In what has potential to emerge as a late 2011/early 2012 buzz topic, another state has moved to toughen the process for debt-saddled municipalities to declare for bankruptcy protection.
California Gov. Edmund “Jerry” Brown this week signed Assembly Bill 506, which will require municipalities seeking the ability to file Chapter 9 to either declare a fiscal emergency or document efforts to negotiate with creditors prior to such a filing. Though promoting it as otherwise, the move appears to be a thinly veiled effort to pump the brakes on the slowly emerging trend of municipalities considering Chapter 9 as an increasingly viable option to beat financial woes. Pennsylvania promoted somewhat similar legislation over the summer.
Brown said the legislation “puts in place reasonable steps for local governments to take before filing bankruptcy…let’s be clear, this bill does not prevent a municipality from declaring bankruptcy or even throw roadblocks in its path.” He continued the goal was to find “alternative, less drastic solutions” then filing.
The municipal bankruptcy issue has become an increasingly hot one for businesses/creditors that do significant selling on terms to municipalities, especially ones now struggling, amid the ongoing financial crisis and increasing entitlement issues. This year, about a half-dozen municipalities filed for protection under Chapter 9 with the latest of which emanating out of Central Falls, RI. Jefferson County, AL narrowly avoided it thanks to a $1 billion renegotiation approved by debt-holders tied to a sewer rehab project, and Harrisburg, PA continues to weigh what appear to be a very narrow set of options as creditors for a failed trash-incineration project haven’t been so flexible.
Bruce Nathan, Esq., of Lowenstein Sandler PC, who is presenting an NACM teleconference Wednesday on the municipal bankruptcy issue, listed skyrocketing health care and pension obligations as well as lower revenue and construction-related debts both tied to the ongoing economic downturn among top reasons for the growing trend. He noted that specifically in California, the state capital city of Sacramento alone has unfunded retiree health care liabilities of $245.6 million and that the bankruptcy filing in the city of Vallejo is among the largest in U.S. history.
For more information on or to register for Wednesday’s teleconference on this topic and how it will affect credit managers, click here.
Brian Shappell, NACM staff writer