WASHINGTON — Michigan Democrat Rep. John Conyers has introduced legislation that would make it much harder for municipalities to restructure their debt through bankruptcy.
The Protecting Employees and Retirees in Municipal Bankruptcies Act of 2015, introduced earlier this week, would alter the U.S. bankruptcy code in several key ways. In remarks submitted to the Congressional Record, Conyers, a Detroit native, said his bill would provide protection for public employees and pensioners who have dedicated their lives to helping their fellow citizens.
"When a municipality files for bankruptcy, its employees and retirees who have devoted their lives to public service — such as police officers, firefighters, sanitation workers and office personnel — risk having their hard-earned wages, pensions and health benefits cut or even eliminated," Conyers said. "My legislation addresses this risk by requiring the municipality to engage in meaningful good faith negotiations with its employees and retirees before the municipality can apply for Chapter 9 bankruptcy relief."
The legislation would protect those employees in two ways. First, it would raise the bar of eligibility for a municipality to file for Chapter 9. Section 109 of the law requires that a municipality negotiate with its creditors "in good faith," before a federal bankruptcy court allows it to file. Conyers' bill would clarify that the phrase "in good faith" to be interpreted with respect to muni employees as laid out in the National Labor Relations Act, a stricter standard than is currently applied by courts. The bill would further alter the language of the law to say that negotiations with creditors are futile when they become "impossible," rather than the current standard of "impracticable."
Under the proposed legislation, a distressed municipality would have to show a bankruptcy court by "clear and convincing evidence" that it had met the filing eligibility requirements.
Vincent Marriott, a partner at Ballard Spahr in Philadelphia, said recent bankruptcy opinions in Stockton, Calif. and Detroit have hinged on a lesser "preponderance of the evidence" standard.
Beyond raising the hurdles to eligibility, the bill also would prohibit a readjustment plan from cutting muni employee or pension benefits without the permission of the beneficiaries.
Marriott said that Detroit used the threat of non-consensual benefit cuts to get pensioners to the bargaining table and to work toward eventually hammering out a negotiated settlement. Under language included in this bill, he said, there would have been little incentive for the employees or retirees to accept any cuts at all.
"The absence of the threat of involuntary impairment puts the municipality in an impossible position," Marriott said. Taken as a whole, the bill would "effectively eliminate Chapter 9 as a tool for distressed municipalities," he concluded.
In his remarks, Conyers said the bill would speed the bankruptcy appeals process and ensure that municipal employees have a voice in the proceedings.
Sources said the bill is unlikely to gain traction in a Republican-controlled Congress that is likely to be more concerned with corporate tax reform and pursuing amendments to the Dodd-Frank Act.
