Money Scale.jpgSince June 28, three California cities have chosen to pursue bankruptcy in the face of burgeoning costs and increasing deficits: Stockton, Mammoth Lakes, and San Bernardino.  Public agencies have been dealing with financial difficulties for several years, but other than the City of Vallejo in 2008, none had resorted to bankruptcy as an option, until now.  With these recent bankruptcies, and the potential for additional ones in the near future, leaders of public agencies may have to respond to questions from the press, taxpayers, and even their own legislative bodies about whether bankruptcy is the solution to mounting financial pressures.   

While bankruptcy may ultimately be an agency’s best answer to its fiscal woes, bankruptcy has its downsides.  Just recently, the Los Angeles Times reported Vallejo Mayor Osby Davis as expressing regret that Vallejo had filed for bankruptcy.  He cited the negative impact of bankruptcy on the morale of the City as well as the costs of the bankruptcy proceedings. 

In Vallejo, the City explored all of its options for restoring fiscal order, but spiraling labor costs in particular forced the City into bankruptcy.  As one of the labor negotiators who worked with the City in the year  before it petitioned for bankruptcy protection, I can attest to the fact that the City attempted to avoid bankruptcy by seeking concessions from its labor unions.  I saw firsthand the City’s struggle with the decision of whether or not to file bankruptcy and the short-term and long-term effects bankruptcy would have on the city and community. 

When I worked with Vallejo in 2007 and 2008, an insolvent municipality in California could seek federal bankruptcy protection under Chapter 9 of the Federal Bankruptcy Code without any significant involvement from the State.  However, in 2011 a state-mandated mediation process was adopted to assist California agencies to avoid bankruptcy.  The relatively new mediation process requires an agency to go to mediation with its major bondholders, bond insurers, employees and retirees for up to 90 days prior to petitioning for bankruptcy protection.

The Vallejo bankruptcy not only holds lessons for public agencies but also for labor unions, who may be more motivated than before to make concessions to stave off bankruptcy. After declaring bankruptcy, the City of Vallejo filed a successful motion in bankruptcy court to reject its existing labor agreements.  In granting the City’s motion, the bankruptcy court found that state labor laws were preempted by federal bankruptcy law.

However, an agency should not be misled into believing that bankruptcy will automatically result in labor agreements being voided.  Most likely the bankruptcy court will require the agency to take all steps necessary to voluntarily reach cost-cutting agreements with labor organizations prior to allowing the agency to reject the contracts outright.  In addition, a bankruptcy court will likely look to see if the following factors have been satisfied: whether the  contract constitutes a burden on the agency; whether the balance of equities favors rejection; and whether the agency negotiated reasonably with the bargaining unit prior to making a request for rejection.  Note that even if an agency is ultimately authorized to reject labor contracts, questions remain regarding whether certain portions of the contract, such as retirement calculations, can be altered.     

Since bankruptcy may not be the magic elixir to all of an agency’s fiscal woes,  financially strapped agencies may want to give careful consideration to other cost-cutting measures first.  Such alternatives should be part of the dialogue if your agency faces the question if it should file for bankruptcy too? 

Agencies should be aware of what meet and confer obligations exist in relation to the cost-cutting measures being considered.  The Meyers-Milias-Brown Act (“MMBA”) generally requires cities, counties and other covered agencies to meet and confer in good faith with recognized employee organizations regarding wages, hours, and other terms and conditions of employment.  The law also allows public agencies to take immediate action when presented with a fiscal emergency without meeting and conferring, though the agency must provide the employee organization the opportunity to meet and confer after the emergency action is taken.  Working within the framework of the MMBA, it is critical for employers to understand the circumstances under which they can act unilaterally to take cost-cutting measures, and when they must first meet and confer with represented bargaining units

For example, an agency’s decision to lay off employees based on economic considerations is a managerial or policy decision that is not negotiable.  However, issues relating to the impacts and effects of layoffs are negotiable.  These issues may include the notice and timing of layoffs, and the number or identity of the employees affected.  An employer is also required to bargain over positions that are reorganized or reclassified as a result of a layoff, and the effect on the workload and safety of the remaining workers. 

