Good News, Bad News on California Municipal Bankruptcy

As it looks more and more certain that one previously filed California community will not go through the entire Chapter 9 bankruptcy process, another seems to be spiraling toward it as quickly as any of its predecessors. And a 2011 state law designed to slow municipal bankruptcies may not be effective in this case, a strategy looking more like a trend in a state where so many debt-hobbled communities exist.

Atwater (CA) lawmakers/policymakers are expected to meet this week to consider taking steps to declare a fiscal emergency, a move that would circumvent the California mandate that forces municipalities to the table with creditors for a period of no less than 90 days before a Chapter 9 legally can be filed. It’s similar to the play made by San Bernardino, one of three California communities to file for municipal bankruptcy in the last year.  It appears the culprit in this case, like in many cities teetering on insolvency, is worker and retiree compensation and/or entitlements (pensions, health care, etc.).

On the flip side, the unwinding of Mammoth Lakes’ attempt to go through Chapter 9 appears to be continuing without a hitch. The possibility of the municipality avoiding going through the entire, painful process took off in recent weeks after it reached a tentative agreement on a settlement of the $43 million court judgment that was won in court by a land developer, a court ruling that almost single-handedly forced the community into insolvency. Said agreement occurred after Mammoth Lakes, essentially a resort/tourism town, officially filed for Chapter 9 protection.
It’s the second time in as many years that parties negotiated a settlement after a filing was made. Concessions with creditors in an out-of-court settlement between Central Falls, RI and its retired workers following that municipality's 2011 filing, one of the first and most publicized of the 2011/2012 wave of cases. The filing essentially forced the negotiations.

-Brian Shappell, CBA, NACM staff writer

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