BILL ANALYSIS
AB 155
Page 1
ASSEMBLY THIRD READING
AB 155 (Mendoza)
As Amended June 1, 2009
Majority vote
LOCAL GOVERNMENT 4-3 APPROPRIATIONS 12-5
-------------------------------------------------------------------
|Ayes:|Caballero, Davis, |Ayes:|De Leon, Ammiano, Charles |
| |Krekorian, Skinner | |Calderon, Davis, Fuentes, |
| | | |Hall, John A. Perez, Price, |
| | | |Skinner, Solorio, |
| | | |Torlakson, Krekorian |
| | | | |
|-----+--------------------------+-----+----------------------------|
|Nays:|Knight, Arambula, Duvall |Nays:|Nielsen, Duvall, Harkey, |
| | | |Miller, |
| | | |Audra Strickland |
-------------------------------------------------------------------
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 (chapter 9).
2)Requires CDIAC, upon request of a local public entity, to
advise, and if deemed appropriate by CDIAC, grant approval to
the local public entity to exercise its right pursuant to
chapter 9.
3)Requires the local public entity to submit to CDIAC all of the
following:
a) A resolution or ordinance adopted by that governing body
at a public hearing held pursuant to the Ralph M. Brown Act
that does both of the following:
i) Requests authority through state law to petition the
AB 155
Page 2
federal bankruptcy court for financial relief under the
provisions of chapter 9 in federal law; and,
ii) Acknowledges that the state's fiscal and financial
responsibilities are not changed by the application or
CDIAC's decision.
b) A thorough analysis of the entity's request to petition
under the provisions of chapter 9 in federal law; in
addition to any other information it may provide, the
entity shall do all of the following:
i) Demonstrate that it is or will be unable to pay its
undisputed debts;
ii) Demonstrate that it has exhausted all options to
avoid seeking relief under chapter 9; and,
iii) Detail a specific plan for restoring the soundness
of entity's financial plans.
c) An itemization of creditors that may be impaired or may
seek damages as a result of the proposed plan.
4)Allows the local public entity to request an expedited
evaluation within five days, to be approved by the CDIAC
chair, if the entity sufficiently demonstrates a need for
improved cashflow or protection from creditors' claims.
5)Requires CDIAC, upon receipt of the information listed in 3)
above, to evaluate the information presented and publish its
evaluation within 30 business days, or, in the case of an
expedited request, within five days.
6)Requires CDIAC staff to specifically evaluate the extent to
which the local public entity has done the following:
a) Demonstrated that it has exhausted other remedies;
b) Demonstrated that it has taken sufficient steps to
reduce the negative consequences of the proposed bankruptcy
relief;
c) Has anticipated the transfer of service responsibility
AB 155
Page 3
to other governments or parties and to what extend the
entity has documented the consequences for the transfer of
municipal and other government services;
d) Documented the likely effect a successful petition will
have on state and local finances, including the impact on
credit access and debt service; and,
e) Has proposed a remedy that it is appropriate and
proportionate to the entity's fiscal problems.
7)Requires CDIAC to conduct a hearing and publish a decision
within 15 days of, but not less than 10 days after the
publication of the staff evaluation; and requires that the
hearing on the application shall be held in convenient
proximity of the entity filing the application.
8)Allows the governing body of a local public entity to reapply
if a previous request has already been denied by CDIAC, and
requires the local public entity, if reapplying, to adopt
another resolution and submit documentation to address the
deficiencies identified by CDIAC.
9)Specifies that CDIAC shall, in a recorded vote, approve or
deny the request of the local public entity.
10)Specifies that if CDIAC approves a request, it may order the
entity, as a condition of approving the request, to limit the
nature and extent of relief provided through chapter 9
bankruptcy proceedings, including all of the following:
a) CDIAC may limit changes to a contract;
b) CDIAC may prohibit the abrogation of contracts; and,
c) CDIAC may limit the amount of relief to ensure the
protection of debt service payments.
11)Requires CDIAC to adopt specific findings that address the
deficiencies of the application, if the application is denied.
12)Requires that the hearing held by CDIAC be subject to the
provisions of the Bagley-Keene Open Meeting Act.
AB 155
Page 4
13)Requires, after CDIAC receives an application from a local
public entity, the executive director to record costs incurred
by CDIAC to make and publish the evaluation and conduct the
public hearing; and requires the director to report the costs
to CDIAC at the next regularly scheduled CDIAC hearing.
14)Allows the executive director or CDIAC, upon denial of the
request, to assess a fee on the requesting entity to cover
some or all of the costs associated with making the findings
and conducting the hearing.
15)Requires that fee revenue be deposited in the CDIAC Fund.
16)Allows CDIAC to propose regulations pursuant to this bill.
17)Declares that in enacting this bill, the state assumes no new
or additional fiscal responsibilities for local entities that
may apply to CDIAC.
18)Specifies that the bill shall only apply to a local public
entity on or after the effective date of the bill.
19)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.
20)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
AB 155
Page 5
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)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.
FISCAL EFFECT : According to the Assembly Appropriations
Committee:
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. Measure provides CDIAC with authority to
charge fees to cover some or all of their costs in the event
they deny the municipality access to bankruptcy.
2)Possible state exposure to legal challenges and related fiscal
pressures, potentially in the hundreds of millions of dollars.
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
AB 155
Page 6
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,
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.
AB 155
Page 7
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
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.
CALIFORNIA'S RESPONSE TO CHAPTER 9
3)In response to the federal creation of chapter 9, the
California Legislature enacted 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 became 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;" and,
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
AB 155
Page 8
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
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 (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 Legislature 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
AB 155
Page 9
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
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
AB 155
Page 10
109 of the federal 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.
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)This bill 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 pre-conditions to filing. This bill 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.
AB 155
Page 11
8)The author bases the justification for this bill on a
California Law Revision Commission report from 2001, in which
CLRC studied California's municipal bankruptcy statute. CLRC
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 CLRC'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, the report noted 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."
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) above, 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)CSAC, in their opposition letter, poses the question of what
CDIAC would have advised in the instance 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 this bill
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
AB 155
Page 12
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." This bill
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. This bill 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 the bill, "last year's bankruptcy filing by
the City of Vallejo has only served to further devastate an
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
AB 155
Page 13
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."
15)In order to not put the financial affairs of a local
government purely in the hands of the state, the Legislature
may wish to consider adding a "local government override"
provision into the bill, through which a local government can
AB 155
Page 14
still file a petition under chapter 9 if they truly feel that
no other viable options remain, even if the local government's
application to petition is denied by CDIAC.
Analysis Prepared by : Debbie Michel / L. GOV. / (916)
319-3958
FN: 0001333