As Westminster officials debated placing the renewal of a local sales tax on the November ballot, the city’s staff and residents threw around the bankruptcy word.
John Moorlach led Orange County out of bankruptcy nearly two decades ago, and warns the process — which, in the county’s case, lasted 18 months — thoroughly drained the county’s resources and employees.
“It’s not for the faint of heart,” Moorlach said.
Arguing Westminster needs to extend its 1% local sales tax set to expire in December, the city’s finance director said it could face bankruptcy without that revenue. Voters will decide in November whether to lock the local tax in for another 20 years, which would mean sales in town would continue to ring up with the 7.75% county-wide tax along with another 1% that goes to the city.
The 1% tax has funneled $81.5 million into city coffers since its adoption in 2016, officials said.
Though not prevalent, California has seen some of its cities declare bankruptcy, including more recently Stockton and San Bernardino.
How does bankruptcy work at the city level?
Cities generally seek relief via Chapter 9 of the federal bankruptcy code, Moorlach said, the same route the county took many years ago.
Created by Congress during the Great Depression to protect municipalities in fiscal crises, Chapter 9 allows its filers to adjust or reduce their financial obligations when they can’t afford them and to sustain basic government functions in the meantime — albeit, at a reduced capacity.
To file for Chapter 9 bankruptcy, a municipality must be authorized by its state to file, be insolvent, have a desire to effect a plan to adjust debts, and have put forth a good faith effort to negotiate with creditors to no avail.
In California, municipalities must either complete a 60- to 90-day mediation process led by a third-party “neutral evaluator” everyone agrees on or be facing an immediate financial crisis that “threatens the health and welfare of its residents.”
In a bankruptcy case, “you’ve got this large debt that you’ve accumulated, and no means to pay it,” said Mark Moses, a municipal finance expert and former chief financial officer for the city of Stockton, which declared bankruptcy in 2012 and recovered by 2015. San Bernardino needed until 2017. “So you go to bankruptcy court, you get relief from that debt, and then you can move on. That’s probably the cleanest kind of situation.”
For Orange County, its debt stacked up from ultimately risky investments. When it filed for bankruptcy in 1994, the county reported investment losses of $1.64 billion.
“We haven’t seen for two decades any city getting that overly aggressive with how they manage their cash,” Moorlach said.
For Westminster, it’s more complex, and Moses said he isn’t sure the city would “get any real significant relief from the bankruptcy process.”
“Westminster has not accumulated a crazy amount of debt,” Moses said, other than the hefty pension obligations and retiree medical obligations typical among most cities.
According to Moses, retirement benefit obligations are not easily adjusted, even in bankruptcy court. He went on to note that impending insolvency does not necessarily equate to bankruptcy.
In theory, though, if Westminster was allowed to file for bankruptcy, it would receive protection from its creditors — such as CalPERS and other state agencies — while it worked on a plan of adjustment. This proposal would need to be approved by the bankruptcy court and at least one class of its creditors.
Once a bankruptcy recovery plan is approved, it creates new memorandums of understanding with a filer’s creditors, Moorlach said. This is how filers eliminate major liabilities and reduce debts — though it may take great compromise inside and outside the courtroom.
“Everybody suffers in bankruptcy,” Moses said. “No one really walks away whole.”
Source: Orange County Register
Be First to Comment