BILL ANALYSIS
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
155 (Mendoza)
Hearing Date: 8/27/2010 Amended: 8/20/2010
Consultant: Bob Franzoia / Mark McKenziePolicy Vote: L Gov 3-2
/ 3-1
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BILL SUMMARY: AB 155 would provide that a local public entity
may only file under federal bankruptcy law with the approval of
the California Debt and Investment Advisory Commission
(commission), or if the governing body of the local entity has
adopted a resolution to override the commission's findings if a
request to file is denied. As an alternative to the commission
process, recent amendments would also allow a local public
entity to file under federal bankruptcy law after the State
Auditor completes an audit of specified information and analyses
describing the public entity's financial position, and the
findings of that audit work are made public.
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Fiscal Impact (in thousands)
Major Provisions 2010-11 2011-12 2012-13 Fund
CDIAC review of local Minor to major costs annually,
ongoing;General*
requests depending on number and complexity of
bankruptcy evaluations
State Auditor Annual costs in the range of $225General
---------see staff comments--------
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* Potentially offset in whole or in part by a fee on the
requesting local public entity to be deposited in the California
Debt and Investment Advisory Commission Fund
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STAFF COMMENTS: This bill meets the criteria for referral to the
Suspense File. Staff notes that this bill was approved by this
Committee on May 27, 2010 by a vote of 6-4. The bill was
recently amended and referred back to the Local Government
Committee pursuant to Senate Rule 29.10, where it was
subsequently approved by a 3-1 vote and re-referred to this
Committee.
Under Chapter 9 of the federal Bankruptcy Code, a municipality
receiving 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 of debt payments, or a refinancing of debt.
Creditors can include holders of municipal debt, vendors, and
counterparties in contracts. Chapter 94/2002 allows a local
pubic entity to file a petition and exercise powers pursuant to
federal law, without any statewide approval or preconditions.
The commission provides information, education and technical
assistance on debt issuance and public fund investments to local
public agencies and other public finance professionals. The
commission serves as the state's clearinghouse for public debt
issuance information and to assist state and local agencies with
the monitoring, issuance, and management of public debt and
investments. The commission consists
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AB 155 (Mendoza)
of the State Treasurer, the Governor or the Director of Finance,
the State Controller, two local government finance officials,
two Assembly Members, and two Senators. Under this bill, the
commission, subject to various provisions and conditions, would
be required to grant approval to a local public entity before
the local public entity could petition the federal bankruptcy
court for financial relief.
AB 155 would permit a local public entity to submit a resolution
to the commission that requests authority to petition the
federal bankruptcy court for financial relief and includes a
thorough analysis of the entity's request and evidence of
irreparable harm that may result from an evaluation period.
Upon receipt of information from the local public entity, the
commission would evaluate the information and within five days,
notify the local public entity that the commission either
approves the request or intends to proceed with a further
evaluation of the extent to which the local public entity has:
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 a successful petition will have
on state and local finances, including the impact on credit
access and debt service.
Proposed an appropriate and proportionate remedy to the
entity's fiscal problems.
If the local public entity's request is denied, the governing
board may either: (1) reapply to the commission by a resolution
that includes documentation addressing the deficiencies
initially identified by the commission; or (2) hold a public
hearing to override the decision and adopt a resolution to
declare the public entity's intent to exercise authority
pursuant to applicable bankruptcy law. At the public hearing,
the governing board shall make findings regarding the necessity
to override the decision of the commission. The ability of a
local entity to override the commission's findings would appear
to limit any General Fund cost pressure to assist the local
public entity that may have resulted if the commission denied
the request. Additionally, Government Code 8863, as added by
this bill, proposes that the state assumes no new or additional
fiscal responsibilities for local entities that may apply to the
commission for review.
The California Debt and Investment Advisory Commission Fund
(0956-001-0171) receives fees for assisting state or local
government units in the planning, preparation, marketing and
sale of new debt issues to reduce cost and to assist in
protecting the issuer's credit. The fee is the lesser of one
fortieth of one percent of the principal amount of the issue or
$5,000.
The August 20, 2010 amendments add an alternative to the
commission proceedings noted above under which a local public
entity may file a petition and exercise powers pursuant to
applicable federal bankruptcy law. Specifically, the amended
bill would allow a public entity to file under federal
bankruptcy law after submitting information to the State Auditor
describing the public entity's financial position, including
analyses of:
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AB 155 (Mendoza)
The entity's petition to exercise powers under applicable
federal bankruptcy law.
The ability of the entity to pay its undisputed debts.
The options that the local entity has considered to avoid
seeking relief.
The entity's plan for restoring the soundness of its financial
position.
An itemized list of creditors that may be impaired or may seek
damages as a result of the proposed plan.
Upon receipt of this information, the bill would require the
State Auditor to audit the analyses and financial position of
the local public entity, and specifies that the audit would take
precedent over any pending audit requested by the Joint
Legislative Audit Committee (JLAC). A local entity would be
authorized to file under federal bankruptcy law after the State
Auditor has notified the entity of completion of the audit work
and made the findings public.
Existing law requires the State Auditor to conduct an audit of a
state or local governmental entity that is requested by JLAC, to
the extent that funding is available and in accordance with
priorities established by JLAC. Existing law also requires the
State Auditor to conduct specified financial and performance
audits directed in statute. Under the 2009-10 Joint Rules of
the Senate and Assembly, Rule 37.4 (b) specifies that "any bill
requiring action by the Bureau of State Audits shall contain an
appropriation for the cost of any study or audit." Staff notes
that the August 20, 2010 amendments are a violation of Joint
Rule 37.4 (b) because the bill does not provide for payment of
State Auditor costs associated with audits of information and
analyses provided by a local entity seeking to file under
federal bankruptcy law. Any auditing costs associated with the
bill would be impossible to predict and would depend upon how
many local entities choose this option prior to filing under
federal bankruptcy law, and the size and complexity of the
entity's case. This provision would also impact the State
Auditor's statutory duties to perform discretionary audits at
the direction of JLAC by specifying that the audits authorized
under this bill would take precedent over JLAC audit requests.
To the extent a local entity seeking to file bankruptcy chooses
these procedures over the commission process, the State Auditor
would perform fewer JLAC-directed discretionary audits. This
could also create inefficiencies by interrupting current audit
work in favor of the audits prescribed under this bill.
Considering the requirements of the State Auditor procedures are
comparatively simpler, take less time, and are less costly for
the local entity than the commission process, staff estimates
that most, if not all, local entities seeking to file for
bankruptcy would choose to submit specified financial
information to the State Auditor rather than seeking approval
from the commission. While actual costs are unknown and would
depend upon the number and complexity of local entities'
requests for audits, the State Auditor estimates General Fund
costs of approximately $225,000 annually. Unlike the commission
process, there are no offsetting fees collected to cover the
State Auditor costs.