A federal judge has ruled that the destitute town of Vallejo, California, which filed for Chapter 9 municipal bankruptcy last year, can petition the bankruptcy court to allow it to void and renegotiate labor agreements with local unions.

The decision is significant. As the Times notes today, “municipal bankruptcies are so rare that until the Vallejo ruling, it was not clear whether a city could get out of its union contracts in Chapter 9.”

The judge clarified this matter by ruling that federal bankruptcy law, under which Chapter 9 falls, trumps California state labor law that prohibits such renegotiations.

The decision isn’t applicable to states themselves, which can’t declare bankruptcy.

Who can declare federal municipal bankruptcy?

Any entity created by a state, including “revenue-producing bodies that provide services which are paid for by users rather than by general taxes, such as bridge authorities, highway authorities, and gas authorities.”

Interesting.

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