BILL ANALYSIS
AB 155
Page 1
Date of Hearing: April 22, 2009
ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT
Anna Marie Caballero, Chair
AB 155 (Mendoza) - As Amended: March 27, 2009
SUBJECT : Local government: bankruptcy proceedings.
SUMMARY : Prohibits a local public entity, as defined, from
exercising its rights under applicable federal bankruptcy law
unless granted approval by the California Debt and Investment
Advisory Commission (CDIAC), under CDIAC's terms and conditions.
Specifically, this bill :
1)Allows a local public entity, if CDIAC approves, under the
terms and conditions that CDIAC may impose, to file a petition
and exercise powers pursuant to applicable federal bankruptcy
law.
2)Requires CDIAC, upon request of a local public agency, to
advise, and if deemed appropriate by CDIAC, grant approval to
the local public agency to exercise its right pursuant to
applicable federal bankruptcy law.
3)Requires the local public agency to submit to CDIAC all of the
following:
a) A proposed plan for restructuring debt and other
financial obligations to avoid a fiscal crisis;
b) An itemization of creditors that may be impaired or may
seek damages as a result of the proposed restructuring;
and,
c) Any and all supporting documentation that the local
entity deems appropriate in support of the stated fiscal
crisis or as requested by the commission, that may be
required to perform a desk audit.
4)Requires CDIAC, upon receipt of the information listed in #3
above, to do all that it deems necessary to evaluate the
fiscal condition of the local public agency, including, but
not limited to, reviewing the submission and recommending
specific action to be taken by the public agency to avert
fiscal insolvency.
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5)Requires CDIAC to conduct a noticed public hearing for any
recommendations released, or approvals granted.
6)Defines "local public entity" to mean any city, county, city
and county, district public authority, public agency, or other
entity that is a "municipality" within the meaning of federal
bankruptcy law applicable to local public entities.
7)Makes findings and declarations relating to municipal
bankruptcies.
EXISTING LAW :
1)Allows a local public entity in California to file a petition
and exercise powers pursuant to applicable federal bankruptcy
law, without any statewide approval or pre-conditions.
2)Defines a "local public entity" as a county, city, district,
public authority, public agency, or other entity, without
limitation, that is a municipality as defined in paragraph
(40) of Section 101 of Title 11 of the United States Code, or
that qualifies as a debtor under any other federal bankruptcy
law applicable to local public entities.
3)Allows a legislative body authorized to conduct a proceeding
pursuant to this chapter (Government Code 59125) to file a
petition and exercise powers under applicable federal
bankruptcy law as provided by Section 53760.
4)Defines the term "municipality" as a political subdivision or
public agency or instrumentality of a state, in federal law
(11 U.S.C. 101 (40)).
5)Prohibits the California Earthquake Authority from
authorization to become a debtor in a case under the United
States Bankruptcy Code.
6)Allows a city to file a petition and take all steps and
proceedings required, permitted, or authorized under
bankruptcy law of the United States, when property owners
located in an assessment district have filed their written
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consent to the refunding and reassessment of bonds issued
under the "Improvement Bond Act of 1915."
7)Allows the Superintendent of Public Instruction to assume
control of a school district that becomes insolvent to ensure
the district's return to fiscal solvency.
8)If the Office of Statewide Health Planning and Development
(OSHPD) determines that a health care district's ability to
fulfill its financial obligation is threatened, allows OSPHD
to assume direct or managerial or financial control of the
health care district.
9)Allows OSHPD to request that the Secretary of the Health and
Human Services Agency appoint a trustee for a health care
district that is determined by OSHPD to have a threatened
ability to fulfill its financial obligations.
FISCAL EFFECT : Unknown costs to CDIAC to implement provisions
of this bill.
COMMENTS :
MUNICIPAL BANKRUPTCY 101 UNDER FEDERAL LAW
1)The list of eligibility requirements for a "municipal debtor"
in federal law under chapter 9 is contained in 11 U.S.C
Section 109(c) and specifies the following:
First, an entity may be a debtor under chapter 9 only if such
entity:
a) Is a municipality;
b) Is specifically authorized, in its capacity as a
municipality or by name, to be a debtor under such chapter
by state law, or by a governmental officer or organization
empowered by state law to authorize such entity to be a
debtor;
c) Is insolvent;
d) Desires to effect a plan to adjust such debts; and,
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e) Has obtained the agreement of creditors holding at least
a majority in amount of the claims of each class that such
entity intends to impair under a plan in case under such
chapter:
i) Has negotiated in good faith with creditors and it
has obtained the agreement of creditors holding at least
a majority in amount of the claims of each class that the
municipality intends to impair under a plan of adjustment
of claims;
ii) Is unable to negotiate with creditors because such
negotiation is impracticable; or,
iii) Reasonably believes that a creditor may attempt to
obtain a transfer that is avoidable under section 547 of
this title.
