Municipal Bankruptcy Seen as a Strategy, Rather Than a Failure

According to Farmer, "A handful of California cities are now using bankruptcy to take on that state’s goliath pension system; the outcomes of those cases could spread far beyond California, changing the way other municipalities view bankruptcy. Filing for Chapter 9 will almost certainly remain a decision of last resort, but the stigma may not be what it once was. There’s a growing sense among some leaders that municipal bankruptcy -- unthinkable just a few years ago -- may be a valuable tool in a city’s financial toolbox."

The bankruptcy of Central Falls, R.I., which allowed the town of 20,000 people to make cuts to its labor and retiree agreements it had long fought for, is seen as an important precedent for cities pushing for pension reform.

“Up until Central Falls, there was never what we call an ‘or else,’” says Ted Orson, the attorney for the city’s receiver. “There wasn’t any leverage to make concessions. However, after Central Falls, when [the labor unions] saw what happened, they understood it’s better to negotiate a better agreement than to be in a position where something can be forced on you and you might not like what it is.”

"Central Falls showed cities that pensions were touchable," says Farmer. "Now, two cases in California could cement that idea into law."

"If a judge rules that pension systems can indeed be treated like other creditors -- many expect the case to make its way to the U.S. Supreme Court -- it could forever change the notion of municipal bankruptcy and fiscal restructuring."