AB 155 Bankruptcy Bill is Back

AB 155 has gotten a lot of press lately. The measure recently passed the Senate Local Government Committee where it had been stalled for over a year. As written, AB 155 would require a local agency to obtain permission from the California Debt and Investment Advisory Commission (CDIAC) before filing for bankruptcy. The obvious effect of AB 155 would be to make it much more difficult for local agencies, like the City of Vallejo, to declare bankruptcy. I first commented on AB 155 in April 2009 (click here for the post), when I called it an overreaction.

However, now that AB 155 has passed its first hurdle, it's worth taking a look at the merits of the bill.  Under AB 155, a public entity must demonstrate to the CDIAC several factors, including: 1) that it cannot pay its debts, 2) that it has exhausted all other options; and 3) that it has a plan for restoring itself to fiscal health. However, those are all factors that are already considered by the bankruptcy court in any bankruptcy filing.  Is there any reason to believe that the CDIAC, which has no experience dealing with Chapter 9 bankruptcies, can evaluate these factors better than a bankruptcy court? I think not.  To the contrary, because the CDIAC is comprised of 7-9 elected officials, politics will invariably come into play in any decision of the CDIAC.

That begs the question, why is AB 155 needed?  In the Senate analysis, the primary justification for AB 155 is the idea that a local bankruptcy has statewide ramifications, and thus, the state should regulate a local agency's ability to seek bankruptcy protection.  As stated in the Senate analysis, "…local and state finances are inextricably linked, the state has a direct interest in the fiscal health of its local governments. A municipal bankruptcy can have statewide repercussions, including higher borrowing costs for other local entities and the state.”  Well, that certainly seems plausible.  However, I wonder if that has been the case.  For example, has the City of Vallejo's bankruptcy filing adversely affected its neighbors?  I'm sure Vallejo's bankruptcy caused all the various bond rating agencies to take a closer look at the finances of California local agencies.  However, apart from that stricter scrutiny I'm not sure that Vallejo's bankruptcy has had the statewide ramifications prophesied by AB 155.

The reality is that AB 155 remains a special interest bill designed to help unions at the bargaining table during these tough economic times.  As I mentioned last year, the possibility of more local agencies actually filing for bankruptcy is fairly remote. However, that hasn’t stopped many local agencies from threatening to “do a Vallejo.”  And that’s really what is driving this bill.  The unions want to prevent cities and counties from using the threat of bankruptcy to leverage concessions.  While the unions' position may be understandable, it doesn't make this a good bill—which it isn't.