BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 506
                                                                  Page  1

          Date of Hearing:  May 4, 2011

                       ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT
                                Cameron Smyth, Chair
                  AB 506 (Wieckowski) - As Amended:  March 31, 2011
           
          SUBJECT  :  Local government: bankruptcy: mediation

           SUMMARY  :  Establishes a process for mediation to be administered 
          by the California Debt and Investment Advisory Commission, and 
          prohibits a local public entity from exercising powers pursuant 
          to applicable federal bankruptcy law unless the local public 
          entity has participated in mediation proceedings and specified 
          criteria have been met through those mediation proceedings.  
          Specifically,  this bill  :  

          1)Prohibits a local public entity, as defined, from filing a 
            petition and exercising powers applicable to federal 
            bankruptcy law unless the local public entity has participated 
            in mediation and received a good faith certification from the 
            mediator, and requires one of the following to apply:

             a)   The local public entity has reached an out-of-court 
               agreement with all interested parties regarding a plan of 
               adjustment pursuant to provisions of this bill; 

             b)   The local public entity and the interested parties were 
               unable to reach an out-of-court agreement and the mediator 
               has certified in writing that the parties have participated 
               in mediation in good faith pursuant to provisions of this 
               bill; or,

             c)   The local public entity initiated the mediation 
               proceeding and interested parties did not participate in 
               the mediation as specified in provisions of this bill.

          2)Prohibits the local public entity from filing a petition and 
            exercising powers under 1) above 
          if either of the following occur:

             a)   The mediator determines that solvency or effective debt 
               restructuring can be achieved through settlement with all 
               interested parties and that a settlement can be reached 
               through further mediation; and,









                                                                  AB 506
                                                                  Page  2

             b)   The mediator determines that a local public entity has 
               failed to participate in good faith mediation, which 
               includes, but is not limited to, the failure to provide 
               accurate and essential financial information, the failure 
               to attempt to reach a settlement with all interested 
               parties to avert bankruptcy, or evidence of manipulation to 
               delay and obstruct a timely agreement.

          3)Requires the California Debt and Investment Advisory 
            Commission (CDIAC) to adopt mediation guidelines relating to 
            local public entity bankruptcy and specifies that CDIAC may 
            consult with Judicial Arbitration and Mediation Services, the 
            Executive Office for U.S. Trustees, retired bankruptcy judges, 
            or other appropriate entities in adopting the guidelines.

          4)Allows a local public entity to initiate a mediation when the 
            local public entity is or is likely to become unable to meet 
            its financial obligations when those obligations are due or 
            become due and owing.

          5)Provides that mediation will be conducted through an 
            alternative dispute resolution program within the state and in 
            accordance with mediation guidelines adopted by CDIAC.

          6)Provides that the role of the mediator shall be to assist all 
            interested parties in reaching an equitable settlement to 
            avert a Chapter 9 filing.

          7)Provides that the mediator may consult with the Judicial 
            Arbitration and Mediation Services, the Executive Office for 
            U.S. Trustees, retired bankruptcy judges, or other appropriate 
            entities in establishing and administering the mediation.

          8)Requires a mediator to meet all of the following 
            qualifications:

             a)   At least 10 years of high level business or legal 
               practice involving bankruptcy;

             b)   Experience in conflict resolution; and,

             c)   Completion of a mandatory training program in municipal 
               organization, municipal debt restructuring, Chapter 9 
               bankruptcy, public finance, taxation, California 
               constitutional law, California labor law, federal labor 








                                                                  AB 506
                                                                  Page  3

               law, and municipal finance dispute resolution, provided 
               through an alternative dispute resolution program within 
               the state.

          9)States that the mediator shall be impartial, objective, 
            independent, and free from prejudice, and shall not act with 
            partiality or prejudice based on any participant's personal 
            characteristic, background, values or beliefs, or performance 
            during mediation.

          10)Requires the mediator to avoid a conflict of interest or the 
            appearance of a conflict of interest during and after a 
            mediation and requires the mediator to make a reasonable 
            inquiry to determine whether there are any facts that a 
            reasonable individual would consider likely to create a 
            potential or actual conflict of interest. 


          11)Requires, prior to mediation, that the mediator shall not 
            establish another relationship with any of the parties in a 
            manner that would raise questions about the integrity of the 
            mediation, except that the mediator may conduct further 
            mediations regarding other potential local public entities 
            that may involve some of the same or similar constituents to a 
            prior mediation.


          12)Requires the mediator to conduct the mediation in a manner 
            that promotes voluntary, uncoerced decisionmaking in which 
            each party makes free and informed choices regarding the 
            process and outcome.


