BILL ANALYSIS
AB 155
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Date of Hearing: May 6, 2009
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Kevin De Leon, Chair
AB 155 (Mendoza) - As Amended: March 27, 2009
Policy Committee: Local
GovernmentVote:4-3
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill requires local governments to receive state approval
prior to filing for bankruptcy under federal bankruptcy law.
The bill also:
1)Specifies that the state agency responsible approving the
request shall be the California Debt and Investment Advisory
Commission (CDIAC).
2)Allows the commission to place conditions on the local public
agency's right to pursue bankruptcy under federal law.
3)Requires a local public agency requesting approval for
bankruptcy protection to submit to CDIAC (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 other supporting
documentation that the local entity or the CDIAC deems
appropriate.
4)Requires CDIAC, upon receipt of the information, 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.
5)Requires CDIAC to conduct a noticed public hearing for any
recommendations released, or approvals granted.
6)Defines local public agency to mean any city, county, city and
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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.
FISCAL EFFECT
1)Given the complexity of the fiscal and legal evaluations
required by the bill - and the tight time frames under which
such evaluations would have to be made - costs to CDIAC
(including staff time and contracts for legal, accounting,
auditing, and financial consulting) could exceed several
hundreds of thousands of dollars in a bankruptcy involving a
large municipality.
2)State exposure to legal challenges and related fiscal
pressures, potentially in the hundreds of millions of dollars
(see discussion below).
COMMENTS
1) Rationale . The author asserts that this bill is needed
because municipal bankruptcy filings have repercussions in
terms of credit rating and spillover effects that will raise
borrowing costs for other California municipalities and the
state. He further states that 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. Supporters (including numerous
labor unions) also assert that bankruptcy can have devastating
effects on communities, and, while they may save money in the
short term, they can cost municipalities more in the long term
2) Background . Federal law regarding municipal bankruptcy
arose from the financial crises of the 1930s. Chapter 9 of
federal law was created in 1934. After several revisions,
chapter 9 was made a permanent part of the Bankruptcy Act in
1946, and was incorporated into the new Bankruptcy Code in
1978. Under the law, a municipality receiving chapter 9
bankruptcy protection is shielded from creditor claims while
it works out a plan of adjustment with its creditors. The plan
of adjustment can involve a reduction to amounts owed, an
extension of debt repayments, or a refinancing of debt.
Creditors can include holders of debt municipal debt, vendors,
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and counterparties in contracts.
With regard to contracts, the U.S. Bankruptcy Judge assigned
to the Vallejo municipal bankruptcy 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 a municipality authorized by
the state to file a chapter 9 petition is entitled to accept
or reject its executory contracts, and that unexpired
collective bargaining agreements are executory contracts
subject to rejection under federal bankruptcy law.
In order for a federal court to approve bankruptcy protection,
the municipality must first demonstrate that it is insolvent,
desires to adjust its debts, and is actively engaged in
negotiations with its creditors, or that it is unable to
negotiate with its creditors because such negotiations are
impracticable.
Chapter 9 enables a municipal debtor to buy time to develop an
adjustment plan, and gives the debtor power to readjust debts
through such an adjustment plan. More generally, it enables
municipalities to continue to provide essential public
services while they work at adjusting their debts.
In 1994, Congress amended federal law to require that
municipalities be "specifically authorized" under state law to
file a petition under chapter 9. SB 1323 (Ackerman), Chapter
94, Statutes of 2002, sponsored by the California Law Revision
Commission (CLRC), provides the specific authorization
required by federal law for California. SB 1323 generally
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.
Filings of bankruptcy by cities and counties have been rare.
There have been just three filings since adopton of chapter 9
into the federal bankruptcy act in the 1940s - Orange County
in 1994, the City of Desert Hot Springs in 2001 because of a
judgment against the city, and the City of Vallejo in May of
2008. However, past is not always prologue. The severe
downturn in the economy could lead to more bankruptcies in the
future.
Although most large states, such as Texas, Florida, and New
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York, allow local governments access to federal bankruptcy
protections with few, if any, preconditions, many intermediate
and smaller sized states have various "gatekeeping"
provisions. These include the requirement of specific findings
and resolutions from the local legislative body, approval from
local finance commissions, vote requirements for local
governing bodies, and approval from a state entity.
CDIAC under the purview of the State Treasurer's office,
currently collects data on municipal finance, and provides
information and technical assistance to local public agencies
and their finance professionals on debt issuance. The
Commission 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.
It should be noted, however, that the statewide implications
of local bankruptcies can very tremendously, depending on the
specific circumstances surrounding the filing. While a
bankruptcy by a major municipality due to general economic
circumstances may affect investor's perception of credit risk
for the state as a whole, bankruptcies due to circumstances
unique to the municipality - such as a large court judgment,
fraud, or investment losses, would have less significant
statewide impacts.
3) Opposition . There is considerable opposition from local
governments to this bill. Their main arguments are: (a) the
current bill does not have a timeline requirement, and the
protracted process described in the bill can have dire effects
on a local government near insolvency; (b) the bill undercuts
local authority by giving the state the right to intervene in
local decisions; and (c) state interference in municipal
bankruptcy may result in state legal liability.
4) Does the bill create a major new state obligation ? State
liability is of particular concern given the broad authority
granted to CDIAC by the bill to deny access to bankruptcy,
place conditions on bankruptcy filings, and to recommend
alternatives. A similar concern was expressed in Governor
Wilson's veto of a bill with similar gatekeeping measures in
1996 (SB 349/Kopp). The veto message stated that state
interference "could raise questions of the liability of the
state to creditors of the public agency if eligibility for
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bankruptcy is denied." The findings and declarations language
in this bill (specifically, paragraphs (d), (e), and (f) of
section 1) imply that the state has an explicit responsibility
to maintain the financial solvency of local governments. Under
the bill, for example, if CDIAC were to deny access to
bankruptcy protection and recommend state that the local
government seek state assistance, the Legislature could face a
strong pressure - even a legal obligation - to provide such
funding.
5) Amendments needed . Given the bill's open ended nature and
the potential for substantial state liability under its
provisions, the committee may wish to amend the measure to
narrow its scope and limit state exposure under this bill.
Specifically, the bill could be amended to:
a) establish specific timelines for CDIAC and the local
agency;
b) establish specific findings that CDIAC must make before
rejecting an application, including:
i) a compelling statewide interest exists in avoiding
the bankruptcy;
ii) denial of bankruptcy will not result in state legal
obligations to the local agency's creditors.
iii) specific alternative budget and financial options
are immediately available to the local agency which would
have less detrimental short-term and long-term effects on
the community. Specify that these options cannot include
state funds that have not been appropriated for that
purpose.
c) delete portions of the intent language that imply state
obligation to provide financial relief to local governments
facing bankruptcy.
Also as indicated in the local government policy committee
analysis, it may also be desirable to amend the bill to give a
local government authority to override a negative finding by
CDIAC through a supermajority vote of its governing body.
Analysis Prepared by : Brad Williams / APPR. / (916) 319-2081
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