A municipality must meet all of these conditions for the
bankruptcy petition to be accepted by the court.
1)According to the U.S. Courts, "the purpose of chapter 9 is to
provide a financially-distressed municipality protection from
its creditors while it develops and negotiates a plan for
adjusting its debts. Reorganization of the debts of a
municipality is typically accomplished either by extending
debt maturities, reducing the amount of principal or interest,
or refinancing the debt by obtaining a new loan."
Chapter 9 provides a municipal debtor with two primary
benefits: a) a breathing spell with the automatic stay; and,
b) the power to readjust debts through a bankruptcy plan
process. The process enables municipalities to continue to
provide essential public services while allowing them to
adjust their debts.
2)Federal law regarding municipal bankruptcy rose out of the
financial crises of the 1930s.
Chapter 9 federal law was created in 1934, and after several
revisions, was made a permanent part of the Bankruptcy Act in
1946, and incorporated into the new Bankruptcy Code in 1978.
In 1994, Congress amended the Bankruptcy Code to require that
municipalities be "specifically authorized" under state law to
file a petition under chapter 9 - this was an express
invitation to the states to revisit the types of local
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agencies that could seek federal relief. SB 1323 (Ackerman),
Chapter 94, Statutes of 2002, sponsored by the California Law
Revision Commission (CLRC), accomplished this by bringing
state law in line with the "specific authorization" as
required under federal law.
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CALIFORNIA'S RESPONSE TO CHAPTER 9
3)In response to the federal creation of chapter 9, the
California Legislature enacted municipal bankruptcy
authorization for municipalities in 1934. The general state
statutes authorizing bankruptcy filings by local governments
were codified in 1949 and those provisions were not amended
until SB 1323 was signed into law in 2002.
There were several attempts in the 1990s to streamline
California law with federal law requiring specific
authorization:
a) SB 1274 (Killea, 1995-1996) and AB X2 2 (Caldera,
1995-1996) would have granted the broadest authority
permissible under federal law by adopting the federal
definition of "municipality."
b) AB X2 29 (Archie-Hudson, 1995-1996) would have provided
authority for a municipality as defined by federal law to
file "with specific statutory approval of the Legislature"
and required the plan for adjustment of debts under
Bankruptcy Code Section 941 to be "submitted to the
appropriate policy committees of the Legislature prior to
being submitted to the United States Bankruptcy Code."
c) SB 349 (Kopp, 1995-1996) would have modernized the
obsolete references and adopted the "municipality"
definition language in federal law. The bill would have
established a Local Agency Bankruptcy Committee" to
determine whether to permit a municipality to file a
chapter 9 petition, and the committee would have contained
the Treasurer, Controller and Director of Finance. The
bill passed the Legislature, but was vetoed by
then-Governor Wilson.
These bills were introduced mainly in response to the Orange
County bankruptcy filing in 1994. According to a study done
by the Public Policy Institute of California on the Orange
County bankruptcy, "the financial difficulties leading to the
bankruptcy were the direct result of an enormous gamble with
public funds taken by a county treasurer who was seriously
under-qualified to deal in the kinds of investments he chose."
At that time, Orange County and its investment pool - which
suffered nearly $1.7 billion in investment losses - filed for
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bankruptcy protection on December 6 in two separate cases. The
bankruptcy judge ruled that only the county, and not the
investment pool, could file for bankruptcy.
4)Currently, California state law authorizes federal bankruptcy
filing by a "local public entity" - "a county, city, district,
public authority, public agency, or other entity, without
limitation, that is a municipality as defined in paragraph
(40) of Section 101 of Title 11 of the United States Code, or
that qualifies as a debtor under any other federal bankruptcy
law applicable to local public entities". As referenced,
federal law defines "municipality" as a political subdivision
or public agency or instrumentality of a state, in federal law
(11 U.S.C. 101 (40). However, the California Law Revision
Commission notes that the definitions in state and federal law
create some ambiguity as to what exactly falls under the
definition of "municipality" and can therefore seek financial
relief through the chapter 9 bankruptcy process.
There is some debate about how broad the definition of
"municipality" and "local public entity" is - it may be that
the definition includes anything from library districts,
parking districts, public cemetery districts, community
service districts and the like. The author and committee may
wish to discuss whether there is a legitimate statewide
interest in preventing these small local government entities
from filing for bankruptcy.
