Here's a little more background from the study:

“Municipalities have rarely defaulted on their debt. As a consequence, municipal debt is regarded as having an extremely low risk for investors. There are disconcerting trends developing that may change this historical view. The combination of the weak U.S. economy, high municipal debt levels, and large under-funded pension liabilities coupled with unfunded retiree health benefits raises the likelihood that more municipalities will become insolvent going forward.

“Declaring bankruptcy (officially Chapter 9 bankruptcy) is an option available to a financially troubled municipality— more precisely to state leaders who must consent to a municipality’s bankruptcy filing—if they meet the eligibility conditions. A municipality can only declare bankruptcy if it is insolvent and only after the municipality has conducted good faith negotiations with its creditors to resolve its financial obligations.

“To provide greater perspective on this subject, this study overviews the purpose of Chapter 9 bankruptcy and then reviews the bankruptcy (or near-bankruptcy) of several prominent cases including: Vallejo, California; Detroit, Michigan; Stockton, California;  San Bernardino, California; San Jose, California; Jefferson County, Alabama; Harrisburg, Pennsylvania; Scranton, Pennsylvania; and New York City, New York.”

“There are important similarities across these high-profile municipal bankruptcies and near bankruptcies that provide  valuable lessons regarding how financial insolvency arises and the value and limits of bankruptcy protection.”

Here's the link.

By Chris Reed

Despite some pension reforms and program cuts, the city of Los Angeles remains in difficult financial shape. A Jan. 24 Fitch credit-rating service analysis says the L.A. economy is rebounding, but that city leaders struggle to find the political will to deal with structural budget problems, and that huge annual deficits will cause headaches for many years to come.

What is a key culprit in L.A.’s financial woes? You guessed it. Fitch says that of the city’s $3.9 billion 2011 general fund budget, nearly 20 percent ($773.5 million) went to fund retirement health care and other post-employment benefits and that nearly 15 percent ($577.4 million) went to city employee and public safety pension funds.

So what are the three key candidates in the March 5 mayor’s race saying they’ll do to deal with the budget and the daunting fact that more than one-third of the city general budget goes to fund public employee retirement benefits?

As this L.A. Times story makes clear, all want to basically duck the topic. Still, at least one candidate, City Councilwoman Jan Perry, knows tough times are ahead, with bankruptcy a possibility.

Wooing cops, firefighters and the SEIU

But two candidates want to make the problem even worse. Candidate Wendy Greuel wants to add 2,000 police and 800 firefighters — a 20 percent increase in a city where crime and fire problems are near modern historic lows. As the city controller, one would think Greuel should know better.

Meanwhile, City Councilman Eric Garcetti, the third major candidate, is in a fight with Greuel to see whom can do the most pandering to the Service Employees International Union, according to a Feb. 5 L.A. Times report:

“[Greuel and Garcetti] offered strong commitments of solidarity with the union representing a major chunk of civilian employees at City Hall, according to recordings of the [candidate interview] sessions obtained by The Times.

“The pledges [were] made last week in a members-only meeting for union workers considering a possible endorsement …

“Greuel … accused city leaders of failing to follow collective bargaining procedures when cutting retirement benefits for future city employees — a complaint being voiced loudly by the SEIU. …

“When it was his turn, Garcetti repeated a pledge to make all of the city’s department heads reapply for their jobs — offering a commitment that city workers would play a role in deciding which managers will remain. …

“The remarks show how much Greuel and Garcetti covet the backing of a union that represents thousands of janitors, trash truck drivers and other blue-collar city workers. If SEIU weighs in on the contest to replace Mayor Antonio Villaraigosa, it could mean hundreds of thousands of dollars and scores of volunteers for a favored candidate.”

Unfortunately for L.A., Greuel is considered the clear favorite, not the far more clear-eyed Perry.

Having lived in Southern California since 1990 and watched the city of Los Angeles go downhill under labor-friendly mayors (Antonio Villaraigosa and James Hahn) and do well under pro-business moderates of both parties (Richard Riordan and Tom Bradley), I’ve wondered when Angelenos would become as pragmatic as New Yorkers.

