintaining its single-A3. In any case, California GOs already were trading as if they were triple-B before Fitch’s downgrade, Dow Jones Newswires reported earlier this week.

    In any case, late Thursday, the Securities and Exchange Commission recommended that the IOUs issued to pay California’s less-pressing bills be regulated as municipal securities by the Municipal Securities Rulemaking Board. That means the IOUs, which pay annual interest of 3.75% to maturity on Oct. 1, can be traded as muni notes.

    That would mean that intermediaries between buyers and sellers may need to register as brokers or dealers, the Associated Press reported. Prior to that, an ad hoc secondary market began to spring up on craigslist.org, with opportunistic buyers offering cash for the IOUs — at hefty discounts.

    A quick perusal on the Los Angeles craigslist site found offers ranging from 88 cents on the dollar to as little as 50 cents. Those vulture buyers emerged after Bank of America (ticker: BAC), Wells Fargo (WFC) and Citigrou p (C) said they wouldn’t accept IOUs after Friday. A spokesman for JPMorgan Chase (JPM) told the AP Thursday it might reconsider continuing to accept the IOUs.”

  4. Rich Rifkin

    One interesting local angle on this handiwork of the California Firefighters who wrote AB155. Our member of the Assembly, Mariko Yamada, was listed as a co-author ([url]http://www.leginfo.ca.gov/pub/09-10/bill/asm/ab_0151-0200/ab_155_bill_20090708_status.html[/url]) of the bill. However, when it came time to vote on AB155, Mariko did not show up ([url]http://www.leginfo.ca.gov/pub/09-10/bill/asm/ab_0151-0200/ab_155_vote_20090603_0120PM_asm_floor.html[/url]) for the vote. I doubt Ms. Yamada had any say in the words in the bill. I suspect she’s simply listed as a co-author to prove herself to her campaign contributors ([url]http://cal-access.ss.ca.gov/Campaign/Committees/Detail.aspx?id=1295700&session=2007&view=late1[/url]):

    10/11/2008 — CDF FIREFIGHTERS — $2,000
    5/30/2008 — CAL. PROFESSIONAL FIREFIGHTERS — $2,500
    5/2/2008 — CAL. PROFESSIONAL FIREFIGHTERS — $1,000

  5. My View

    “However, when it came time to vote on AB155, Mariko did not show up for the vote.”

    Guess Assemblymember Yamada did not have the courage of her convictions? Or just plain did not have courage? I think her days in the Assembly are numbered.

  6. Rich Rifkin

    Given term limits, her days are numbered in that sense. However, I agree with “Davis Fire” that Mariko is very well positioned to win re-election in 2010, given her general popularity, the partisan composition of our district and the debility of the Republicans.

    I do wonder, though, if the California economy continues to suck, will some incumbents (of either party) lose next year as a result? Republicans have nothing to celebrate if there is an anti-incumbent backlash. Of the 29 seats the GOP holds in the Assembly, for example, only 9 of those won handily (greater than 60% of the vote) in 2008. By contrast, 45 of the 51 Dems in the Assembly won in 2008 by more than 60%. So a general anti-incumbent movement won’t likely help the minority party. Their only hope would be if the voters exclusively blame Democrats, which I suppose is possible. (Republicans would have to hope that Democratic voters just don’t come out.)

  7. My View

    “She’s in a safe seat, so it is doubtful her days are numbered. She is who she is. We knew that when she ran last time.”

    There may be members of her own party that try and unseat her. I know of at least three who are covetous of her seat – I won’t mention any names.

  8. Mariko Yamada

    Dear Readers:

    By way of clarifying my absence from the June 3, 2009 Assembly Floor Session during which AB 155 and dozens of other measures were taken up, the reason I “did not show up for the vote” is that I had requested and was granted an excuse that day in order to attend funeral services for my eldest brother in Los Angeles.

    If any Vanguard reader ever has a question about legislation bearing my name, please contact my office at 916-319-2008 or email me at assemblymember.yamada@assembly.ca.gov. Thank you.

  9. Curious

    Mariko Yamada: “By way of clarifying my absence from the June 3, 2009 Assembly Floor Session during which AB 155 and dozens of other measures were taken up, the reason I “did not show up for the vote” is that I had requested and was granted an excuse that day in order to attend funeral services for my eldest brother in Los Angeles.”

    Is it possible to vote in absentia, to make sure your vote is counted on a specific bill?

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