BILL ANALYSIS
SENATE LOCAL GOVERNMENT COMMITTEE
Senator Tom Torlakson, Chair
BILL NO: SB 1323 HEARING: 3/6/02
AUTHOR: Ackerman FISCAL: No
VERSION: 1/29/02 CONSULTANT:
Carpenter
Municipal Bankruptcy
Background and Existing Law
Federal bankruptcy law for public agencies gives government
debtors time to come up with repayment plans, providing
them a breathing spell from creditors' collection efforts.
Unlike private bankruptcy law, however, municipal
bankruptcy law must respect the states' sovereign powers.
Consequently, the states have the power to control their
local agencies' access to federal bankruptcy protection.
Like 11 other states, California grants its cities,
counties, and special districts the broadest possible
access to federal bankruptcy available.
Because one municipality's bankruptcy may have a negative
effect on other local governments' borrowing power, some
states limit or prohibit their local governments to access
federal protections. After the 1994 Orange County
bankruptcy, the Legislature tried to establish state
oversight in municipal bankruptcy filings. The bill
passed, but Governor Pete Wilson vetoed it (SB 349, Kopp,
1996).
California codified its local government bankruptcy statute
in 1949 and has not amended it since. Many of its
references to federal law have been obsolete since federal
law changed in 1978. In addition, the statute needs to
change in order to comply with 1994 federal amendments that
require specific state authorization before local
governments can petition for federal debt adjustment.
In 2001, the California Law Revision Commission produced a
study of California's municipal bankruptcy statute. The
Commission recommended that the Legislature revise the
state law to conform with the federal provisions but
stopped short of recommending substantive policy changes.
SB 1323 -- 1/29/02 -- Page 2
Proposed Law
Senate Bill 1323 changes the bankruptcy statute by revising
California's definition of "local government entity" to fit
with the federal Bankruptcy Act's definition of
"municipality." SB 1323 also repeals obsolete sections and
makes conforming changes.
SB 1323 -- 1/29/02 -- Page 3
Comments
1. When government fails . SB 1323 modernizes state law
without limiting local governments' access to federal
bankruptcy protection. Public bankruptcies are uncommon in
California. Nevertheless, if fiscal stresses persist,
other counties, cities, or districts may seek federal
bankruptcy protection from their creditors. In the event
of another municipal bankruptcy, the changes in SB 1323
will ensure that local governments can use federal
protection.
2. Distinction with a difference ? SB 1323 intends to
grant the broadest possible access to local governments to
bankruptcy protections by using the federal definition of
"municipality." However, the federal term technically
fails to capture California's cities in its scope because
of their unique relationship to the state. The federal
statute implies that cities are political subdivisions of
the state government. Because of California's home rule
tradition, cities are not considered the state's political
subdivisions. To avoid possible ambiguity or future
confusion, the Committee may wish to consider if a
clarifying amendment to SB 1323 is appropriate.
3. Deciding not to act . With legislative instigation, the
California Law Revision Commission studied the mechanisms
that the state might use to oversee local government access
to bankruptcy protections, effectively providing a state
"gatekeeper." The intent behind oversight is to guard
against one local government's bankruptcy hurting other
local governments' borrowing power. The study presented
options for revising the law, but chose not to recommend
substantive changes. There are valid policy reasons to
install a gatekeeper as well as reasons to allow unfettered
access to federal protections. It's useful to remember
that by not including substantive change in SB 1323, the
Legislature is effectively choosing in favor of the current
system that provides access without state oversight.
4. Misery loves company . Since 1990, only six local
governments have published opinions from their Chapter 9
filings: Corcoran Hospital District, Heffernan Memorial
Hospital District, Orange County, Richmond Unified School
District, Southern Humboldt Community Healthcare District,
and Ventura Port District. The City of Desert Hot Springs
SB 1323 -- 1/29/02 -- Page 4
filed for Chapter 9 bankruptcy protection in late 2001.
Support and Opposition (2/28/)
Support : Unknown.
Opposition : Unknown.