The same dynamic of mayoral success holds in the Big Apple — pro-business centrists like Michael Bloomberg and Rudy Giuliani have a way better record than labor-friendly liberals like David Dinkins and Abe Beame. And in New York, the heavily Democratic electorate figured this out long ago. When was the last time New York City voters elected a Democrat to be mayor?

All the way back in 1990.

Editor’s Note: This is the Ninth in a CalWatchDog.com Special Series of in-depth articles on municipal bankruptcy.

Nov. 12, 2012

By Tori Richards

It was 1975 and New York City was running out of cash. Its excessive spending and lack of financial oversight created a $14 billion debt, with more than half of it short-term. A request for a bailout from the federal government, headed by President Gerald Ford, didn’t happen and was memorialized with the famous New York Daily News headline, “Ford to City: Drop Dead.”

So rather than watch the Big Apple fail, the state of New York took action and helped make the city the strong metropolis it is today. That landmark process has become a primer for other entities to follow in keeping out of bankruptcy.

“It’s a well-regarded credit now,” municipal bond manager Tom Dalpiaz said of the city. “New York’s budgetary process is very strong. They keep track of it, have projections and know when they are going to run into trouble.” Dalpiaz oversees portfolios worth $280 million as senior vice president of Advisors Asset Management in Colorado.

But before arriving at a disaster point, municipalities can employ a variety of strategies to stay solvent, experts say.

“You can only do what is sustainable and affordable and if you make promises you can’t keep, then the best thing you can do is correct that mistake as soon as possible,” said Chicago bankruptcy attorney James Spiotto, considered one of the foremost experts on the topic. “You have to watch your budget.”

Before a municipality can file for Chapter 9, it has to be truly insolvent and not just looking for a way to get out of existing contracts and pensions. Cities like Vallejo, Calif.and Central Falls, R.I. had minuscule budgets compared to their looming pension payments and the contracts with city workers were excessive. Bankruptcy was the only option.

The Municipal Assistance Corporation

New York legislators knew that a bankruptcy filing for their world-class city would be disastrous for the state’s credit rating, Wall Street and the economy. So they created the Municipal Assistance Corporation  in 1975.

With members appointed by the governor, this state agency converted the city’s sales and stock transfer taxes into state taxes which were used as security for additional bond sales. It also advanced funds to keep the city running, according to a report from the California Research Bureau.

“The MAC demanded that the city institute a wage freeze, lay off employees, increase subway fares and begin charging tuition at city universities,” the report said. “Despite a summer of labor unrest, these measures stuck and MAC was able to refinance some city debt, but the market was still resistant.”

Next, the state created the Emergency Financial Control Board, which took control of the city’s finances.

“The state law creating the EFCB required the city to balance its budget within three years, change its accounting, and submit a three-year financial plan,” the report said. “The Board had the power to review and reject the city’s financial plan, operating and capital budgets, contracts negotiated with the public employees’ unions, and all municipal borrowing.”

Six years later, the city had a balanced budget and was able to sell long-term bonds. By 1985, MAC was no longer needed and New York was again a thriving city. It had overcome an operating deficit of $2.2 billion, the report said.

“MAC hasn’t issued bonds in 20 years,” Dalpiaz said. “It did the job and now the sick patient is up and healthy and on its own. That’s how the state is supposed to work with a troubled municipality.”

What New York accomplished has been emulated by other states across the nation, but not where it has been needed the most. Jefferson County, Ala. and Orange County, Calif. were both in dire straits financially, with the latter filing for bankruptcy in 1994 to close a $1.7 billion deficit. Jefferson County, Alabama’s largest and home to Birmingham, filed for bankruptcy on Nov. 8, 2011.

Neither California 16 years ago, nor Alabama today, has helped floundering counties avoid bankruptcy. California, which is also home to the bankrupt cities of Vallejo, Stockton, San Bernardino and Mammoth Lakes, passed a law last year that stops short of doling out funds. Assembly Bill 506, by Assemblyman Bob Wieckowski, D-Fremont, requires municipalities to work with a neutral evaluator under the California Debt Advisory Commission and obtain permission before filing for Chapter 9.

