California may bar city bankruptcies

NEW YORK (CNNMoney.com) -- A bill that clamps down on municipal bankruptcy filings is headed for Gov. Schwarzenegger's desk, which is bad news for Los Angeles and other cash-strapped California cities.

It the governor signs Assembly Bill 155, it would place a hurdle in the path of filing for Chapter 9 municipal bankruptcy. The bill stipulates that a city may only file for bankruptcy with the approval of the California Debt Investment Advisory Commission, which provides information on debt to public agencies.

"California's taxpayers who rely on public safety, senior, park and library services, as well as those who own and operate businesses in our communities, deserve every effort that state and local government can make to avoid the long-term devastation of bankruptcy," the bill says.

In particular, the bill says it intends to protect retirement pensions and health benefits for public employees, which would be disrupted and renegotiated in the wake of bankruptcy.

This could have a direct impact on the state's largest city, Los Angeles, which is facing a huge budget shortfall.

L.A. is projecting that city revenues will fall 11.2% short of projected expenses in the current fiscal year, which adds up to a deficit of $492 million, according to Pew Charitable Trusts, a non-profit research organization on public policy. The city had a shortfall of 12.1% the prior year.

The city's former mayor, Richard Riordan, is calling for bankruptcy as the current mayor, Antonio Villaraigosa, is proposing deep cuts to city payrolls, according to news reports. Riordan and Villaraigosa were not immediately available for comment to CNNMoney.com.

Villaraigosa said in March that he would have to cut more than 3,000 city jobs, according to Pew. Instead, he agreed with the City Council to lay off between 761 and 1,761 positions - unless the unions accept pay cuts and unpaid furloughs.

The city of Vallejo, located north of San Francisco, already filed for bankruptcy in 2008. If Schwarzenegger approves the bill, it would impact the ability of other cities to file for Chapter 9.

Of course, California isn't the only state with cities in fiscal crisis. According to Pew, Chicago is faced with a projected budget shortfall of 16.3%, while Kansas City and Phoenix, each have shortfalls of 12.5%. New York City has a projected deficit of $4.9 billion, or 8.2% of expenses.