I recently posted elsewhere that the City of Stockton, California had filed a plan of adjustment to which the principal competing creditors--retirees (through their proxy CalPERS) and bondholders had agreed. Implementation of the plan was conditioned on Stockton residents agreeing to raise their taxes. This past Tuesday saw those voters approve an increase in the local sales tax from 8.25% to 9%.
In my draft article, Fairness and Risk in Stockton: Pensions, Bonds, and Taxes -- When Doing Nothing is Doing Well, I observed that Chapter 9 of the Bankruptcy Code fails to include official representation of municipal residents and eligible voters. Both are indirectly represented in the sense that the officials they elected must have decided to seek bankruptcy relief but unlike creditors they lack an official voice once the case begins. Notwithstanding lack of an express statutory role, Bankruptcy Judge Christopher Klein appointed a taxpayer committee in Stockton's case. But, more importantly, California law required a vote by city residents before taxes could be increased.
So, as it turns out, in Stockton taxpayers were able to vote, albeit not directly on the plan. Yet, it remains the case that city residents as such don't have any say over their future. In other words, a city may in the course of its bankruptcy reduce municipal services. Stockton made most of its service reductions before filing but it could have equally done so during the case. City residents as a stakeholder entity have no voice. While they can "vote the rascals out" at the next election, a city whose plan has been confirmed has little leeway going forward. Thus, I recommend that Bankruptcy Courts in future cases take a step beyond what the Code requires and in most cases appoint a "citizens committee" whose mandate would be to represent the interests of service recipients. Like other official committees, the city would bear the reasonable costs and professional expenses of a citizens committee.
Municipal bankruptcy may be the best solution for the financial issues facing many cities but the vital process of plan negotiation should be open to meaningful input from all stakeholders.