BANKRUPTCY PRACTICES IN OTHER STATES
5)The 10th amendment to the United States Constitution says that
"the powers not delegated to the United States by the
Constitution, nor prohibited by it to the States, are reserved
to the States respectively, or to the people," otherwise known
as the sovereign rights of the states. In the context of
municipal bankruptcy filing, it is up to each state to decide
whether to empower its municipalities to utilize federal
bankruptcy laws.
Other states approach authorization for municipalities in
various ways - some explicitly authorize municipalities and
provide unlimited access, or explicitly authorize certain
types of municipalities, some states are silent, one state
expressly prohibits municipalities from filing, and yet others
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have their own state pre-conditions, processes or
"gate-keeping" requirements.
Those states comparable to California in terms of population,
like Texas and Florida, provide explicit authorization for
municipalities in their state statutes. The state of New York
allows a municipality or its emergency financial control board
to file any petition within any United States district court
or court of bankruptcy and explicitly notes in the statute
that "nothing contained in this title shall be construed to
limit the authorization granted by this section [for
municipalities to file a petition under federal bankruptcy
law]."
For those states with preconditions or "gatekeeping"
provisions, the following is a sample of the wide range of
state statutes:
Iowa : Permits "a city, county, or other political
subdivision" to become a chapter 9 debtor only if it is
rendered insolvent as a result of debt (a defined term in the
state statute) involuntarily incurred.
Michigan : Requires notice to be given to the local emergency
financial assistance loan board and authorization from the
emergency financial manager.
Montana : Applies to a "local entity." The local entity's
legislative body must pass an ordinance or resolution
declaring that it meets all eligibility requirements found in
109 of the Bankruptcy Code.
New Jersey : Applies to "any county, municipality, school
district or other political subdivision of this State." The
political subdivision must get the approval of the municipal
finance commission before filing the petition. Also, the
governing body of the political subdivision must pass an
ordinance authorizing the filing by a not less than two-thirds
vote of all the members elected to the governing body. The
municipal finance commission must approve the plan of
adjustment before the political subdivision files it with the
court, and the commission must approve in writing each payment
for attorneys, agents, committees, or other representatives of
creditors.
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North Carolina : Applies to "any taxing district, local
improvement district, school district, county, city, town, or
village." The local unit must get the approval of the Local
Government Commission of North Carolina, which oversees local
government debt and financial management.
PROPOSED LAW
6)AB 155 places conditions on how and when a municipality could
seek chapter 9 relief under federal bankruptcy law. Current
law authorizes municipalities to file a petition under the
federal bankruptcy process without any prior state approval or
state placed pre-conditions to filing. AB 155 creates
"gatekeeper" provisions by granting a state entity - CDIAC -
the authority to allow or disallow a municipality from
exercising its rights to file a petition under federal chapter
9.
7)CDIAC under the purview of the State Treasurer's office,
currently collects data on municipal finance, conducts
research, and provides information and technical assistance to
local public agencies and their finance professionals. Since
CDIAC has expertise in the financial health of local
governments, it makes sense to put the review process in their
hands. CDIAC's Board is comprised of the State Treasurer as
Chair, and other members including the State Controller, the
Governor, two members each from the Senate and Assembly, and
two local government officials with expertise in debt
issuance.
8)The author bases the justification for AB 155 on a California
Law Revision Commission report from 2001, in which the
commission studied California's municipal bankruptcy statute.
The commission recommended that the Legislature revise the
state law to conform to the federal provisions and what
resulted was SB 1323 by Senator Ackerman. However, the
Commission's report only suggested that California law be
updated to provide explicit authority for municipalities, per
the federal statute requiring states to have explicit
authorization. The report did not recommend any other
substantive policy changes or pre-conditions, or
"gate-keeping" in order to access the federal bankruptcy
process, and instead, commented that "there does not appear to
be any general agreement on the best approach to reform, or
even as to the need for additional protections or controls."
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The California State Legislature has a long history, dating
back to the Orange County bankruptcy filing in 1994, of
debating access to federal municipal bankruptcy laws every few
years (see Comments under # 3 and #4), and ultimately in 2002,
made the decision to seek the broadest authority for municipal
bankruptcies that exists under federal law.
9)The author argues that a municipal bankruptcy filing will have
repercussions in terms of credit rating and spillover effects
that will raise borrowing costs for other California
municipalities and the state. Arguably, a municipal
bankruptcy, depending on the size of the entity, could
potentially affect other local agencies and the state as a
whole. The author argues that the state government should
have the opportunity to consider whether bankruptcy is the
best approach to the problem, since municipal affairs are of
interest to the state and should not be left to the sole
discretion of the municipality.