“This bill would NOT ban municipal bankruptcies or make them impossible,” according to a statement on the California Labor Federation’s Website. “Instead, it would simply create an oversight structure to ensure that bankruptcies are only entered into when necessary.”

What the Website doesn’t say is that a federal judge has the authority to deny a bankruptcy petition that lacks merit. For example, Bridgeport, Conn. filed in 1991, but the case was dismissed by a judge who ruled that the county was not insolvent.

Interestingly, California is in dire straits itself and some have floated the idea of amending federal bankruptcy law to allow states to reorganize their finances.

In a January 27, 2011 column, Newt Gingrich and Jeb Bush called for Congress to “allow states in default or in danger of default to reorganize their finances free from the union contractual obligations.” Gingrich is the former speaker of the U.S. House of Representatives and a was Republican candidate for president. Bush is a former governor of Florida. 

Organized Labor

Municipalities that aren’t lucky enough to have a MAC-style agency helping out have to look toward other options in preventing bankruptcy. One of the most obvious is controlling labor costs.

Worker contracts and their pensions proved to be the undoing of both Vallejo and Central Falls and have placed an untold number of other municipalities in danger, including San Diego and Los Angeles.

“To the extent that employee compensation costs are a problem, states have it within their power to change collective bargaining rules,” said E.J. McMahon, a senior fellow with the Manhattan Institute, a New York-based free-market think tank. “If you are threatened with fiscal distress because of collective bargaining rules, you can change the rules.”

In California, those rules were enacted in 1977 with what’s called the Dills Act. The bill was signed into law by none other than Jerry Brown, during his first stint as governor. The rules and can be undone by the Legislature at any time, McMahon said. He added, “California has a statutory presumption that the pensions are contractual. No one has been willing to test [in court] that it’s a benefit not yet earned by future employees.”

Another recommend overhaul in California and perhaps elsewhere is civil-service rules.

“Most of the states need to move to a new place away from old civil-service rules and there is not a move to do that,” McMahon said. “A federal judge can’t just say, ‘Let’s get rid of these civil service rules’.”

Unyielding unions, which drove Vallejo into bankruptcy, got more than they bargained for when a judge ruled that the labor contracts could be broken. That precedent-setting move is bad news for unions in future cash-strapped municipalities.

“There are painful choices that need to be made when a budget needs to be cut,” Dalpiaz said. “No one wants their ox to be gored; everyone thinks the problem is somewhere else. The fighting gets intense and. before you know. it people throw up their hands and say, ‘We have to file for bankruptcy’.”

Lessons from the Past

New York’s problems may have dated back to the 1960s, but 50 years later they seem remarkably contemporary. According to the California Research Bureau, the following “gimmicks” existed:

* Overly optimistic forecasts of revenues;

* Heavy use of revenue anticipation notes, including notes for revenues that did not materialize;

* Underfunding of pensions;

* Use of funds raised for capital expenditures for operating costs;

* Appropriation of illusory fund balances, meaning that special fund revenues were overestimated and used to balance the budget;

* Writing checks late.

Of course, any expert would advise entities to conduct affairs in the opposite manner. Bankruptcy attorney Robert McConnell, who represented Vallejo, said too few lawmakers have a working knowledge of finances.

“They get elected because they are popular, not because they are accountants or financial experts,” he said. “They leave it to their professional staff to explain it to them. When you go to a city council, board of supervisors or water district meeting, they have their accounting experts out there to explain it to them. Any legislator has to do his or her own independent research.”

Understanding finances will help lawmakers pinpoint the exact reason for fiscal trouble, which is the first thing a municipality needs to do, according to the report, “Municipal Bankruptcy: Avoiding and Using Chapter 9 in Times of Fiscal Stress.” It was written by attorneys John Knox and Marc Levinson, who also represented Vallejo in its bankruptcy.

