BILL ANALYSIS                                                                                                                                                                                                    




                     SENATE GOVERNANCE & FINANCE COMMITTEE
                            Senator Lois Wolk, Chair
          

          BILL NO:  AB 506                      HEARING:  7/6/11
          AUTHOR:  Wieckowski                   FISCAL:  Yes
          VERSION:  6/29/11                     TAX LEVY:  No
          CONSULTANT:  Weinberger               

                          LOCAL GOVERNMENT BANKRUPTCY
          

          Prohibits a local agency from petitioning for bankruptcy 
          protection unless it starts a neutral evaluation process 
          and meets other conditions.


                           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.  Only a municipality, which federal law 
          defines as a political subdivision, public agency, or 
          instrumentality of a state, can initiate a Chapter 9 
          proceeding.  The municipality must be insolvent and desire 
          to effect a plan to adjust its debts.  To qualify as 
          insolvent, a municipality must demonstrate that it:
                     Has obtained the agreement of creditors holding 
                 at least a majority of the amount of the claims of 
                 each class that such entity intends to impair under 
                 a plan in a case under Chapter 9;  or  ,
                     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;  or  ,
                     Is unable to negotiate with creditors because 
                 negotiation is impracticable;  or  ,
                     Reasonably believes that a creditor may attempt 
                 to obtain a transfer that is avoidable under federal 
                 bankruptcy law.

          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 




          AB 506 - 6/2911 -- Page 2



          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.

          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.  Last year, AB 
          155 (Mendoza, 2010) would have required either the approval 
          of a state commission or the completion of a state audit 
          before a local public entity could file for bankruptcy.  
          That bill died on the Senate Floor.

          The California Debt and Investment Advisory Commission 
          provides information, education, and technical assistance 
          on debt issuance and public fund investments to local 
          public agencies.  The Bureau of State Audits conducts 
          performance, financial, and compliance audits that are 
          either mandated by statute or requested by the Legislature 
          through the Joint Legislative Audit Committee.  Information 
          relating to any audit conducted by the Bureau of State 





          AB 506 - 6/2911 -- Page 3



          Audits cannot be released to the public until the audit is 
          completed.

          In 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.  After more 
          than three years, Vallejo remains under the bankruptcy 
          court's protection, although it may emerge from bankruptcy 
          soon.  

          In response to the length, cost, and consequences of 
          Vallejo's bankruptcy and the potential for additional 
          municipal bankruptcy filings, labor unions and others want 
          local officials to participate in a neutral alternative 
          dispute resolution process before filing for bankruptcy.
           




           
                                   Proposed Law 
          Assembly Bill 506 prohibits a local public entity from 
          filing a petition and exercising powers under federal 
          bankruptcy law unless it participates in a neutral 
          evaluation process, and meets certain conditions.

          I.   Requirements for seeking bankruptcy protection  .  
          Specifically, AB 506 prohibits a local public entity from 
          filing for bankruptcy protection unless it participates in 
          a neutral evaluation process, receives a good faith 
          certification from the neutral evaluator, and:
                 Reaches an out-of-court agreement with all 
               interested parties regarding a plan of adjustment; or  ,
                 Is unable to reach an out-of-court agreement and 
               the neutral evaluator certifies in writing that the 
               parties have participated in the neutral evaluation 
               process in good faith;  or  ,
                 Interested parties did not participate in the 
               neutral evaluation process.

          AB 506 prohibits a local public entity from filing a 
          petition and exercising powers under federal bankruptcy law 
          if the neutral evaluator determines that the local entity 
          failed to participate in the neutral evaluation process in 





          AB 506 - 6/2911 -- Page 4



          good faith. Failure to participate in good faith includes 
          the failure to provide accurate and essential financial 
          information, the failure to attempt to reach settlement 
          with all interested parties to avert bankruptcy, or 
          evidence of manipulation to delay and obstruct a timely 
          agreement. See 3 of the bill.]

          Alternatively, AB 506 allows a local public entity to file 
          a petition and exercise powers under federal bankruptcy 
          laws if:
                 The State Auditor determines that the local public 
               entity is insolvent, as defined in federal law;  and  ,
                 The local public entity has been participating in a 
               neutral evaluation with interested parties for at 
               least 90 days. 
               ݧ12]

          For these purposes, AB 506 states that the term "local 
          public entity" does not include a school district. ݧ3]


          II.   Neutral evaluation process  .  When a local public 
          entity is or likely will become unable to meet its 
          financial obligations when those obligations are due or 
          become due, AB 506 allows a local public entity to initiate 
          a neutral evaluation process.  The neutral evaluation must 
          be conducted through an alternative dispute resolution 
          program within the state and in accordance with state law. 
          ݧ5]

          AB 506 requires each interested party to provide at least 
          one representative to attend all neutral evaluation 
          conferences.  Each party's representative must have 
          authority to settle and resolve disputes or be in a 
          position to present any proposed settlement or plan of 
          readjustment to the governing body or membership for 
          approval and implementation.  The local public entity must 
          provide a representative who must represent the local 
          public entity's interest and who must be in a position to 
          propose any settlement or plan of readjustment to the local 
          public entity's governing body.  AB 506 allows an 
          interested party to be represented by legal counsel, but 
          requires it to inform all parties of the representation. 
          ݧ9]