An agency may wish to consider voluntary means for achieving reductions in force, including offering retirement incentives.  Even these may be subject to meet and confer obligations as well as statutory limitations under the Public Employees Retirement Law. For example,  the Public Employees’ Retirement System (“PERS”) strictly limits the circumstances in which Golden Handshakes may be offered and the procedures that must be followed. First, the agency must determine that it is facing an impending curtailment of, or change in the manner of performing service. That is, the agency must determine that it will be reducing staffing levels or substantially reorganizing personnel via transfers or demotions.  Second, the agency will need to designate one or more job classifications, departments, or other organizational units that are  facing impending layoffs, transfers, or demotions, such that those job classifications, departments or other organizational units will be offered Golden Handshakes.  Golden Handshakes cannot, however, be provided on the basis of employee organization or non- represented groups. In other words, the agency cannot simply state that it will offer Golden Handshakes to all employees in the agency who qualify, or only to members of a particular bargaining unit. The intent of the statute is to only offer Golden Handshakes to employees in classifications which might otherwise suffer layoff, transfer or demotion because of curtailment of the public agency’s services or a change in the manner of performing service. 

Other alternatives that may be considered include furloughs and/or reduced hours.  On the one hand, neither the courts nor the Public Employment Relations Board (PERB) have specifically found that furloughs must be negotiated.  On the other hand, PERB recognizes a critical distinction between a layoff decision and a decision to implement an involuntary reduction in hours.  PERB explains that layoffs suspend the employment relationship entirely, while a reduction of hours maintains the relationship but alters some of its terms.  Accordingly, while a decision to implement layoffs need not be bargained, an employer must meet and confer over a reduction in hours.

Restructuring public employee retirement benefits is also on the public’s radar and a likely consideration for budget cuts.  Typically, retirement benefits provided under the PERS are a function of four factors:  applicable retirement formula, age at retirement, service credit and final compensation.  During the current period of severe budgetary shortfalls, negotiators here at LCW have successfully represented clients in negotiating lowered 2nd tier retirement and retiree health benefits.  Plus, recently, San Diego and San Jose, non-PERS agencies that administer their own retirement plans, passed pension reform ballot measures.  Governor Jerry Brown unveiled his 12-Point Pension Reform Plan last October which will apply to CalPERS and ’37 Act employers, among others.  Some commentators believe that the ballot measures passed in San Diego and San Jose will act to hasten and embolden the Governor’s 12-Point Pension Reform Plan, but this remains to be seen.  It is noteworthy that the public tide seems to have shifted in favor of public employee pension reform.

In light of the events involving Stockton, Mammoth Lakes and San Bernardino in the last few weeks, the question of whether to petition for bankruptcy will inevitably be addressed by various municipalities across the state.  However, as mentioned, bankruptcy is not a cure-all, fail-safe resolution.  It is incredibly costly from a financial standpoint, may affect the agency’s ability to secure credit in the future, serves as a disruption to operations, and harms the morale of employees and citizens.  For many public agencies, seeking concessions through the meet and confer process may be enough to avoid bankruptcy.  In addition, measures such as lay-offs, furloughs and early retirement incentives can also ease some of the financial pressure felt by agencies.

Recognizing the pressing nature of this issue, Liebert Cassidy Whitmore will soon be conducting a webinar training aimed at assisting our clients with the crucial issues of how to implement cost-cutting measures, negotiations strategies and techniques, options for bargaining in tough economic times, and the realities of bankruptcy as one of those options.  We remain committed to serving as trusted advisors to our clients during these tough economic times.

Additional coverage of these events:

From Diego To The Bay: California Voters Love Pension Reform, But It’s Not As Simple As It Looks For Public Employers, Liebert Cassidy Whitmore Special Bulletin (June 12, 2012)

Red flags over cities’ bankruptcy filings, SFGate (July 14, 2012)

Bankruptcy choices highlight fiscal pain of cities nationwide, Los Angeles Times (July 15, 2012)