AB 155: Unions Respond to Vallejo’s Bankruptcy Filing

California unions have responded to the City of Vallejo’s bankruptcy filing with the introduction of AB 155 (Mendoza). Under AB 155, a municipality would have to obtain approval from the California Debt and Investment Advisory Commission before filing for bankruptcy. The 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. AB 155 is supported by a number of unions, including the California Professional Firefighters and CDF Firefighters Local 2881, both of whom are co-sponsoring the bill. The California Association of Counties and the League of Cities are leading the opposition.

Obviously, the unions are worried that more municipalities will follow Vallejo into bankruptcy in an effort to void labor contracts. AB 155 goes a long way towards preventing that. By requiring approval by the California Debt and Investment Advisory Commission, unions hope to prevent municipalities from filing for bankruptcy altogether or at least delay the process long enough to give them more leverage.

I think AB 155 is a bad idea. More important, I think organized labor has vastly overreacted to Vallejo’s bankruptcy filing. The fact is that few municipalities are likely to follow Vallejo into bankruptcy. Yes, everyone is talking about it and a few have even looked into it, but I doubt many will actually do it. Here’s why.

While newspapers have correctly reported that Vallejo’s public safety labor contracts (fire and police) tied the City to high wages, that’s really only half the story. If the contracts just provided for high salaries, Vallejo probably wouldn’t be in bankruptcy. This is because Vallejo could have just exercised its management right to lay-off firefighters and police officers if the total costs of the contract were more than the City could afford. In Vallejo’s case it couldn’t do that. (Vallejo also has binding interest arbitration—but that’s a post for another day . . .)

That’s what the newspapers have failed to properly report. Vallejo’s real problem was that its public safety contracts provided for high salaries and required minimum staffing levels. In the case of firefighters, the contract (as interpreted by an arbitrator) required that the City staff 28 firefighters at all times. To my knowledge there are only a handful of other agencies in the state with contracts that provide for minimum staffing levels. As an employer, having such a provision obviously ties your hands. After all, there are really only two components to an employer’s personnel costs: the cost per employee and the number of employees. As long as you control one of these variables, you can always reduce your personnel costs—either by reducing the cost per employee or reducing the workforce. In Vallejo, it couldn’t reduce its public safety costs because the contracts locked the City into high salaries and minimum staffing levels.

This unique situation is why I don’t think many other municipalities will file bankruptcy. Even if you’re a municipality with a labor contract that now seems unaffordable, you still have the ability to reduce your total costs by reducing your workforce. Granted, laying-off employees is not something any municipality wants to do, but at least it’s an option. It wasn’t an option for Vallejo.