BILL ANALYSIS                                                                                                                                                                                                    



                                        
                       SENATE LOCAL GOVERNMENT COMMITTEE
                            Senator Dave Cox, Chair


          BILL NO:  AB 155                     HEARING:  4/19/10
          AUTHOR:  Mendoza                     FISCAL:  Yes
          VERSION:  7/1/09                     CONSULTANT:   
          Weinberger
          
                          LOCAL GOVERNMENT BANKRUPTCY

                           Background and Existing Law  

          Federal bankruptcy law for public agencies (Chapter 9)  
          gives government debtors time to come up with repayment  
          plans, providing them a breathing spell from creditors'  
          collection efforts.  Unlike private bankruptcy law (Chapter  
          11), municipal bankruptcy law must respect the states'  
          sovereign powers.  Consequently, the states can control  
          their local agencies' access to federal bankruptcy  
          protection.  

          Like 11 other states, California grants its local public  
          agencies the broadest possible access to federal bankruptcy  
          available.  The state statutes broadly authorizing  
          bankruptcy filings by local governments were first enacted  
          in 1939 (SB 338, Phillips, 1939) and codified in 1949 (SB  
          768, Cunningham, 1949).  In 2001, after studying the state  
          statutes authorizing bankruptcy filings by local public  
          entities, the California Law Revision Commission  
          recommended revisions to conform the statutes to changes in  
          federal bankruptcy law and to reaffirm the intent of the  
          statute to provide the broadest possible access to  
          municipal debt relief under federal law.  Legislators  
          approved the Commission's recommendations the following  
          year (SB 1323, Ackerman, 2002).

          Because one municipality's bankruptcy may have a negative  
          effect on other local governments' borrowing power, some  
          states limit or prohibit their local governments to access  
          federal protections.  Local governments in 22 states do not  
          have access to municipal bankruptcy, while 16 other states  
          impose some conditions on municipal bankruptcy filings.   
          The conditions imposed by other states range from a  
          requirement that a local entity's legislative body must  
          pass an ordinance or resolution before filing for  
          bankruptcy to a requirement that a state commission grant  
          approval before a local government may file for bankruptcy




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          After the 1994 Orange County bankruptcy, the Legislature  
          tried to establish state oversight for municipal bankruptcy  
          filings.  The bill passed, but Governor Pete Wilson vetoed  
          it (SB 349, Kopp, 1996).  The Law Revision Commission's  
          2001 study also considered proposals to require prefiling  
          approval by the Governor or a governmental committee, but  
          did not recommend any substantive reforms.

          The California Debt and Investment Advisory Commission  
          (CDIAC) provides information, education, and technical  
          assistance on debt issuance and public fund investments to  
          local public agencies.  The Commission has nine members,  
          including the State Treasurer, the Governor or the Director  
          of Finance, the State Controller, two local government  
          finance officials, two Assembly Members, and two Senators.   
          The State Treasurer serves as the Chairperson and appoints  
          the two local government officials. The Assembly Speaker  
          appoints the Assembly's representatives and the Senate  
          Rules Committee appoints the Senate's representatives.

          On May 23, 2008, the City of Vallejo filed a Chapter 9  
          bankruptcy petition.  The City subsequently asked the  
          bankruptcy court for permission to reject collective  
          bargaining agreements with four unions representing city  
          employees.  Early last year, the City negotiated  
          supplemental labor agreements with two of those unions.   
          The City Council recently approved a new labor agreement  
          with a third union after reaching an agreement under which  
          the City rejected that union's collective bargaining  
          agreement.  The fourth union is appealing the bankruptcy  
          court's ruling that the City can reject its collective  
          bargaining agreement, leaving the status of that agreement  
          unresolved.  Vallejo remains under the bankruptcy court's  
          protection.  

          In response to concerns about Vallejo's decision to file  
          for bankruptcy and the potential for additional municipal  
          bankruptcy filings, labor unions and others want to require  
          state oversight of local governments' bankruptcy petitions.