          AB 506 requires the parties to maintain the confidentiality 





          AB 506 - 6/2911 -- Page 5



          of the neutral evaluation process and prohibits them from 
          disclosing statements made, information disclosed, or 
          documents prepared or produced, during the neutral 
          evaluation process unless all parties consent in writing to 
          the disclosure.  The confidentiality requirement does not 
          apply to documents that were not confidential before the 
          start of the neutral evaluation process. ݧ9]

          AB 506 requires the parties to a neutral evaluation process 
          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 neutral 
          evaluator.  The neutral evaluator may request the 
          submission or exchange of memoranda on issues, including 
          the underlying interests, and the history of the parties' 
          prior negotiations.  Information that a party wishes to 
          keep confidential may be sent to the neutral evaluator in a 
          separate communication clearly marked "CONFIDENTIAL." ݧ8]

          AB 506 requires the neutral evaluation process to end if:
                     The parties execute an agreement of settlement.
                     The parties reach an agreement or proposed plan 
                 of readjustment that requires the approval of a 
                 bankruptcy judge.
                     The neutral evaluator certifies that one or 
                 more of the parties has not participated in good 
                 faith, that no resolution has been reached, and that 
                 further efforts at the neutral evaluation process 
                 would not contribute to a resolution of the parties' 
                 dispute.
                     The neutral evaluator certifies that the 
                 parties have participated in good faith, but the 
                 parties have reached an impasse and further efforts 
                 at the neutral evaluation process would not 
                 contribute to a resolution of disputes.
                     The neutral evaluator certifies that a neutral 
                 evaluation was initiated by the local public entity 
                 but that no interested parties participated.
                 ݧ10]


          III.   Neutral evaluator selection and removal  .  AB 506 
          requires the parties to a neutral evaluation process to 
          select a neutral evaluator through a mutually agreed upon 
          process.  If at any time during the neutral evaluation 





          AB 506 - 6/2911 -- Page 6



          process, the public entity and a majority of interested 
          parties wish to have the neutral evaluator replaced, AB 506 
          allows the public entity or a member of the interested 
          parties to request that the neutral evaluator be removed.  
          If the public entity and the majority of the interested 
          parties agree that the neutral evaluator should be removed, 
          then a new neutral evaluator must be selected in a mutually 
          agreed upon selection process. ݧ7]

          If a neutral evaluator is informed of the existence of any 
          facts that a reasonable individual would consider likely to 
          create a potential or actual conflict of interest, AB 506 
          requires the neutral evaluator to disclose those facts to 
          the local public entity and all interested parties involved 
          in the neutral evaluation.  If any party to the neutral 
          evaluation objects to the neutral evaluator, that party 
          must notify all other parties, including the neutral 
          evaluator, within 15 days of receiving the notice from the 
          neutral evaluator.  The neutral evaluator must withdraw and 
          a new neutral evaluator must be selected. ݧ6]


          IV.   Neutral evaluator requirements  .  AB 506 requires a 
          neutral evaluator to oversee the neutral evaluation 
          process, and facilitate the following requirements:
                 The local public entity must completely disclose of 
               all documentation necessary to clearly demonstrate 
               whether the local public entity is solvent, including 
               financial reports, expenditures, assets, and any other 
               relevant documentation.
                 The local public entity and any interested party 
               must present information to each other, including the 
               status of funds of the local public entity that 
               clearly distinguishes between general funds and 
               special funds.
                 The local public entity and any interested party 
               must present its proposed plan of readjustment.
                 The local public entity and any interested party 
               must negotiate in good faith.
               ݧ4]

          AB 506 requires a neutral evaluator to assist all 
          interested parties in reaching an equitable settlement to 
          avert a Chapter 9 filing.  The neutral evaluator must also 
          assist the parties in identifying the anticipated legal 
          costs associated with a Chapter 9 filing relative to the 





          AB 506 - 6/2911 -- Page 7



          local public entity's budget shortfall.  The neutral 
          evaluator may consult with alternate dispute resolution 
          service providers, the California Debt and Investment 
          Advisory Commission, the California State Mediation and 
          Conciliation Service, the Executive Office for U.S. 
          Trustees, retired bankruptcy judges, or other appropriate 
          entities in establishing and administering the neutral 
          evaluation regarding issues that are not confidential. ݧ5]

          AB 506 requires the California Debt and Investment Advisory 
          Commission, when requested by a local public agency or a 
          neutral evaluator, to serve as a neutral third party to 
          provide technical assistance in any neutral evaluation 
          process conducted pursuant to state law governing municipal 
          bankruptcy. ݧ2]

          AB 506 requires a neutral evaluator to meet all of the 
          following qualifications:
                 At least 10 years of high level business or legal 
               practice involving bankruptcy.
                 Experience and training in conflict resolution and 
               alternative dispute resolution.
                 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 law, and municipal finance dispute 
               resolution, provided through an alternative dispute 
               resolution program within the state.
               ݧ6]