          13)Prohibits the mediator from imposing a settlement on the 
            parties and requires the mediator to use his or her best 
            efforts to assist the parties to reach a satisfactory 
            resolution of their disputes


          14)Allows, subject to the discretion of the mediator, the 
            mediator may make oral or written recommendations for 
            settlement or plan of readjustment to a party privately or, if 
            the parties agree, to all parties jointly.










                                                                  AB 506
                                                                  Page  4

          15)Specifies that the mediator has a duty to instruct and inform 
            the local public entity and all parties of the limitations of 
            Chapter 9 relative to other chapters of the bankruptcy codes 
            and requires that this instruction highlight the limited 
            authority of United States bankruptcy judges in Chapter 9 such 
            as the lack of flexibility available to judges to reduce or 
            cram down debt repayments and similar efforts not available to 
            reorganize the operations of the city, that may be available 
            to a corporate entity.


          16)Requires the mediator to request from the parties 
            documentation and other information that the mediator believes 
            may be helpful in assisting the parties to address the 
            obligations between them.


          17)Allows, in the event a complete settlement of all or some 
            issues in dispute is not achieved within the scheduled 
            mediation session or sessions, the mediator to, at the 
            mediator's discretion, continue to communicate with the 
            parties in an ongoing effort to facilitate a complete 
            settlement in order to avoid a Chapter 9 filing.


          18)Requires the mediator to provide council and guidance to all 
            parties and shall not be a legal representative of any party 
            and shall not have a fiduciary duty to any party.


          19)Allows, in the event of a settlement with all interested 
            parties, the mediator to assist the parties in negotiating a 
            prepetition, preagreed plan of readjustment in connection with 
            a potential Chapter 9 filing.


          20)Requires the mediator to maintain the confidentiality of all 
            the information obtained by the mediator in mediation, unless 
            otherwise agreed to by the parties.

          21)Requires parties to exchange all documents including current 
            financial information and projections addressing future 
            financial obligations affecting the local public entity or 
            that may hinder a resolution of the issues before the 
            mediator, and allows the mediator to request the submission or 








                                                                  AB 506
                                                                  Page  5

            exchange of memoranda on issues, including the underlying 
            interests, and the history of the parties' prior negotiations.

          22)Allows information that a party wishes to keep confidential 
            to be sent to the mediator in a separate communication clearly 
            marked "CONFIDENTIAL."

          23)Requires each interested party to provide at least one 
            representative to attend all mediation conferences, and states 
            that each party's representative shall have authority to 
            settle and resolve disputes or shall be in a position to 
            present any proposed settlement or plan of readjustment to the 
            governing body or membership for approval and implementation.

          24)Requires the local public entity to provide a representative 
            who shall represent the local public entity's interest in the 
            mediation and who shall propose any settlement or plan of 
            readjustment to the governing body of the local public entity.

          25)Allows an interested party to be represented by legal 
            counsel, but must inform all parties of the representation.

          26)Requires the parties to participate in the mediation in good 
            faith, and allows the mediator to request that a substitute 
            representative be appointed, if the mediator determines that a 
            representative of one or more of the parties is not 
            participating in good faith.

          27)Requires the parties to maintain the confidentiality of the 
            mediation and prohibits the parties from disclosing statements 
            made, information disclosed, or documents prepared or produced 
            during the mediation process as specified in provisions of the 
            Evidence Code related to mediation, unless all parties consent 
            in writing to the disclosure.

          28)Requires mediation to end if any of the following occur:

             a)   The parties execute an agreement of settlement;

             b)   The parties reach an agreement or proposed plan of 
               readjustment that requires the approval of a bankruptcy 
               judge;

             c)   The mediator certifies in writing that one or more of 
               the parties has not participated in good faith, that no 








                                                                  AB 506
                                                                  Page  6

               resolution has been reached, and that further efforts at 
               mediation would not contribute a resolution of the parties' 
               dispute;

             d)   The mediator certifies in writing that the parties have 
               participated in good faith but the parties have reached an 
               impasse and further efforts at mediation would not 
               contribute to a resolution of disputes; or,

             e)   The mediator certifies in writing that a mediation was 
               initiated by the local public entity, but that no 
               interested parties participated.

          29)Adds a new section that defines terms related to provisions 
            of the bill.

          30)States that the Legislature finds and declares that certain 
            sections contained in the bill impose a limitation on the 
            public's right of access to the meetings of public bodies or 
            the writings of public officials and agencies pursuant to 
            Section 3 of Article I of the California Constitution, and 
            provides that the reason to demonstrate the interest protected 
            by this limitation and the need for protecting that interest 
            is to facilitate the process to avoid municipal bankruptcy; 
            therefore, it is necessary to provide for secure documents.

          31)Makes other legislative findings and declarations.

           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.








                                                                  AB 506
                                                                  Page  7


          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  :  Unknown

           COMMENTS  :

           MUNICIPAL BANKRUPTCY 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,

             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;









                                                                  AB 506
                                                                  Page  8

               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 
            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 








                                                                  AB 506
                                                                  Page  9

            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 
               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.