                                   Proposed Law  

          Assembly Bill 155 authorizes a local public entity, with  
          the approval of the California Debt and Investment Advisory  





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          Commission (CDIAC), and under CDIAC's terms and conditions,  
          to file a petition and exercise powers under federal  
          bankruptcy law.

          I.   Submitting a request  .  When a local public entity asks  
          CDIAC for approval to exercise its rights under federal  
          bankruptcy law, AB 155 requires local officials to submit:
                 A resolution or ordinance, adopted by the governing  
               body at a public hearing held pursuant to the Ralph M.  
               Brown Act that does both of the following:
               o      Requests authority to petition the federal  
                 bankruptcy court for financial relief.
               o      Acknowledges that the state's fiscal and  
                 financial responsibilities are not changed by the  
                 application or CDIAC's decision.
                 A thorough analysis of the entity's request to  
               petition under federal bankruptcy law. The entity  
               must:
               o      Demonstrate that it is or will be unable to pay  
                 its undisputed debts.
               o      Demonstrate that it has exhausted all options  
                 to avoid seeking relief under Chapter 9.
               o      Detail a specific plan for restoring the  
                 soundness of the entity's financial plans.
                 An itemization of creditors that may be impaired or  
               may seek damages as a result of the proposed plan.
                 Evidence of irreparable harm that may result during  
               the 30-day evaluation period and the 15 days allotted  
               for a hearing.

          AB 155 allows a county that requests approval from CDIAC to  
          require local agencies with funds invested in the county  
          treasury to provide a five-day notice of withdrawal before  
          the county must comply with a request for withdrawal of  
          funds.

          II.   Initial review  .  Within five days of receiving the  
          information that must accompany a local public entity's  
          request, CDIAC must evaluate the information and notify the  
          entity of one of the following results:
                 Approval of the request, or
                 That CDIAC will proceed with a further evaluation  
               based on a finding that the local public entity did  
               not provide sufficient evidence of irreparable harm.  
          If CDIAC does not respond within five days, the request is  
          deemed approved.





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          III.   Evaluation  .  AB 155 requires CDIAC to publish its  
          evaluation within 30 business days of receiving the  
          information that must accompany a local public entity's  
          request.  After notifying the local public entity of its  
          intent to further evaluate a request, CDIAC's staff must  
          specifically evaluate the extent to which the local public  
          entity has done the following:
                 Demonstrated that it has exhausted other remedies,
                 Demonstrated that it has taken sufficient steps to  
               reduce the negative consequences of its proposed  
               bankruptcy relief,
                 Anticipated the transfer of service responsibility  
               to other governments or parties and to what extent the  
               entity has documented the consequences for the  
               transfer of municipal and other government services,
                 Documented the likely effect that a successful  
               petition will have on state and local finances,  
               including the impact on credit access and debt  
               service, 
                 Proposed a remedy that is appropriate and  
               proportionate to the entity's fiscal problems.

          IV.   Hearing  .  AB 155 requires CDIAC to hold a public  
          hearing to consider a local public entity's request for  
          approval to file a petition and exercise powers pursuant to  
          federal bankruptcy law.  The hearing must:
                 Occur at least 10 days, but not more than 15 days,  
               after the publication of CDIAC's staff evaluation of  
               the request,
                 Comply with the provisions of the Bagley-Keene Open  
               Meeting Act and additional public notice provisions,
                 Provide sufficient time for public testimony, and
                 Be held in convenient proximity of the local public  
               entity.

          V.   Approval or denial  .  AB 155 requires CDIAC, in a  
          recorded vote on the date of the public hearing, to approve  
          or deny the local entity's request.

          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:
                 Limiting changes to a contract,
                 Prohibiting the abrogation of contracts, and





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                 Limiting the amount of relief to ensure the  
               protection of debt service payments.

          If CDIAC disapproves a request, it must adopt specific  
          findings that address the deficiencies of the application.   
          If CDIAC denies a request, the local public entity may  
          reapply by adopting another resolution and submitting  
          documentation to address the deficiencies.

