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 ****