            The California Law Revision Commission (CLRC) studied 








                                                                  AB 506
                                                                  Page  10

            California's municipal bankruptcy statute and released their 
            report in 2001.  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.

          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.









                                                                  AB 506
                                                                  Page  11

           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 
                                                     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 Ýfor 
            municipalities to file a petition under federal bankruptcy 
            law]."
           
          RECENT LEGISLATION
           
          6)The Legislature saw two municipal bankruptcy bills in the 
            2009-10 legislative session, 
          AB 155 (Mendoza) and SB 88 (DeSaulnier), following on the heels 
            of the City of Vallejo bankruptcy filing in May of 2008.  Both 
            bills would have prohibited a local public entity from 
            exercising its rights under applicable federal bankruptcy law 
            unless granted approval by CDIAC, and would have specified 
            procedures in which the local public entity could override a 
            decision of denial by CDIAC.  AB 155 died on the Senate Third 
            Reading File and SB 88 was chaptered with other provisions not 
            relating to municipal bankruptcy.

          7)For both AB 155 and SB 88, the authors argued that a municipal 








                                                                  AB 506
                                                                  Page  12

            bankruptcy filing has 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.  
           
          PROPOSED LAW  
           
           8)AB 506 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.  Instead of full and unfettered 
            access, this bill requires that a local government go through 
            a mediation process first, and that local government can only 
            file a petition for Chapter 9 if certain conditions are met.  
            First, the local public entity would need to participate in 
            mediation proceedings and receive a good faith certification 
            from the mediator.  Second, the local public entity would need 
            to have one of the following happen:  a) Reach an out-of-court 
            agreement with all interested parties regarding a plan of 
            adjustment; b) Be unable to reach an out-of-court agreement 
            but have the mediator certify that all parties acted in good 
            faith; or, 
          c) The local public entity would need to initiate the mediation 
            proceeding but have interested parties not participate in the 
            mediation.

            The bill also prohibits a local public entity from filing a 
            petition for Chapter 9 if either of the following occurs:  a) 
            The mediator determines that solvency or effective debt 
            restructuring can be achieved through settlement with all 
            interested parties and that a settlement can be reached 
            through further mediation; or b) The mediator determines that 
            a local public entity has failed to participate in good faith 
            mediation.

            Additionally the bill requires CDIAC to administer the 
            mediation process and adopt guidelines for mediation.  The 
            provisions of the bill allow a local public entity to initiate 
            a mediation when the local public entity is or is likely to 
            become unable to meet its financial obligations, and provides 
            that the mediation shall be conducted through an alternative 
            dispute resolution program within the state and in accordance 








                                                                  AB 506
                                                                  Page  13

            with mediation guidelines adopted by CDIAC.
          9)The author argues that the state has a vested interest in 
            protecting taxpayers from the effects of an ill-advised 
            bankruptcy and believes that this bill will help local public 
            entities and elected officials make the most responsible 
            decisions for the communities they represent.  Additionally, 
            the author notes that "in the absence of clear standards or 
            oversight, local elected officials considering bankruptcy and 
            the communities impacted by such a bankruptcy have little 
            guidance about whether Ýthe bankruptcy] is merited or 
            necessary."  The author argues that under current law, there 
            is nothing to prevent a frivolous bankruptcy petition or one 
            that is politically motivated. 

          10)In order for a bankruptcy petition to be accepted by the 
            court for a Chapter 9 filing, certain conditions must be met 
            by the local public entity (see Comment #1).  The local public 
            entity must be insolvent, have the desire to effect a plan to 
            adjust debts, and must attempt to negotiate in good faith with 
            creditors, as long as such negotiation is not impracticable.  
            In situations where the local public entity has not met these 
            conditions, the court can reject the bankruptcy petition.

            The Committee may wish to consider whether the bill's 
            mediation process is duplicative of what is already required 
            for local governments before they can file a bankruptcy 
            petition for Chapter 9 protection.

          11)According to Judicial Arbitration and Mediation Services 
            (JAMS), "mediation" is defined as "a process wherein the 
            parties meet with a mutually selected impartial and neutral 
            person who assists them in the negotiation of their 
            differences."  JAMS specifies the following about the role of 
            the mediator:

            "Mediation leaves the decision power totally and strictly with 
            the parties.  The mediator does not decide what is 'fair' or 
            'right,' does not assess blame nor render an opinion on the 
            merits or chances of success if the case were litigated.  
            Rather, the mediator acts as a catalyst between opposing 
            interests attempting to bring them together by defining issues 
            and eliminating obstacles to communication, while moderating 
            and guiding the process to avoid confrontation and ill will.  
            The mediator will, however, seek concessions from each side 
            during the mediation process."








