Bankruptcy judge dissolves labor contract: a first?

In what may be the first action of its kind, a federal bankruptcy judge dissolved a City of Vallejo labor contract this week.

But the overturning of a public employee labor contract, opposed by labor unions and CalPERS (a top creditor owed $84 million), comes after a long and expensive bankruptcy process.

The City of Vallejo’s legal costs since declaring bankruptcy in May of last year, a widely watched move prompting a labor-backed legislative attempt to control local government bankruptcies, have reportedly reached $5 million.

Overturning the contract of the electrical workers union, a lone holdout after three other unions reached an agreement, saves the city an estimated $860,000 in salary increases during the final two years of the contract.

U.S. Bankruptcy Judge Michael McManus in Sacramento said in a landmark ruling last March that labor contracts can be dissolved in a municipal bankruptcy, if the standards for dissolving contracts in corporate bankruptcies are met.

But the judge also made it clear that he was reluctant to actually dissolve the Vallejo labor contracts, repeatedly noting during one hearing that overturning a contract would result in negotiations for a new contract.

As he queried lawyers for the city and the unions, the judge seemed to be suggesting: Why not begin negotiating now, instead of waiting for the court to force talks by overturning the contract?

Police and a small bargaining unit of managers and professionals agreed to revised contracts last January. The judge ordered mediation in April for firefighters and the International Brotherhood of Electrical Workers.

There was no movement for months as the unions appealed a McManus ruling last September that Vallejo was eligible for bankruptcy under Chapter 9. The unions argued that the city had untapped money in funds restricted for transportation and other purposes.

The ruling that Vallejo was eligible for bankruptcy was upheld in June by a three-judge federal bankruptcy appellate panel in Los Angeles. An appeal of the ruling was not withdrawn by the firefighters and electrical workers until early last month.

Then on Aug. 26, the city announced an agreement that overturned its contract with the International Association of Firefighters. If talks do not produce a new contract by Sept. 30, mediation begins and, if necessary, arbitration to produce a new contract.

“This is the same process the parties would have followed had the agreement not been reached and Judge McManus ruled in the city’s favor on its rejection (of the contract) motion,” said a city news release.

The judge ruled Monday (Aug. 31) in favor of the city’s motion to reject the collective bargaining agreement with the electrical workers, finding that mediation had failed and that the city had made a “reasonable” attempt to negotiate.

An expert on municipal bankruptcy, James Spiotto, a partner in the Chapman and Cutler law firm in Chicago, said he does not recall any other cases where a judge dissolved a municipal labor contract.

“It may be a first, at least in recent memory, of a union contract being up for decision as to being rejected,” he said.

Spiotto recalled that a San Jose school district declared bankruptcy in 1983, contending that it could not pay teachers an amount resulting from a labor arbitration in a salary dispute.

“They ultimately settled with the teachers with a different amount they felt they could pay, and they dismissed the bankruptcy,” he said. “There wasn‘t any real court decision on it. They basically worked it out.”

Currently, said Spiotto, it‘s “a time of stress for a lot of municipalities. Unfunded pension liabilities — in some people‘s count, it‘s over $1 trillion state and local. Those are big issues, especially now when every dollar counts.”

Spiotto said he thinks “the message from Vallejo — and it‘s a little like going to the eye doctor when he says, ‘Is it clearer now, or is it clearer now?’ — is do you have to go through the court hearings?”

He said if municipalities and labor loosen their positions and work together to avoid going into Chapter 9 bankruptcy, there is less “stress“ and more money from early savings to help solve problems.

Spiotto said Vallejo should be a reminder that if labor contracts become so burdensome that a municipality cannot afford them, cities can go to court and get a plan of adjustment and a fresh start.

“I think it stated what the law was,” Spiotto said of the McManus ruling in March that city labor contracts can be dissolved in bankruptcy.

“But I think it was an articulation that hadn’t been made before,” he said. “So I think it was an awakening for people who didn’t read the fine print of the Chapter 9 bankruptcy code.”

In its bankruptcy filings, Vallejo said the city expected to begin the fiscal year in July of last year with an estimate of $77.9 million in general fund revenue, less than its $79.4 million cost for labor.

The city has made some savings by freezing salaries under bankruptcy, not filling vacancies and cutting services. Most of the members of the electrical workers union are paid from restricted special funds, not the deficit-ridden general fund.

McManus said the electrical workers, unlike other unions, did not make salary concessions as the city attempted to avoid bankruptcy. The hard line apparently continued in negotiations after bankruptcy.

An electrical workers union official told the Vallejo Times-Herald earlier this week that it’s not clear whether the judge’s ruling will be appealed or when talks on a new contract might begin.

“We’re meeting and conferring with our attorneys and international reps,” Ken Shoemaker, IBEW vice president, told the newspaper. “We’re kind of weighing all our options and where we go from here and what this actually means for our members.”

A bill requiring local governments to get the approval of the California Debt and Investment Advisory Commission before declaring bankruptcy, AB 155 by Assemblyman Tony Mendoza, D-Norwalk, passed the Assembly but stalled in the Senate.

At the top of the list of creditors when Vallejo filed for bankruptcy last year were retiree health care, $135 million, and the California Public Employees Retirement System, $84 million.

The city has paid the legal fees of a group formed to represent retirees in the bankruptcy. CalPERS used its own attorney to oppose the rejection of the labor contracts.

But so far, the Vallejo bankruptcy seems to have had little direct impact on retirement matters.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at https://calpensions.com/ Posted 4 Sep 09

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