          VI.   Additional provisions  .  The bill requires CDIAC's  
          executive director, after the Commission receives a local  
          public entity's request for review and approval of a  
          bankruptcy filing, to record the costs incurred by CDIAC in  
          conducting an evaluation of and holding a hearing on the  
          request.  The director must report those costs to the  
          Commission at its next regularly scheduled hearing.  Upon  
          denial of the request, the director or Commission may  
          assess the requesting entity a fee to cover some or all of  
          CDIAC's costs.  Fee revenue must be deposited in a  
          specified fund.

          AB 155 allows CDIAC to propose regulations to govern the  
          request and review process enacted by the bill.

          AB 155 states that, in enacting the bill, the state assumes  
          no new or additional fiscal responsibilities for local  
          entities that may apply to CDIAC for review.

          The bill requires the State Treasurer to temporarily  
          replace a local government finance officer serving on CDIAC  
          who is employed by an entity requesting CDIAC's approval to  
          petition for bankruptcy with another local government  
          representative who meets the qualifications for membership  
          on the Commission.

          The bill contains extensive legislative findings and  
          declarations regarding the interdependence of state and  
          local finances and the state's interest in various impacts  
          of municipal bankruptcy.


                                     Comments  

          1.   Compelling state interest  .  Municipal bankruptcy's  
          broad and significant impact on the bankrupt entity's  
          residents, on other local government entities, and on the  





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          state necessitates state oversight of local public  
          entities' bankruptcy filings.  Because local and state  
          finances are inextricably linked, the state has a direct  
          interest in the fiscal health of its local governments.  A  
          municipal bankruptcy can have statewide repercussions,  
          including higher borrowing costs for other local entities  
          and the state.  The state also has a compelling interest in  
          ensuring the validity and enforceability of contracts  
          negotiated through the collective bargaining process, which  
          forms the foundation for positive and stable labor  
          relations.  The review process authorized by AB 155 could  
          help local officials find alternative strategies to address  
          short-term fiscal challenges in ways that avoid the broad  
          and lasting spillover effects of municipal bankruptcy.  AB  
          155 follows a model used successfully in other states to  
          protect the interests of a broad coalition of stakeholders  
          who are affected by municipal bankruptcies.

          2.   Local control  .  By authorizing CDIAC to either deny, or  
          impose conditions on, a local public entity's bankruptcy  
          filing, AB 155 critically undermines local officials'  
          discretion in responding to fiscal crises.  Local elected  
          officials are directly accountable to residents within  
          communities affected by a municipal bankruptcy.  As a  
          result, a decision to enter bankruptcy is a last resort  
          that those officials do not take lightly.  High legal  
          costs, damaged credit ratings, and a lasting stigma that  
          can deter investment and growth in a community all weigh  
          heavily against a decision to petition for bankruptcy  
          protection.  The principal benefit of federal bankruptcy is  
          the automatic stay of financial obligations which allows a  
          local entity some breathing space to formulate a debt  
          readjustment plan that is consistent with the fiscal  
          interests and priorities of the local community.  Allowing  
          CDIAC to deny or limit a local entity's restructuring could  
          place the burden of fiscal recovery solely on cuts to  
          public services, which may not reflect local residents'  
          priorities.  The Committee may wish to consider whether AB  
          155 is an unjustified state intrusion into local affairs.

          3.   What's changed  ?  Local officials have used municipal  
          bankruptcy protection sparingly during the 70 years that it  
          has been available to local public entities in California.   
          Only three general purpose governments have filed for  
          municipal bankruptcy protection: Orange County (1994), the  
          City of Desert Hot Springs (2001), and the City of Vallejo  





