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Busting Unions With Bankruptcy Isn’t Chapter 9 Way: Joe Mysak

Jan. 6 (Bloomberg) -- Chapter 9 municipal bankruptcies fell in 2010, to six from 10 the previous year.

Who went bust? A couple of sanitary and improvement districts in Nebraska, a hospital in Idaho, a Texas municipal-utility district, a Missouri community-improvement district and a toll road in South Carolina, according to James Spiotto, a partner at Chapman & Cutler in Chicago.

In the municipal market, those entities, most of them used for real-estate development, are typical of the ones who file for Chapter 9.

There are several reasons for that. Keep them in mind as more people champion Chapter 9 as the new best way to fillet public-employee union salaries and benefits.

There’s nothing easy, or convenient, or cheap, or quick, or even predictable about Chapter 9. Those who talk about municipal bankruptcy as if it is any of those things, and the blogosphere is alive with such opinions right now, don’t know what they are talking about.

Even the lawyers who specialize in it don’t recommend municipal bankruptcy.

“Filing for bankruptcy protection under Chapter 9 should be considered a last resort, to be effected only after every effort has been made to avoid it,” wrote John Knox and Marc Levinson, partners at Orrick, Herrington & Sutcliffe LLP in San Francisco in their 2009 publication, “Municipal Bankruptcy: Avoiding and Using Chapter 9 in Times of Fiscal Stress.” Orrick is counsel to Vallejo, California, which in May 2008 entered bankruptcy and isn’t out yet.

Negotiation Required

To review: states can’t file for Chapter 9. Creditors can’t petition for a municipality to be declared bankrupt; the entity does so voluntarily. Then the municipality has to prove it is insolvent and can’t pay its bills. It also has to show that it has tried to avoid bankruptcy through negotiations.

And municipalities have to be authorized to file. More than half the states don’t allow it. Most of those that do allow municipalities to file for bankruptcy discourage it. Long before public officials take the march up the courthouse steps, states find it in their best interest to intervene.

Now, why do you think that is? Conspiracy theorists may say that it’s because public officials want to protect other public officials and local government in general against the taxpayers’ desire for a less taxed, more unfettered life.

Grow up.

The reason bankruptcy is so rare in the municipal market is because it could blow up the borrowing costs of every government in a state, as well as the state itself.

‘Breathing Space’

“It’s not a strategy,” said Orrick’s Knox in an interview Jan. 4. “All Chapter 9 does is give you breathing space to rearrange your affairs.”

That includes a municipality’s general obligation debt and, yes, collective-bargaining agreements. The bankruptcy judge is there to help the parties negotiate a plan of adjustment, not as some avenging angel intent on gutting the police union.

Full-service municipalities don’t enter Chapter 9 in order to liquidate or to fire the entire department of sanitation. They do so in order to continue as going civic concerns.

“It is important that services essential to the city be able to be provided in an efficient, effective and affordable manner,” Spiotto said in an e-mail this week.

So even if a judge rejects some collective-bargaining agreements, the municipality will still be talking to the people who provide police, fire and sanitation services.

Remain Adults

“The best solution,” Spiotto said, “is a negotiated resolution where both sides retain their adult state, recognize what is reasonable, attainable and affordable and recognize what promises can be lived up to and what cannot.”

I like his reference to “adult state.”

Those who espouse widespread municipal bankruptcy to free America from the tyranny of teachers, librarians, police and firefighters don’t seem to live there. They live in an inflamed fantasyland.

Let’s all go bust! That will show them! As American writer H.L. Mencken once wrote: “There is always a well-known solution to every human problem -- neat, plausible, and wrong.”

(Joe Mysak is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Joe Mysak in New York at

To contact the editor responsible for this column: James Greiff at

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