BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 506
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          Date of Hearing:   May 18, 2011

                        ASSEMBLY COMMITTEE ON APPROPRIATIONS
                                Felipe Fuentes, Chair

                  AB 506 (Wieckowski) - As Amended:  March 31, 2011 

          Policy Committee:                              Local 
          GovernmentVote:5-3

          Urgency:     No                   State Mandated Local Program: 
          No     Reimbursable:              

           SUMMARY  

          This bill 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.

          2)Requires the California Debt and Investment Advisory 
            Commission (CDIAC) to adopt mediation guidelines relating to 
            local public entity bankruptcy.  Establishes qualifications 
            for a mediator.

          3)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.  

          4)Prohibits the local public entity that is in mediation from 
            filing a petition if either the mediator believes settlement 
            is possible or the mediator finds the local government has not 
            participated in good faith.

           FISCAL EFFECT  








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          1)Costs to the California Debt and Investment Advisory 
            Commission of approximately $250,000 to develop program 
            guidelines, develop qualifications for mediators and carry out 
            other duties related to mediation.

          2)State exposure to legal challenges and related fiscal 
            pressures, potentially in the hundreds of millions of dollars 
            (see comment #4).

           COMMENTS  

           1)Purpose.   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. 

           2)Bankruptcy background  .  Federal law regarding municipal 
            bankruptcy rose out of the financial crises of the 1930s.  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.  

            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 (Ackerman), Chapter 94, Statutes of 2002 became law.  
            This bill was sponsored by the California Law Revision 
            Commission (CLRC), accomplished the specific authorization as 
            required under federal law.

           3)Chapter 9.   According to the U.S. Courts, "the purpose of 
            Chapter 9 is to provide a financially-distressed municipality 








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            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.

            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.  The local public entity must be 
            insolvent, have the desire to develop and implement 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.

           1)CDIAC  .  CDIAC under the purview of the State Treasurer's 
            office, currently collects data on municipal finance, and 
            provides information and technical assistance to local public 
            agencies and their finance professionals on debt issuance. The 
            Commission is comprised of the State Treasurer, as Chair, and 
            the State Controller, the Governor, two members each from the 
            Senate and Assembly, and two local government officials with 
            expertise in debt issuance.

           2)Does the bill create a major new state obligation  ? State 
            liability is of particular concern given the broad authority 
            granted to CDIAC by the bill to deny access to bankruptcy.  
            The mediator, who is operating under state guidelines, also 
            has significant authority, including blocking a bankruptcy 
            filing if the mediator determines the local entity is not 
            operating in good faith.  A similar concern was expressed in 
            Governor Wilson's 1996 veto of SB 349 (Kopp), a bill with 
            similar gatekeeping provisions in 1996. The veto message 
            stated that state interference "could raise questions of the 
            liability of the state to creditors of the public agency if 
            eligibility for bankruptcy is denied."  

           3)Impact of bankruptcy.   The statewide implications of local 








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            bankruptcies can vary tremendously, depending on the specific 
            circumstances surrounding the filing.  While a bankruptcy by a 
            major municipality due to general economic circumstances may 
            affect investors' perception of credit risk for the state as 
            whole, bankruptcies due to circumstances unique to the 
            municipality - such as a large court judgment, fraud or 
            investment losses, would have less significant statewide 
            impacts.  If investors were to see mediation as a barrier to 
            protecting their interests, that view could negatively affect 
            perceptions of credit risk within the state.

           4)Amendments.   The bill raises significant questions.

             a)   Who will appoint the mediator?

             b)   Who will pay for mediation?

             c)   How long will the mediation process take?

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

             e)   What happens when the mediator denies the entity from 
               seeking bankruptcy and the entity defaults?

             f)   Why is CDIAC, an entity with no experience with 
               mediation, the administrative entity rather than the 
               Attorney General?

           1)Opposition.   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.
             
             The League of California Cities argues that this bill is a 
            state intrusion into local affairs.  They are concerned it 
            creates obstacles rather than assisting municipalities and the 








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            state commission will not be a neutral forum.  They are also 
            concerned about mediation being convening by a stakeholder 
            concerned about the financial condition of the municipality 
            and argue that this intrusion by the state into local affairs 
            may be unconstitutional. 




           Analysis Prepared by  :    Roger Dunstan / APPR. / (916) 319-2081