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          (2008).  Since 1999, 19 local public entities have filed  
          for bankruptcy; more than half were small health care  
          districts.  This recent average of fewer than two municipal  
          bankruptcy filings per year from among the thousands of  
          local public entities in California may reflect the  
          substantial, inherent disadvantages of resorting to  
          bankruptcy.  Proponents of AB 155 argue that this history  
          of bankruptcy filings and the inherent disincentives are  
          not reliable indicators of future behavior.  The immense  
          fiscal challenges now confronting many local governments  
          and the precedent set by Vallejo's bankruptcy may open the  
          door to more widespread, and less responsible, use of  
          bankruptcy protection in the near future.  However, despite  
          the recession and additional state-imposed burdens on local  
          finances, the Sierra Kings Health Care District is the only  
          California local government that has filed for bankruptcy  
          protection in the nearly two years since Vallejo entered  
          bankruptcy.  The Committee may wish to consider whether  
          potential changes to the frequency and purpose of municipal  
          bankruptcy filings justify the changes that AB 155 makes to  
          the state's long-standing municipal bankruptcy statute.

          4.   What happens next  ?  It is unclear what might happen  
          after CDIAC denies a local public entity's request to file  
          for bankruptcy, or imposes conditions on a bankruptcy  
          filing that make restructuring impossible.  As mentioned in  
          Governor Wilson's veto of the 1996 Kopp bill, some  
          opponents of state oversight of municipal bankruptcy argue  
          that a denial of eligibility for bankruptcy "could raise  
          questions of liability of the state to creditors of the  
          public agency."  However, there is no evidence that this  
          theoretical concern has become a problem in the other  
          states that block access to municipal bankruptcy.   
          Regardless of whether the state may incur legal liability,  
          it may face heightened political pressure to provide fiscal  
          assistance to a local entity that can't seek bankruptcy  
          protection.  Legislators may feel obligated to intervene to  
          ensure that an insolvent county, city, or district doesn't  
          stop providing vital public services.  The Committee may  
          wish to consider whether the state oversight authorized by  
          AB 155 to protect limited state interests could result in  
          expanded state obligations to struggling local entities.

          5.   Regulation or prohibition  ?  Six states broadly require  
          some form of state approval before local governments can  
          petition for Chapter 9 bankruptcy protection:  Connecticut,  





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          Kentucky, Louisiana, New Jersey, North Carolina, and Ohio.   
          Of the 76 local governments that have filed for Chapter 9  
          bankruptcy protection since 1999, only two received  
          approval from one of these states:  the South Brunswick  
          Water & Sewer Authority (North Carolina, 2004) and the  
          Lower Cameron Hospital Service District (Louisiana, 1999).   
          Based on this recent pattern in other states, the Committee  
          may wish to consider whether requiring state approval of  
          Chapter 9 petitions filed by California local governments  
          would almost completely restrict access to municipal  
          bankruptcy protection in California.

          6.   Take two  .  The Senate Local Government Committee  
          considered AB 155 at its July 8, 2009 hearing.  After  
          taking testimony from 24 witnesses, the Committee held the  
          bill at the request of the author.  Although AB 155 has not  
          been amended, the Committee will again hear testimony on  
          the bill because two new members joined the Committee this  
          year.


                                 Assembly Actions 

          Assembly Local Government Committee: 4 - 3
          Assembly Appropriations Committee:12- 5
          Assembly Floor:                    47- 25
           




                        Support and Opposition  (4/15/10)

           Support  :  California Professional Firefighters, CDF  
          Firefighters Local 2881, California Labor Federation,  
          California State Treasurer Bill Lockyer, AARP, American  
          Federation of State, County and Municipal Employees,  
          AFL-CIO, Association for Los Angeles Deputy Sheriffs,  
          California Alliance for Retired Americans, California  
          Association of Highway Patrolmen, California Conference  
          Board of the Amalgamated Transit Union, AFL-CIO, California  
          Nurses Association, California Reinvestment Coalition,  
          California School Employees Association, California State  
          Employees Association, California State Firefighters'  
          Association, Inc., California Teamsters Public Affairs  
          Council, Consumer Federation of California, Engineers and  





