BILL ANALYSIS                                                                                                                                                                                                    



                                                                       


           ------------------------------------------------------------ 
          |SENATE RULES COMMITTEE            |                  SB 1323|
          |Office of Senate Floor Analyses   |                         |
          |1020 N Street, Suite 524          |                         |
          |(916) 445-6614         Fax: (916) |                         |
          |327-4478                          |                         |
           ------------------------------------------------------------ 
           
                                         
                                    CONSENT


          Bill No:  SB 1323
          Author:   Ackerman (R)
          Amended:  3/7/02
          Vote:     21

           
           SENATE LOCAL GOVERNMENT COMMITTEE  :  5-0, 3/20/02
          AYES:  Torlakson, Ackerman, Machado, Margett, Soto


           SUBJECT :    Municipal bankruptcy

           SOURCE  :     California Law Revision Commission


           DIGEST  :    This bill modifies bankruptcy statute by  
          changing the definition of local government entity to  
          conform with the federal Bankruptcy Act definition of  
          "municipality.  This bill also makes other conforming  
          changes and makes technical changes to correct obsolete  
          references.

           ANALYSIS  :    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  
                                                           CONTINUED





                                                               SB 1323
                                                                Page  
          2

          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.

          This bill changes the bankruptcy statute by revising  
          California's definition of "local government entity" to fit  
          with the federal Bankruptcy Act's definition of  
          "municipality."  This bill also repeals obsolete sections  
          and makes conforming changes.

           FISCAL EFFECT  :    Appropriation:  No   Fiscal Com.:  No    
          Local:  No

           SUPPORT  :   (Verified  3/21/02)

          California Law Revision Commission (source)

           ARGUMENTS IN SUPPORT  :    According to Senate Local  
          Government Committee analysis, this bill 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 this bill  
          will ensure that local governments can use federal  







                                                               SB 1323
                                                                Page  
          3

          protection.

          LB:sl  3/21/02   Senate Floor Analyses 

                         SUPPORT/OPPOSITION:  SEE ABOVE

                                ****  END  ****