Dan Walters: Three California cities' bankruptcy cases reverberate

08/08/2012 12:00 AM

10/20/2014 1:26 PM

The back-to-back bankruptcy filings of Stockton and San Bernardino, following Vallejo's insolvency a few years earlier, have sparked finger-pointing about causes and speculation about whether more cities may go under.

Those on the political right say the bankruptcies resulted from local politicians' caving in to pressure from unions for higher pay and more generous pension and health benefits.

Those on the left – unions particularly – contend that the collapse of the real estate market, caused by rapacious Wall Street bankers, is to blame.

The reality is more nuanced.

All three cities on the suburban peripheries were facing urban decay. When the housing boom brought revenue surges, their leaders assumed, irresponsibly, that the windfalls would never end.

They overspent, not only on better pay and benefits for their employees, but in Stockton's case, on massive loans for image-improving civic projects.

When the housing bubble burst, they covered up the shortfalls with creative bookkeeping. Eventually, reality caught up with them.

San Bernardino's leaders were especially creative, perhaps illegally so.

And they've also blamed the state's elimination of local redevelopment agencies and seizure of their assets.

It's apparent, however, that San Bernardino and many other cities had been using redevelopment funds improperly, if not illegally, to fill holes in their budgets, rather than for eliminating urban blight.

Stockton and San Bernardino sought bankruptcy under a new law that requires local governments to negotiate with creditors prior to filing, unless they declare emergencies. Stockton went though the process, but San Bernardino declared an emergency.

That legislation was a milder version of a measure that unions – worried that contracts or even pension benefits could be abrogated under federal bankruptcy laws – had been pushing to require cities to get permission from the state before seeking bankruptcy.

The unions came back with a stronger bill this year. It cleared the Assembly but stalled in the Senate after several senators complained that it would violate last year's compromise.

Meanwhile, the question about whether union contracts or pension obligations could be abrogated in bankruptcy remains unanswered.

A new briefing paper on municipal bankruptcy from the Legislature's budget analyst, Mac Taylor, says that contracts could be overturned, as could health care commitments to retirees, but that the status of pensions remains unsettled.

Pensions were changed in a Rhode Island city that filed for bankruptcy, but how they would be treated in California "is not clear."

With more California cities flirting with insolvency, there may be many more opportunities for the question to be answered.

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