Opinion: AB 506 May Be Pacifica's Salvation

By Todd McCune Bray, Riptide Correspondent

After Vallejo's bankruptcy in 2008, the State of California passed Assembly Bill 506, which allows a municipality to restructure its debts with creditors and renegotiate employee contracts without declaring bankruptcy, thereby saving its bond ratings from the consequences of a formal Chapter 9 bankruptcy.

The City of Pacifica has taken the first step necessary for this by declaring a fiscal emergency. Whether intentional or not, our city can now aggressively bring down the cost of senior staff, department heads, fire and police, and potentially restructure its debts with creditors, including fines like the one agreed to in the recent $50 million settlement with the water board.

As of now, AB 506 seems to me like the best option for our city. Correct me if I am wrong, but of all those financial task force options, none of them included a reference to the restructuring AB 506 would afford our community.

Comments

[Lionel Emde]

The city has enough revenue if Todd's idea of a scaled pay cut is at least run through as an idea and agreed to in negotiations with the unions.

Other than that, it's declining returns.

[bankruptcy attorney]

Todd:

First you state that the city has enough revenue? Now you say it is time to file Chapter 9 bankrutpcy.

From having enough revenue to bankruptcy is a long way apart.

[todd bray]

Larry, perhaps read the executive summary below. As you've stated, we have very different ideas about what AB 506 can accomplish.

[Larry Rosenstein]

Todd: I don't think AB 506 does what you're suggesting here. A city can always negotiate with its employee unions, creditors, etc., and try to reach some sort of restructuring agreement. AB 506 doesn't change this. My take on it is that it imposes additional requirements before a city can declare Chapter 9 bankruptcy, to prevent a city from using bankruptcy as a quick and easy way to restructure its obligations. In other words, a city can't just declare bankruptcy and force its unions to accept changes. Under AB 506, a city has to work with the interested parties to get a neutral evaluation of its financial condition. (BTW, if I read the Stockton information correctly, doing this evaluation is going to cost $3.5 million; see page 251.16.)

A city can bypass the evaluation if it declares an emergency, but I don't think the city's declaration of an emergency meets the requirements of AB 506. The executive summary you posted says:

"The declaration of fiscal emergency must include findings that 'the financial state of the local public entity jeopardizes the health, safety, or well-being of the residents of the local public entity’s jurisdiction or service area absent protections of Chapter 9' of the federal bankruptcy code.9 Additionally, the resolution of the public agency must include a finding that the public agency will be unable to pay its obligations within the next 60 days."

The ordinance shown in the February 27 agenda shows the first finding, but it did not include a finding that the city is unable to pay its obligations in the next 60 days. In fact, the ordinance says that the city's operating reserves will be depleted by 2017, so presumably the city can pay all of its bills for at least the next 60 days, if not the next couple of years.

[todd bray]

This is a link to an executive summary of AB 506. It's new. I have confirmation that AB 506 has not been discussed at Financing City Services Task Force meetings or by staff or City Council. AB 506 allows for all the necessary financial restructuring of a traditional Chapter 9 bankruptcy without the negative consequences to our bond rating.

It's time for senior staff, council, task force, and the rest of us to at least TRY to understand the difference between an AB 506 restructuring and a Chapter 9 bankruptcy.

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