Friday, March 27, 2009

remember Vallejo

Something that I have not had a chance to look at in depth... but there has been news in the case of Vallejo, California's Chapter 9 municipal bankruptcy. The news of late is that the judge has ruled that he has the authority to void the city's labor contracts. To skip my repeated rambling on the context and background.. my long musings on what the Vallejo bankruptcy may mean to Pittsburgh I put in a couple posts in the past.... Why Vallejo Matters and Why Vallejo Matters pt. 2.

So first off, I actually am confused why this is news. It seems pretty obvious to the non-lawyer that I am that a bankruptcy would open the door to all contracts with the city being voided in one way or another. I am surprised this was even taken up as debatable as to whether this could apply to the city's labor contracts. The punch line of my earlier posts is that the big question in a bankruptcy is how workers claims will be balanced against other claims, in particular bond debt.
Forbes already points out the role of bonds in the Vallejo bankruptcy in their recent story on the topic: Beware Defaulting Bonds. So at the end of the day, this would have been bizarre news if the ruling had been the contracts were inviolate in a bankruptcy... but as it is the state of things seems much as it was before. Still with the big questions unanswered.

For more on the situation in Vallejo, BusinessWeek had a recent report: Portrait of a Broke Town. What I have pointed out in the past is that as bad as Vallejo's situation is, from a purely fiscal perspective the state of Vallejo's city budget is nowhere near as bad as Pittsburgh's right now. Go figure.


Anonymous Anonymous said...

I think that the real question posed by the Vallejo bankruptcy is the effect of the contracts clause of the US and state constitutions on the ability of municipalities to void contracts in bankruptcy. Unlike a typical debtor, or business for that matter, government entities can't just pass an ordinance or resolution voiding contracts. Since there has been a dearth of chapter 9 bankruptcies until recently, there has not been much precedent on this issue. I'm sure an appeal is coming.

If past practice is any guarantee, it's the 9th Circuit, so the appeal will likely be successful and then subsequently overturned by the US Supreme Court.

I think the interesting question in this bankruptcy is what haircut the bondholders will be taking. It's my read that the Vallejo assets' value are far outstripped by the secured debt. Since the debtors don't want the assets anyways, what % discount will they take? If it is enough, I think that more municipalities, transit and sewer authorities will think about taking that leap.

Friday, March 27, 2009 8:10:00 AM  
Anonymous Anonymous said...

Q: The local dealer named "Kenny Ross" in the Business Week article you linked to surely can't be the same one as Pittsburgh's, can it?

Friday, March 27, 2009 10:54:00 AM  

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