WASHINGTON — Two U.S. senators have introduced a bill that give more rights to municipal employees in Chapter 9 bankruptcy proceedings, but experts warn the measure could lead to more litigation and raise Constitutional issues.
"The Bankruptcy Fairness and Employee Benefits Protection Act" (S. 2418), introduced on Monday by Sens. Jay Rockefeller, D-W.Va. and Elizabeth Warren, D-Mass., would establish rights for municipal employees and retirees similar to those provided for workers in corporate bankruptcies.
The bill would give municipal employees and retirees a priority claim for unpaid wages and benefits.
In addition, it would prohibit cuts in municipal employee and retiree compensation and benefits below the minimum levels necessary for the municipality to emerge from bankruptcy.
The legislative text was not available as of Tuesday. A summary of the bill was available on Monday. The bill has been referred to the Senate Judiciary Committee. Neither Rockefeller or Warren is a member of that committee. But Jim Spiotto, managing director of Chapman Strategic Advisors, said that the measure would make two major changes, raise Constitutional issues, and possibly have unintended consequences.
First, the bill would create a higher standard for rejecting labor contracts.
In a Chapter 9 bankruptcy a municipality can reject a labor contract if it would be "unduly burdensome" to the municipality's coming up with a plan to exit bankruptcy.
But in Chapter 11, a corporation must take multiple steps. It must show why it can't meet its obligations to employees, it must give them a proposal, and then there is a process of negotiation.
The bill would essentially require the Chapter 11 requirements for labor contracts to apply to municipal bankruptcies. "It would take a lot more effort and a lot more time," Spiotto said.
The legislation also would give municipal employees and retirees a high priority in bankruptcy proceedings.
It would basically apply to municipal bankruptcies provisions of Chapter 11 that say all employees and retirees that had pre-petition claims would have priority over unsecured creditors for wages and benefits totaling $12,475 per person.
"So if a municipality had 10,000 employees and each had a priority for $12,475, it would have to pay them a total of $124.75 million ahead of everyone else, including essential services like infrastructure and public safety," Spiotto said.
The whole idea of Chapter 9, he said, is to create a process whereby the municipality can exit bankruptcy but retain its ability to obtain revenues, especially for essential services and infrastructure, so that residents and business do not leave, creating further revenue losses. Businesses would instead stay and grow.
Spiotto said the bill "is going to raise a big Constitutional issue" because the Congress or the federal government would be making policy for states, in violation of the 10th Amendment on States Rights.
The 10th amendment says that "the powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states respectively, or the people."
"The federal government is not supposed to interfere in states' rights," Spiotto said.
Twenty-four states already either specifically or conditionally authorize municipal bankruptcies. The new measure would amount to Congress telling them what they can do as far as bankruptcy proceedings.
If the bill became law and states didn't like it, they could just pass laws to prohibit municipal bankruptcy filings, a possible unintended consequence, Spiotto said.
Robert Klausner, with Klausner, Kaufman, Jensen & Levinson, said, "It's a well-intentioned piece of legislation that is intended to protect public employees and retirees from being lumped in with general creditors in a bankruptcy and that's a good thing. But, to the extent that it could be read as undoing any state protections for pensions, then it might be a 10th Amendment problem because the contract rights that states choose to confer with regard to pensions are a matter solely of state law reserved under the 10th Amendment."
W. Clark Watson, an attorney at Balch & Bingham who co-wrote a municipal bankruptcy guide for public finance lawyers, said the bill, "would really be a significant restraint on the ability of the corporate or municipal debtor to reorganize and it would create a whole new subset of litigation within Chapter 11 and Chapter 9 proceedings, which historically has been reserved for the rejection of collective bargaining agreements and pension obligations.
