BILL ANALYSIS                                                                                                                                                                                                    



                                        
                       SENATE LOCAL GOVERNMENT COMMITTEE
                          Senator Tom Torlakson, Chair


          BILL NO:  SB 1323                     HEARING:  3/20/02
          AUTHOR:  Ackerman                     FISCAL:  No
          VERSION:  3/7/02                      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 for 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 -- 3/7/02 -- Page 2



                                   Proposed Law  

          Senate Bill 1323 provides the specific state authorization  
          that is required for "local public entities" to file for  
          bankruptcy protection under federal law.  SB 1323 also  
          repeals obsolete sections and makes conforming changes.













































          SB 1323 -- 3/7/02 -- Page 3



                                     Comments  

          1.   When government fails  .  SB 1323 modernizes the law and  
          ensures conformity with federal requirements.  In keeping  
          with historical practice, it also provides local  
          governments with the broadest possible access to federal  
          bankruptcy protections.  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.   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.

          3.   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  
          filed for Chapter 9 bankruptcy protection in late 2001.


                         Support and Opposition  (3/14/02)

           Support  :  Unknown.

           Opposition  :  Unknown.