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          Scientists of California, Glendale City Employees  
          Association, International Longshore & Warehouse Union,  
          Kern County Fire Fighters Union, Inc., Los Angeles County  
          Probation Officers Union, Livermore-Pleasanton Firefighters  
          Local 1974, Los Angeles County Fire Fighters Local 1014,  
          Los Angeles Police Protective League, National Nurses  
          Organizing Committee, North Bay Labor Council, AFL-CIO,  
          Orange County Employees Association, Orange County  
          Professional Firefighters Association, Organization of SMUD  
          Employees, Peace Officers Research Association of  
          California, Production Strategies, Inc.,  Professional and  
          Technical Engineers Local 21, Professional Engineers in  
          California Government, 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, State Building and Construction Trades  
          Council of California, UNITE HERE, United Food and  
          Commercial Workers Union, Western States Council. 

           Opposition  :  Counties of Butte, Imperial, Nevada, Madera,  
          Orange, Riverside, San Bernardino, San Luis Obispo, Yolo,  
          Cities of Antioch, Adelanto, Apple Valley, Atascadero,  
          Arvin, Bellflower, Belmont, Benicia, Berkeley, Beverly  
          Hills, Blythe, Brea, Burbank, Burlingame, California City,  
          Calistoga, Camarillo, Carmel-by-the-Sea, Carson, Carlsbad,  
          Chowchilla, Clayton, Cloverdale, Clovis, Coalinga,  
          Commerce, Concord, Costa Mesa, Cotati, Covina, Cypress,  
          Daly City, Danville, Diamond Bar, Dixon, El Segundo,  
          Encinitas, Exeter, Fairfield, Fontana, Fountain Valley,  
          Fowler, Fremont, Fullerton, Glendora, Greenfield,  
          Guadalupe, Hanford, Healdsburg, Hermosa Beach, Highland,  
          Hollister, Hughson, Huntington Park, Huntington Beach,  
          Irvine, Irwindale, Kingsburg, La Palma, La Puente, La  
          Verne, Laguna Hills, Lake Forest, Lafayette, Lakewood,  
          Lathrop, Lawndale, Lemoore, Lindsay, Livermore, Long Beach,  
          Madera, Mammoth Lakes, Manhattan Beach, Manteca, Merced,  
          Mendota, Mill Valley, Modesto , Moreno Valley, Murrieta,  
          Napa, Newport Beach, Norco, Norwalk, Novato, Oakdale,  
          Oakland, Ontario, Oroville, Palmdale, Palo Alto, Paradise,  
          Pasadena, Patterson, Pinole, Placentia, Pleasanton, Pomona,  
          Rancho Cordova, Rancho Cucamonga, Reedley, Ridgecrest,  
          Rialto, Rio Vista, Rohnert Park, Rolling Hills Estates,  
          Rosemead, Salinas, Sanger, San Luis Obispo, San Marcos,   
          San Pablo, Santa Cruz, Santa Maria, Santa Rosa, Seaside,  





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          Sebastopol, Shafter , Signal Hill, Stockton, Tehachapi,  
          Tiburon, Torrance, Tracy, Tulare , Tustin, Vacaville,  
          Vallejo, Villa Park, Visalia, Vista, Walnut Creek, Wasco,  
          West Covina, West Hollywood, Westminster, Windsor,  
          Woodlake, Woodland, Yorba Linda, Yountville, and Yucaipa,  
          Ambrose Recreation and Park District, Bell Canyon Community  
          Services District, El Dorado Hills Community Services  
          District, Goleta Sanitary District, Lincoln rural County  
          Fire Protection District, Mountain House Community Services  
          District, Squaw Valley Public Service District, Stallion  
          Springs Community Services District, Vista Irrigation  
          District, Association of California Health Care Districts,  
          Association of California Water Agencies, California  
          Chamber of Commerce, California Contract Cities  
          Association, California Public Securities Association,  
          California Society of Municipal Finance Officers,  
          California State Association of Counties, California  
          Special Districts Association, Howard Jarvis Taxpayers  
          Association, League of California Cities, League of  
          California Cities Inland Empire Division,  League of  
          California Cities Orange County Division, Marin County  
          Council of Mayors and Councilmembers, South Bay Cities  
          Council of Governments.