What Is the Role of States in Municipal Bankruptcy?

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December 9, 2014
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The Federalism Differences in Municipal Bankruptcy

Municipal bankruptcy is unique in that it is authorized in federal law—but only if a state enacts legislation providing the right for a municipality to seek federal bankruptcy protection through the federal court system. Unsurprisingly, between the 12 states that specifically authorize municipal bankruptcies, the 12 which conditionally authorize municipal bankruptcies (and the three with limited authorization); states have created very different models. A key difference has to do with governance: does the state authorization retain municipal decision-making or governance authority—or does it usurp it? And, now with greater experience from the post-Great Recession spate of municipal bankruptcies, are there lessons to be learned from the different choices?

As the issue of governance appears to be disrupting San Bernardino’s ability to achieve consensus on how to agree upon a plan of debt adjustment to present to U.S. Bankruptcy Judge Meredith Jury—indeed now taking so long that Judge Jury has imposed a May 30 deadline—the governing dysfunction is threatening not only to add to the costs to the city and its taxpayers, but also raises the question about whether the Michigan and Rhode Island models which provide for the appointment of a receiver or an emergency manager might not offer greater efficiency and celerity to enabling a municipality to get back onto its own two feet. In California, as in Alabama, the respective state enabling statutes leave the respective municipally elected leaders to remain in charge. But it is the fraying process in San Bernardino―where the City Council has set a special meeting for tonight to discuss the performance of City Manager Allen Parker in closed session, in the wake of Mr. Parker’s refusal of Mayor Carey Davis’s request that he resign―where we can begin to see some questions emerge.

San Bernardino filed for federal bankruptcy protection under chapter 9 of the United States Bankruptcy Code on August 1, 2012 (The case was filed in the Court’s Riverside Division and was assigned case number 6:12-bk-28006.), or more than 28 months ago—so that a growing tab has been accruing and taking away from resources vital to not only providing essential public services, but also for investing in the city’s future. In contrast, Detroit exited in seven months and Central Falls, Rhode Island, in just over 13 months—compared to Stockton’s 15 months, and Jefferson County’s 23 months.

The comparisons bear consideration, because of the very different models: Under Rhode Island’s municipal bankruptcy enabling legislation, the Governor may appoint a receiver; in Michigan, the Governor appoints an emergency manager: in Michigan and Rhode Island, therefore, the respective municipalities’ elected leaders were effectively stripped of any governing authority. In contrast, in Jefferson County, Stockton, Vallejo, and San Bernardino; the respective Mayors and Councils remained in power with full responsibility for pulling together and putting into effect—with the federal bankruptcy court’s approval — so-called plans of debt adjustment in order to obtain U.S. judicial approval to exit municipal bankruptcy.

The process of putting together a proposed municipal bankruptcy plan of adjustment has now consumed so much time that U.S. Bankruptcy Judge Meredith Jury has taken the unprecedented step of imposing a deadline for the city to submit such a plan. In the seeming soap opera in San Bernardino, the City Council last week rebuffed Mayor Davis when it refused to extend his chief of staff’s contract. City Manager Parker said Mayor Davis asked him to advocate for the chief of staff, but he said that would be inappropriate. Thus, the attempt to force out the San Bernardino City Manager days later appeared like retaliation to many, including Councilman Fred Shorett, who notes: “Anyone would be really hard-pressed to think this isn’t somehow retaliatory or somehow connected to Monday night’s vote…I just find that hard to believe.” The chief of staff, Michael McKinney, did not respond to calls from the press last night, but earlier said the Mayor would not comment, because it was a confidential personnel matter. Similarly, City Council members have said they cannot comment; nor, it seems, will City Attorney Gary Saenz.

For his part, Mr. Parker said he would not have a problem working for a mayor who had requested his resignation, but he said it was important for the Mayor and Council to get on the same page: “What’s important to me is that the council and mayor continue to work together…Obviously, I’d like to continue be part of the team. I think that having them working together is more critical…There obviously was a schism that became apparent at Monday’s meeting, and that needs to be worked through by the Council and the Mayor.” Under San Bernardino’s city charter, the city manager can only be dismissed at the request of the mayor—together with a two-thirds vote of the City Council. The discussion evaluating Manager Parker’s performance will be private, but it will be preceded by an opportunity for members of the public to give their thoughts, this evening.

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