Some financial stressors are a one-time problem — such as Jefferson County and a huge sewer repair bill. Others are systemic and flaws in the municipality’s operation.  The former may be able to be rectified by spreading payments out over a long period of time; the latter requires structural change which lawmakers may not want to tackle.

Regardless, it’s essential that officials closely monitor the operating fund so they will know when the money runs out.

Knox and Levinson wrote, “A municipal official who requires or even permits employees to come to work if the official knows that the municipality will not be able to pay them may be violating state labor laws or committing common law fraud. In some states, this may even constitute a criminal offense.”

Novel Approaches

Obviously, raising taxes could stave off some filings, although the public doesn’t appear to have an appetite for that, especially in the high-tax states such as California, where municipal bankruptcy threats are more common. But there are other things legislators can do. According to a 2008 report from the American Bankruptcy Institute, state legislators can pass a law requiring cities to set aside a certain amount of money every year as a “rainy day fund,” with a mandate that it cannot be spent until a time of need. Research showed that states with such laws weathered recessions better than others that didn’t.

Also, local tax systems can be reformed to required suburbs to share in part of a city’s expenses. This could be accomplished by the creation of special districts to levy taxes. Where citizens refuse to back tax increases, a host of fees could be tacked on to services such as trash, sewage, parking and utilities.

But above all, just have common sense, McConnell said.

“Don’t give away the bank. Our previous city council made some pretty generous agreements with our labor unions. That can only be sustained with a healthy economy.

“Bankruptcy is like a boat overloaded with people in the water when a storm comes,” McConnell continued. “It’s that one wave that sinks them and they are all done. We have to be more careful than we ever were before.”

Richards is an award-winning investigative reporter.

By Michael Warnken

Sept. 10, 2012

Until the public shooting of two Hispanic men by local police just a month ago, Anaheim was mostly known for the Anaheim Angels, Gene Autry and Disneyland. Today, we are well aware it is not the happiest place on earth. Anaheim, like many other parts of the state, has a gang problem and it seems to a have a police problem, too, as the recent shootings by police occurred in broad daylight under questionable circumstances.

Mayor Tom Tait called for an investigation into these incidents by the offices of California Attorney General Kamala Harris and U.S. Attorney General Eric Holder. However, local residents were not satisfied, and many felt that the police had crossed the line, especially since there had been six other similar events this year, five of which were fatal.

Most of the police brutality was focused around Hispanic citizens, who make up half of city residents. However, because many residents are immigrants who are not citizens, perhaps about one third of the city’s eligible voters are Hispanic.

The council’s current makeup is: Lori Galloway, half Hispanic, half Filipina; Harry Sidhu, a Sikh immigrant from India; and two Anglos, Gail Eastman and Kris Murray.

So Hispanic activists began calling for changes in the city’s electoral system. Along with others, the activists believe there is a connection between the electoral system in Anaheim and the violence.

The Orange County Register also reported:

“Those pushing for change point to the elegant neighborhoods of Anaheim Hills. The city’s current voting system has concentrated overwhelming political power there: Four of the city’s five council members are residents.

“That far exceeds the percentage of city voters who live there, a disparity that districts would remedy — according to their supporters — by more evenly distributing council seats. A review of voter-registration numbers by ZIP code shows that the Anaheim Hills area accounts for less than a fourth of the city’s voters.

“By comparison, the central part of the city — including Disneyland but also the hard-life neighborhoods at the heart of recent protests — has more than a third of the city’s voters but only one resident council member. And the west side of Anaheim accounts for about 40 percent of the city’s registered voters, but is home to no council member.”

On August 8, the Anaheim city council held a special hearing where a proposal by Tait was considered to raise the number of council members from four to six, with calls for an increase to as many as eight. Calls also went up to switch from the current system of at-large elections for council members to a system in which members are elected by geographical district. The council did not vote to send the proposal to the voters, but tabled it for further investigation.