10)One of the major concerns of the opposition to this bill is
that the current bill language does not present any timeline
requirement for the CDIAC review process. The California State
Association of Counties (CSAC) notes that "AB 155 requires the
collection and presentation of data by a local agency, the
review and evaluation of such data by CDIAC, a public hearing
to discuss the fiscal situation of the local agency,
preparation of recommendation for actions, potential
imposition of terms and conditions prior to receiving approval
to enter chapter 9 bankruptcy, action by the local agency to
implement recommendations, action by the local agency to meet
terms and conditions required by CDIAC, and finally time to
see if the recommendations, terms and conditions actually make
a difference in the local agency's fiscal situation."
Further, "counties respectfully suggest that this process will
take a considerable amount of time, during which the local
agency's financial obligations are expected to be met when
they are either completely or nearly unable to meet them. The
principal benefit of federal bankruptcy is the automatic stay
of financial obligations, allowing a debtor some "breathing
space" to formulate a debt readjustment plan."
CSAC, in their opposition letter, additionally poses the
question of what CDIAC would have advised in the instance
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earlier this year when the state withheld hundreds of millions
of dollars in state payments to counties due to the state's
cash flow crisis. CSAC notes that "the process outlined by AB
155 would place the local agency at risk of default, creditors
at risk of not getting paid, and the state with the potential
liability for damages as a result, with little to no benefit
for citizens."
11)The issue of state liability is of great concern. As noted
in Governor Wilson's veto of
SB 349 (Kopp) in 1996, state interference in municipal
bankruptcy "could raise questions
of the liability of the state to creditors of the public agency
if eligibility for bankruptcy is denied. State denial of
access to chapter 9 may create the implication that the state
has assumed responsibility for the debts of the distressed
municipality."
12)The Association of California Water Agencies writes that
"this bill is an unwarranted and unjustified intrusion on
local control" and that the "determination to pursue
protection under federal bankruptcy law should be left to the
discretion of a local agency's board of directors." AB 155
undercuts local authority by giving the state the right to
intervene in local decisions. Voters elect their local
representatives and expect that their local elected officials
know best about the municipality's financial condition, which
will vary from jurisdiction to jurisdiction based on unique
local needs. AB 155 effectively undoes the will of the voters
by allowing the state to take the reigns on making a local
decision.
13)The League of California Cities, in opposition, writes that
"[local governments] will use all means available to avoid
bankruptcy" and even then it is strictly a last resort. They
site the rare usage of the chapter 9 process under federal law
- only three filings by cities and counties since the adoption
of the state Bankruptcy Code in 1949 - Orange County in 1994
(See Comment #4), the City of Desert Hot Springs in 2001
because of a judgment against the city, and the City of
Vallejo in May of 2008.
14)According to the California Professional Firefighters (CPF),
a co-sponsor of AB 155, "last year's bankruptcy filing by the
City of Vallejo has only served to further devastate an
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already struggling community, including local businesses that
were already feeling the adverse impact of a stagnant economy.
Since the filing, Vallejo's litigation costs have escalated
to
over $5 million thereby further encumbering an already dried up
general fund budget."
Additionally, CPF notes that "bankruptcy may appear to provide a
municipality quick relief from certain [types] of debt
obligations, but the municipality will ultimately end up
paying in the financial markets."
The Assembly Local Government Committee held a hearing in
February 2009 jointly with Assembly Budget Subcommittee #4 on
State Administration to hear directly from local cities and
counties about the effect of the economic downturn on their
budgets. Many local officials noted that sales tax revenue is
down and the effect of the housing market is now being felt in
decreasing property tax revenues. Along with the Pooled Money
Investment Board's decision in December 2008 to stop funding
local projects, the declining sales and property tax revenues
are troubling for local governments. The committees also
received information from cities and counties in California
about the types of cuts they were making and had already made
to stay solvent - everything from staff volunteering to be
furloughed, involuntary furloughs and lay-offs, and cutting of
services to seniors, parks and recreation, and other local
programs, cuts to planning departments and public safety,
among other solutions to scale back local budgets.
