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Disolving Cities What happens when city bankruptcy isn’t enough? By: ROBERT ISBILL
California cities that have hit
their fiscal bottoms have been turning to the Chapter 9 municipal bankruptcy process, including at least three California cities last year, Mammoth Lakes, Stockton, and San Bernardino. In California, municipal bankruptcies are virtually the only option for a cash strapped town. Fitch Ratings reports that California has an effective mechanism to support struggling schools, but they don’t have any such assistance for cities that are in the same boat. And then there’s, “Disincorporation.” The city of San Bernardino is on the record for looking into going a step further with the possibility of disincorporating, a viable option that might occur here in the High Desert considering certain local cities financial situations. Disincorporation is a municipal action where the county absorbs a city within and covers the debts. In California, seventeen cities have been disincorporated, including Long Beach and Pismo Beach. “It’s a very complex process. There’s a lot of speculation as to how that process would work,” said Kathleen Rollings-McDonald, CEO of the San Bernardino County Local Agency Formation Commission, or LAFCO. “There’s speculation about the city of San Bernardino itself, if the bankruptcy fails to produce the results, so they can come out of bankruptcy. Disincorporation may be their only option, and so there is discussion about that.” If a city is successful in disincorporating, “The city will just go away,” said McDonald. “Police powers and the rest will be assumed by someone else. If the city is not present, the county is the authority for law enforcement, (other) controls, maintenance of roads, and so to disincorporate, there would be a means to transfer all those things back to the county along with the revenue streams to support it.” This includes the water systems and parks and all would be assumed by a special district that could leave some semblance of local control or local government or could be placed under the Board of Supervisors governing. Plans of service would be required for disincorporation to be initiated, and someone would say what they envision that to be, said McDonald. Disincorporation comes with several additional drawbacks including, a county-controlled police department, sporadic road maintenance, no City Council and no recreation department. “There’s a requirement to analyze it and to develop a report and submit it to the Commission who has the ability to approve, modify or deny it. In order for it to move forward, it would require a vote of the people.” When a city disincorporates, there are still pensions and other financial responsibilities to consider. The cities have to provide for the payment of all its debts and the distribution of all its assets, said Attorney Michael Colantuano of Colantuano & Levin, PC in Penn Valley, California, who recently conducted a CALAFCO workshop. “Typically, that means the successor agency which could be the county, is protected from the debt by conditions of the disincorporation imposed by LAFCO that would require a taxing district to be established to pay those debts.” Federal law allows a city or other local government to seek bankruptcy only consistently with state law, so state law controls access to bankruptcy for local governments. Until about 2010 local government had absolute power to just do it. “AB 506 requires sort of a consultation process that has to take place before you can file bankruptcy. Stockton went through that process. Other than bankruptcy there’s no legal way to walk away from those obligations.” The existing statute was written pre-Prop 13, and presumes that property taxes would be used to pay those debts. So those provisions don’t work because Prop 13 caps taxes at 1%. Still, cities like San
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Bernardino and Stockton who first filed bankruptcy before looking into disincorporation, are being watched closely. “Everybody is watching Stockton,” Colantuano said. “Because the banking creditors in Stockton are pushing the bankruptcy courts to cheapen up the pensions and spread the pain among the present and former employees of Stockton and its other creditors. CalPERS intervened in Stockton bankruptcy to defend the city’s contract with CalPERS, and everybody is watching very closely to see what happens there.” Across the state, cities are struggling to provide the services residents have come to expect with fewer revenues and staff. People are looking for a way out, according to Bill Chiat, executive director of the California Association of Local Agency Formation Commissions. "There certainly have been cities in this economic climate that have inquired about disincorporation," said Chiat. California law requires a procedure to disincorporate a city that involves four stages: Initiating of process; consideration by LAFCO; election, and completion of proceedings. The first step would be filing an application with LAFCO. A city submits a plan describing the level of services residents could expect if the city disincorporates. It would then go before the LAFCO commission, which would approve or deny the application. LAFCOs' current legal authority and mandate are defined by the Cortese-Knox-Hertzberg Local Government Act of 2000. “The Act “provides the “sole and exclusive authority and procedure” for the disincorporation of a California city”. There are twenty-four cities in the County of San Bernardino, and there are fifty-eight counties in the state of California. Problematic cities are not confined only to the state of California. Nor is the act of disincorporation. In a February 17, 2013 article in the Missouri Show-Me Daily newspaper, three Missouri towns have disincorporated in the last year: St. George, Mack’s Creek and Quitman. Local Agency Formation Commission (LAFCO) was established in 1963 by the State Legislature under the administration of Governor Edmund G. (Pat) Brown. Seventeen cities in California, including Long Beach, Pismo Beach, and Stanton have at one time or another disincorporated and subsequently reincorporated. However, only Cabazon has disincorporated under the auspices of LAFCO, and that was in Riverside County.
Bob Isbill is a Better Business Bureau Arbitrator, freelance writer, and Publicist for the High Desert Resource Network
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