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Tuesday, March 17, 2009 3:26 PM

Judge Rules Vallejo Can Void Union Contracts

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In a groundbreaking ruling as well as a rare victory for common sense and the overall good of taxpayers, Bankruptcy Judge Rules Calif. City Can Void Union Contracts.

In the first ruling of its kind, a bankruptcy judge held the city of Vallejo, Calif. has the authority to void its existing union contracts in its effort to reorganize, holding public workers do not enjoy the same protections Congress gave union workers at private companies.

Municipal bankruptcy is so rare that no judge had yet ruled on whether Congressional reforms in the 1990s that required companies to provide worker protections before attempting to dissolve union contracts also applied to public workers' union contracts

"This will have a huge effect nationwide if it is upheld," said Kelly Woodruff, of Farella, Braun & Martel in San Francisco, representing the firefighters and electrical workers unions. Woodruff said the unions would certainly appeal if the city ultimately voids the existing contracts with the two unions. "And I think we have a good chance of success," she said.

"My understanding is that a lot of cities are watching this and particularly this motion," said Woodruff. "If the city of Vallejo succeeds in using bankruptcy to void union contracts I am sure others will follow," she said.

Vallejo attorney Norman C. Hile of Orrick, Herrington & Sutcliffe's Sacramento, Calif. office said, "This is a decision that is somewhat groundbreaking."

"There are a number of other cities and government entities watching it very closely," he said, but declined to speculate on whether others would take the step Vallejo took of seeking bankruptcy protection.

The decision will be particularly important to cities with large unfunded pension liabilities, according to James Spiotto, of Chapman & Cutler in Chicago and a specialist in municipal bankruptcy who helped advise the Senate Judiciary Committee on Chapter 9 reforms.

He said the unfunded pension liabilities for states and cities was $800 billion a few years ago and may be at $1 trillion today. "The question is whether it is an inability to pay or an unwillingness to pay. If municipalities can't provide basic services and still pay labor costs or pensions then that is a real issue," Spiotto said.

McManus held that because Congress did not impose limits on invalidating union contracts under Chapter 9, cities must only meet the requirements under the U.S. Supreme Court's ruling in NLRB v. Bildisco, 456 U.S. 513 (1984), which gives broader discretion to break the contracts in bankruptcy.

McManus did not allow for an immediate action by the city but ordered both sides back to court March 23 to tell him if negotiations with the two unions have progressed.

Woodruff said at this point the sides are not talking.
I am hoping this gets settled in court rather than out of court. In that regard, it's good news that the sides are not talking.

The union wage and pension agreements were absurd; the union refused to give in; and now the union got what it deserved for bankrupting Vallejo, California. This is a victory for Vallejo taxpayers, and actually, taxpayers in general as this is likely to be a precedent setting case.

Expect to see more cities file bankruptcy or threaten to, in order to get major union concession on pension funding. I am tired of sky high taxes for the benefit of the few while most private plans have suffered.

This was a good ruling. A tip of the hat goes to U.S. Bankruptcy Judge Michael McManus.

Mike "Mish" Shedlock
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