Unfortunately, the bankruptcy filing in Vallejo seems to be a
situation created out of nightmare conditions, given the
highly political and volatile nature of the ongoing bankruptcy
proceedings. In a March 13, 2009, memorandum, Michael
McManus, the
U.S. Bankruptcy Judge assigned to the Vallejo case, addressed
whether chapter 9 of the Bankruptcy Code permits a
municipality to reject collective bargaining agreements with
its public employee unions. He found that "if a municipality
is authorized by the state to file a chapter 9 petition, it is
entitled to fully utilize 11 U.S.C. 365 (Section 365) to
accept or reject its executory contracts" and that "unexpired
collective bargaining agreements are executory contracts
subject to rejection under Section 365."
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15)COMMITTEE AMENDMENTS : In order to not put the financial
affairs of a local government purely in the hands of the
state, the committee may wish to have the author and sponsor
take the following amendments to provide a mechanism by which
a local government can still file a petition under chapter 9
if they truly feel that no other viable options remain:
Add to Section 8860 of the Government Code:
The governing body of the local public entity, after the
hearing required by this section, may hold a public meeting to
override the recommendations and prescriptions proved by the
commission and declare intent to exercise powers pursuant to
applicable federal bankruptcy law under Section 53760. The
governing body shall make public findings about the necessity
to override the alternatives or preconditions raised in the
report.
Revise Section 53760 of the Government Code to read:
A local public entity may file a petition and exercise powers
pursuant to applicable federal bankruptcy law, if either of
the following apply:
(1) The California Debt and Investment Advisory Commission has
granted approval and the local public entity has met the
conditions pursuant to Section 8860; or
(2) The governing body of the local public entity has voted,
by 2/3 vote, to override the commission's recommendations and
prescriptions pursuant to Section 8860.
REGISTERED SUPPORT / OPPOSITION :
Support
CA Professional Firefighters [CO-SPONSOR]
CDF Firefighters Local 2881 [CO-SPONSOR]
AARP
American Federation of State, County and Municipal Employees,
AFL-CIO
Association for Los Angeles Deputy Sheriffs
CA Alliance for Retired Americans
CA Association of Highway Patrolmen (CAHP)
CA Labor Federation, AFL-CIO
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CA Nurses Association
CA Professional Firefighters
CA Reinvestment Coalition
CA School Employees Association (CSEA)
CA State Employees Association
CA State Firefighters' Association, Inc.
CA Teamsters Public Affairs Council
Consumer Federation of CA
Glendale City Employees Association
Kern County Fire Fighters Union, Inc.
L.A. County Probation Officers Union
Livermore-Pleasanton Firefighters Local 1974
Los Angeles County Fire Fighters Local 1014
Los Angeles Police Protective League
Napa-Solano Central Labor Council
National Nurses Organizing Committee
North Bay Labor Council, AFL-CIO
Organization of SMUD Employees
Peace Officers Research Association of CA (PORAC)
Production Strategies, Inc.
Professional Engineers in CA Government (PECG)
Riverside Sheriffs' Association
San Bernardino Public Employees Association
San Diego Municipal Employee's Association
San Francisco Labor Council
San Luis Obispo County Employees Association
Santa Rosa City Employees Association
Service Employees International Union (SEIU)
State Building and Construction Trades Council of CA
Individual letter
Opposition
Association of California Water Agencies
CA Special Districts Association
CA State Association of Counties
Cities of: Adelanto, American Canyon, Antioch, Arvin,
Atascadero, Belmont, Benicia,
Berkeley, Burlingame, California City, Calistoga,
Chowchilla, Cloverdale, Clayton,
Clovis, Coalinga, Concord, Cypress, Exeter, Fairfield,
Fowler, Fremont,
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Fullerton, Guadalupe, Healdsburg, Hermosa Beach, Highland,
Huntington Beach,
Huntington Park, Huron, Kingsburg, Lemoore, Livermore,
Fontana, Madera, Manteca,
Merced, Mendota, Mill Valley, Modesto, Moreno Valley,
Newport Beach, Norco,
Norwalk, Palmdale, Patterson, Placentia, Pleasanton, Rio
Vista, Reedley, Ridgecrest, San
Luis Obispo, San Pablo, Santa Rosa, Shafter, Signal Hill,
Stockton, Tehachapi, Torrance,
Tracy, Tulare, Tustin, Visalia, Wasco, Walnut Creek,
Woodlake, Yorba Linda, Yucaipa
County of Orange
League of CA Cities
League of CA Cities, Inland Empire Division
League of CA Cities, Orange County Division
Regional Council of Rural Counties
South Bay Cities Council of Governments
Towns of Apple Valley, Danville, Mammoth Lake, Paradise, Windsor
and Yountville
Urban Counties Caucus
Analysis Prepared by : Debbie Michel / L. GOV. / (916)
319-3958