Thursday, July 28, 2011

California Supreme Court to Hear Challenge to City's Purported Fiscal Emergency

The California Supreme Court recently depublished City of Los Angeles v. Superior Court (Engineers and Architects Association) (2011) 193 Cal.App.4th 1159, and granted review.  The decision of our Supreme Court to grant review appears to reflect a greater willingness of the courts to provide judicial oversight of local bureaucrats attempting break contractual obligations by declaring fiscal emergencies, rather than negotiate concessions or seek bankruptcy protection.

Some prominent law firms representing public agencies have been advocating that the Los Angeles case supported their contention that agencies can suspend MOUs merely by declaring fiscal emergencies and that the resulting contract violations could not be arbitrated because declarations of emergency are not subject to review, and that more cities should declare emergencies to avoid contractual obligations.   These firms contend that review of cities' declarations of emergency and suspension of MOU terms is an improper delegation of cities' salary setting and budget making powers.  Under this rationale, cities' would not need Chapter 9 bankruptcy, because they could avoid court oversight of their true financial situation and any reorganization plan by suspending contractual obligations at their discretion.

This expansive reading of the Los Angeles case conflicts with Prof'l Engineers in Cal. Gov't v. Schwarzenegger (2010) 50 Cal.4th 989, 1043, where in our Supreme Court held the establishment of an emergency does not provide any substantive power to take an action not already authorized, but only avoids meet and confer obligations.   The Supreme Court will likely address the ability of local agencies to suspend their contractual obligations through misuse of emergency declarations in this case.