Three California cities have filed for municipal bankruptcy in the last several weeks. With economic concerns strengthening in areas like California, it seems that even city governments aren’t immune from financial hardship. While debt restructuring efforts through bankruptcy are a good thing, not everyone is protected from ill effects of the debt negotiation process.
A labor-backed bill was submitted to California lawmakers a few weeks ago that would extend protections for creditors in a municipal bankruptcy. Public-employee unions have taken the largest hit when city governments end up overdrawn and unable to satisfy debt obligations. The bill was intended to help better protect unions from benefit and pension cuts, but has been set aside by law makers until a further time.
Under the current law, financially distressed municipalities must attempt to negotiate debts with investors and employee unions before entering Chapter 9 bankruptcy. The new bill would have allowed for negotiation mediators to have broader powers and deadlines to be loosened, leaving creditors will more time to work out a deal. However, many analysts suggest the bill is simply a distraction from the issue of pension reform and that dictating how and when municipalities file for bankruptcy is not the way to end the bigger problem.