                                                                  AB 506
                                                                  Page  14


            While this bill requires mediation for a local public entity 
            and interested parties in order to "assist all interested 
            parties in reaching an equitable settlement to avert a Chapter 
            9 filing," it is important to note that mediators are not 
            usually responsible for making determinations.  

            This bill, however, gives a mediator involved in bankruptcy 
            mediation the ability to determine if solvency or effective 
            debt restructuring can be achieved through settlement with all 
            interested parties.  This bill also gives the mediator the 
            power to determine whether the mediator thinks a settlement 
            can be reached through further mediation.  The Committee may 
            wish to consider whether the authority given to mediators 
            under the provisions of the bill is too far-reaching and 
            changes the typical role a mediator would play.

          12)This bill treats all forms of local governments - cities, 
            counties, and special districts - the same, even though there 
            is wide variation among these entities and how they are 
            funded, the services they provide, and the different ways that 
            they function and are governed.  


            According to the Urban Counties Caucus (UCC), in opposition to 
            the bill, counties provide many mandated programs on behalf of 
            the state or federal government.  UCC raises the point that 
            counties often have fiscal issues related to payment deferrals 
            or a lack of payments from the state or federal government.  
            In a situation where there is a court case, run on the bank, 
            or decreased payments from the state or federal government, 
            the provisions of the bill do not allow for the types of 
            emergency situations that could occur for counties.

            According to the California Special Districts Association 
            (CSDA) and the Association of California Healthcare Districts 
            (ACHD), in opposition, special districts have never entered 
            Chapter 9 because of a disputed labor contract.  Rather, 
            certain types of special districts, like healthcare districts, 
            have typically used Chapter 9 because of low Medi-Cal 
            reimbursements or a court judgment that the district could not 
            afford.  In these situations, going through a mediation 
            process does not make sense and prohibits districts from being 
            granted the automatic stay protection under Chapter 9.









                                                                  AB 506
                                                                  Page  15

            The Committee may wish to consider whether these types of 
            situations for local governments warrant the inclusion of 
            emergency process provisions in the bill to allow local 
            governments to have access to the automatic stay of protection 
            under Chapter 9 in cases where mediation will have little to 
            no impact.
             
          13)The bill's provisions are silent on the following issues.  
            The  Committee may wish to ask the author:

             1)   Who will appoint the mediator?

             2)   Who will pay for mediation?

             3)   How long will the mediation process take?

             4)   What happens if the local public entity or other 
               stakeholders involved in the mediation process want to 
               request a different mediator?  

          1)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."  The Committee may wish to consider 
            this bill creates some sort of unintended state liability.  

          2)The California Professional Firefighters, writes that the 
            "2008 bankruptcy filing by the City of Vallejo has only 
            serviced to further devastate a struggling community, 
            including local businesses that were already feeling the 
            adverse impact of a stagnant economy."  As well, "Upon 
            ÝVallejo's bankruptcy filing] the city's bond interest rates 
            converted to their maximums and the city's filing claimed a 
            deficit of approximately $12 million, and Vallejo's litigation 
            costs have escalated to over $9.5 million, thereby further 
            encumbering an already dried-up general fund budget."


          3)Support arguments:  According to the California Labor 
            Federation, in support, "in the absence of clear standards or 
            oversight, local elected officials considering bankruptcy and 
            the communities impacted by such a bankruptcy have little 








                                                                  AB 506
                                                                  Page  16

            guidance about whether it is merited or necessary."  
            Additionally, "the state has a vested interest in protecting 
            taxpayers from the effects of an ill-advised bankruptcy, and 
            all major creditors, workers, retirees, and investors have a 
            stake in reaching a fair resolution without resorting to 
            bankruptcy, as do local elected officials."

            Opposition arguments:  The California Chamber of Commerce, in 
            opposition, writes that the "business community's concern is 
            three-fold:  Debts and contracts remain unpaid as the local 
            government entity simply will not function or is dissolved; 
            the local entity will raise fees, assessments and taxes on the 
            community's residents and businesses at a time when jobs need 
            to be created and the economy stimulated; the state - already 
            facing a cash crisis and budget deficit - steps in to take 
            over the provision of services, putting further strain on the 
            budget that other Californians and businesses will have to pay 
            for.

           REGISTERED SUPPORT / OPPOSITION  :   

           Support 
           
          California Labor Federation
          California Nurses Association
          California Professional Firefighters

           Opposition 

           Association of California Healthcare Districts
          California Chamber of Commerce
          California Special Districts Association
          California State Association of Counties
          Howard Jarvis Taxpayers Association
          League of California Cities
          Regional Council of Rural Counties
          Urban Counties Caucus
           
          Analysis Prepared by  :    Debbie Michel / L. GOV. / (916) 
          319-3958