The San Diego discussion about the availability of Chapter 9 bankruptcy routinely devolves into emotion which compromises its utility. It is not ‘pointed’ at any person, group, etc. It is a process of rational adjustments to acute or chronic debt to achieve solvency/liquidity. It could be equally employed in the support of municipal employee interests as it could any other interest group of policy sector. It’s about math, not politics. And, it can be very effective. Properly approached, the end result can provide access to a healthier, revived entity which benefits all.

But, it is not something any government has to do. It is an option — and San Diego has routinely preferred to address its debt issues in other ways, which ways may be successful, or not. Bankruptcies are admittedly dynamic, and not subject to outcome certainty in advance. But, arguably, the ‘other ways’ are at least equally if not more uncertain. Certainly the many efforts to date to address the city’s accumulating debt have been less than easily achieved or uniformly successful.

The research I have seen from local sources on the ‘protected’ status of employment-related preferences has focused almost exclusively on state law — and it makes a good point. Namely, there is no ‘reorganization’ statutory scheme under California state law. State courts thus have no jurisdiction to ‘adjust’ legal claims (no comment here about the ‘legality’ issue) even if in a given circumstance that would be a very good thing indeed. Municipal employment-related claims are arguably ‘constitutionally protected’ in California under California law, but so are all other legally incurred claims having nothing to do with municipal employment. Legal claims of every type cannot be ‘adjusted’ in California courts — and they are not.

My friend Vlad’s comment about state-created claim preferences/protections being preserved and applicable in bankruptcy is not the normal case. The allowance, classification and treatment of claims in bankruptcy is different — intentionally so. And, a state-created preservation of the claims of some based on a preferred status over other claimants is generally not the norm. If it were, the opportunity for bankruptcy mischief would be bracing, a result considered and found unacceptable to the fairness principles included in the federal system. If a municipality files for Chapter 9, it is governed by all the federal laws and rules — not just some of them.

The discussion of Chapter 9 for San Diego is really not a viable dialogue at this point for two reasons. First, as a matter of political/policy choice, San Diego does not want to use this approach regardless of its utility in achieving a good result. This is reflected in the position of its electeds, its newspapers, and its public dialogue. Second, as a result of the enactment of Assembly Bill 506, California has essentially precluded the effective availability of Chapter 9 to its municipalities, which is clearly the right of the state. Normally such state action brings with it a responsibility to be part of the financial solution at the municipal level, and the state essentially expressed its intent to do so when 506 was enacted.

Patrick Shea is a local bankruptcy attorney and a former candidate for mayor of the city of San Diego.

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