At-Large Elections

An at-large electoral system exists when all the representatives in a city are elected by the entire populace. The alternative to this is known as “district elections,” in which city council members are each elected from different geographical districts of the same population.

District elections give smaller areas of people direct access to a representative. The people of that district knows who represents them, and are able hold them more directly accountable for their actions and decisions. Representatives in at-large districts are less accountable and like to claim they “represent everyone,” but in actual practice, they tend to ignore everyone equally, except those who are celebrities, powerful special interests and large campaign donors.

At-large electoral systems are dubious to begin with, as they have long been used to suppress minority political participation. This  practice was mastered in the American South, where cities with black populations of 40 percent to 50 percent or more would not have a single black city council representative.  The problem was so bad in the South that the Voting Rights Act was passed by Congress in 1965 to address this and other voting-rights problems. The act forced cities in the Southern states to hold single-member district elections.

As the largest city in Orange County and the 10th largest city in the state, with a population of about 340,000 people, Anaheim should have single-member district elections. A move to such a system would open the city up to more electoral diversity.  Just as juries and grand juries should reflect a cross section of a community, any properly formed electoral system should reflect the participants that they represent in a meaningful way.

Local Representation

In a reader rebuttal in the Orange County Register, council member Kris Murray justified the tabling of the proposal of moving to six members elected by district:

“There are still many questions to be answered surrounding those shootings, and several independent investigations are already underway to do so. Although some have asserted that there may be a correlation between the two issues, the city would be irresponsible to undertake wholesale change of its entire electoral system without first providing an opportunity for extensive citizen dialogue, careful legal analysis, and consideration of the options available to meet voters’ concerns for fair representation.”

But Police officers, judges and city administrative employees are added to governmental institutions without much thought. It’s silly to suggest that moving to district elections and adding more city councilors to the most important branch in a representative republic requires months of review. So, let’s indulge Murray on that point and consider the proposal for an increase in members and single member districts.

Currently, each of the four council members in Anaheim represents all 340,000 residents of Anaheim. If single-member districts were implemented without increasing the number of council members, each of four district would comprise about 85,000 people. An increase to six members would create districts of just under 60,000 people. (In both cases, I’m assuming the mayor, who sits on the council, would continue to be elected at large.)

But in evaluating this proposal, one simple question that needs to be asked is this: Is that real representation? Is that truly adequate? Can anyone even begin to honestly suggest that a city councilor can represent 60,000 or more people? So, why stop at just six members? At some point, the fundamental question needs to be asked: “How many people can a single city council member adequately represent?”

True representation means agency, direct contact and access by all. This might mean proper representation leads to significantly more elected council members (or their equivalents) Consider, for example the fact that Chicago has 50 aldermen and New York City has 51 city council members. More is not a problem; in fact, from a legislative standpoint, these cities work quite well.

More decentralization is needed

In the end, representatives are elected to resolve problems. More representatives would indeed help address Anaheim’s current problems — challenges that are not limited to gang violence and police brutality. If the city council had enough representatives, they could hold their own hearings investigating the police, like a state legislature or congress would and try to work them out rather than depending on the state and federal attorneys general. This amounts to self-government.

Further, at-large elections serve to protect incumbents from challengers because of the influence city employees have on such elections. Through their unions, city employees (including police) are more able to concentrate their influence and back their slate of candidates in at-large elections. The fewer representatives, the fewer votes on the council are required to raise taxes and spike employee pensions. The fewer representatives, the less accountable they and their employees are to the citizens.

Anaheim’s city council is not going to want to implement any changes. It will likely continue to put the matter off as long as it can because the reform needed is a direct threat to the current council’s power. The longer they are able to delay a change, the more they can maintain the status quo.

However, the citizens of Anaheim need to be vigilant. They need to keep pushing for more representation and single member districts. The thoughts and ideas of the representatives should be as broad and diverse as the people they represent. More representatives would achieve that goal as well as level the political playing field and lead to less violence and more accountability.

(Editor’s note: This is a revision of an earlier piece on the same subject.)

(Michael Warnken is an expert in the field of political representation and American electoral history.)