Los Angeles City Bankruptcy – Can a Major City Go Broke?

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Last year, there were about 69,000 bankruptcy cases filed within the city of Los Angeles. You and I can go broke. So can a city. There can indeed be a Los Angeles Bankruptcy. This year, many commentators and political elites are openly talking about the possibility that the City of Los Angeles itself may have to file bankruptcy some time soon.

There could be, and soon. Last April, the Chief Administrative Officer Miguel Santana told the Los Angeles Times  that the budget gap was $222 million and he the city was in “crisis mode.” He also disclosed that the shortfall is expected to increase to $427 million by 2014-15. Former Los Angeles mayor Richard Riordan has been quoted two years ago as saying, “I’ve suggested it since 2005. The city, the way it is going, is unsustainable. If they don’t do it this year, they are going to have to do it in the next four or five years.” The ex-mayor ought to know. He ran the city for 8 years.

The big problem that might force a Los Angeles Bankruptcy is the city’s huge, unfunded pension obligations. As the size of city government has exploded, the number of retired city employees also grows with each passing year.  The burden on city revenues that must be paid for retirement benefits is increasing, and results in less money left over to pay for normal city functions such as street repair, public parks, police, and fire safety.

The ultimate question becomes where does the city’s primary responsibility lie? Is it to to providing the residents with safe, clean streets,  quality police and fire protection, or to paying out pension benefits that are usually far in excess of what most people receive?

Chapter 9 of the The Federal Bankruptcy Code actually provides the legal framework that will govern a municipal government bankruptcy filing. If there is a  Los Angeles Bankruptcy municipal case,  the bankruptcy court may allow the city to rewrite it’s union contracts and reform it’s pension benefits. Last year, all of those 69,000 Angelinos who filed bankruptcy were given instructions by the Los Angeles Bankruptcy Court to live within their means and stop overspending.  If there is a municipal Los Angeles Bankruptcy filing, you can bet that the same treatment will befall the city, and I predict that the city residents won’t stand for any reduction in basic city services.

Of primary concern is the city’s spiraling pension obligations, which are growing astronomically at a time when city coffers are running out of cash.

“Those will be over $1 billion a year,” Riordan said. “The city will not be able to afford it.”

You have to live within your menas. So do I. When we don’t, the Bankruptcy Court will determine what happens and decides who gets what, and who doesn’t.

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Leon Bayer and Jeffrey Wishman are Los Angeles Bankruptcy attorneys. They have been practicing bankruptcy lawyers in Los Angeles for 37 years and are Certified Bankruptcy Specialists by the State Bar of California. These are lawyers who bring experience, skill and creativity to the highly complex area of bankruptcy law. At this Los Angeles law firm, the your initial consultation with an expert is free. Mr. Bayer is a coauthor of Nolo's The New Bankruptcy: Will It Work for You?, authors the “Ask Leon” series on Nolo’s Bankruptcy, Debt & Foreclosure blog, and writes on bankruptcy topics for Nolo’s website. In addition, Mr. Bayer devotes a significant number of hours to volunteer legal services. The State Bar of California has commended Mr. Bayer for this work every year since 2004.