          AB 506 provides that a neutral evaluator:
                     Must be impartial, objective, independent, and 
                 free from prejudice.
                     May not act with partiality or prejudice based 
                 on any participant's personal characteristics, 
                 background, values or beliefs, or performance during 
                 the neutral evaluation process. 
                     Must avoid a conflict of interest or the 
                 appearance of a conflict of interest during the 
                 neutral evaluation process and must 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. 
                     May not, before the neutral evaluation process, 





          AB 506 - 6/2911 -- Page 8



                 establish another relationship with any of the 
                 parties in a manner that would raise questions about 
                 the integrity of the neutral evaluation, except that 
                 the neutral evaluator may conduct further neutral 
                 evaluations regarding other potential local public 
                 entities that may involve some of the same or 
                 similar constituents to a prior mediation.
                     Must conduct the neutral evaluation process in 
                 a manner that promotes voluntary, uncoerced 
                 decisionmaking in which each party makes free and 
                 informed choices regarding the process and outcome.
                     May not impose a settlement on the parties. 
                     Must use his or her best efforts to assist the 
                 parties to reach a satisfactory resolution of their 
                 disputes.  The neutral evaluator may make oral or 
                 written recommendations for settlement or plan of 
                 readjustment to a party privately or to all parties 
                 jointly.
                     Must instruct and inform the local public 
                 entity and all parties of the limitations of Chapter 
                 9 relative to other chapters of the bankruptcy 
                 codes.  This instruction must 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.
                     May request documentation and other information 
                 from the parties that the neutral evaluator believes 
                 may be helpful in assisting the parties to address 
                 the obligations between them.
                     Must provide counsel and guidance to all 
                 parties and is prohibited from being a legal 
                 representative of any party or having a fiduciary 
                 duty to any party.
                     Must maintain the confidentiality of all the 
                 information he or she obtained in the neutral 
                 evaluation process, unless otherwise agreed to by 
                 the parties.
                 ݧ6]

          If a complete settlement of all or some issues in dispute 
          is not achieved within the scheduled neutral evaluation 
          sessions, the neutral evaluator may continue to communicate 
          with the parties in an ongoing effort to facilitate a 





          AB 506 - 6/2911 -- Page 9



          complete settlement in order to avoid a Chapter 9 filing. 
          ݧ6]

          In the event of a settlement with all interested parties, 
          the neutral evaluator may assist the parties in negotiating 
          a prepetition, preagreed plan of readjustment in connection 
          with a potential Chapter 9 filing. ݧ6]


          V.   Confidentiality requirements  .  AB 506 requires the 
          neutral evaluation process to meet extensive 
          confidentiality requirements. ݧ13]  Specifically, the bill 
          requires that:
                 No evidence of anything said or any admission made 
               for the purpose of, in the course of, or pursuant to, 
               a neutral evaluation is admissible or subject to 
               discovery, and disclosure of the evidence cannot be 
               compelled, in any arbitration, administrative 
               adjudication, civil action, or other noncriminal 
               proceeding in which testimony can be compelled to be 
               given.
                 No writing, as defined in state law, that is 
               prepared for the purpose of, in the course of, or 
               pursuant to a neutral evaluation is admissible or 
               subject to discovery, and disclosure of the writing 
               cannot be compelled, in any arbitration, 
               administrative adjudication, civil action, or other 
               noncriminal proceeding in which testimony can be 
               compelled to be given.
                 All communications, negotiations, or settlement 
               discussions by and between participants in the course 
               of a neutral evaluation must remain confidential.
                 Evidence otherwise admissible or subject to 
               discovery outside of a neutral evaluation cannot be 
               inadmissible or protected from disclosure solely by 
               reason of its introduction or use in a neutral 
               evaluation.
                 Neither a neutral evaluator nor anyone else may 
               submit to a court or other adjudicative body, and a 
               court or other adjudicative body may not consider, any 
               report, assessment, evaluation, recommendation, or 
               finding of any kind by the neutral evaluator 
               concerning a neutral evaluation conducted by the 
               neutral evaluator, unless the information is deemed 
               necessary by a judge presiding over a Chapter 9 
               bankruptcy proceeding to determine eligibility of a 





          AB 506 - 6/2911 -- Page 10



               municipality to proceed with a Chapter 9 case or 
               unless all parties to the neutral evaluation expressly 
               agree otherwise.
                 A communication or a writing, as defined in state 
               law, that is made or prepared for the purpose of, or 
               in the course of, or pursuant to a neutral evaluation 
               is not made inadmissible, or protected from 
               disclosure, by provisions of this chapter if either:
                  o         All persons who conduct or otherwise 
                    participate in the neutral evaluation expressly 
                    agree in writing, or orally, to disclosure of the 
                    communication, document, or writing.
                  o         The communication, document, or writing 
                    was prepared by or on behalf of fewer than all 
                    the neutral evaluation participants, those 
                    participants expressly agree to its disclosure, 
                    and the communication, document, or writing does 
                    not disclose anything said or done or any 
                    admission made in the course of the neutral 
                    evaluation.
                 A written settlement agreement prepared in the 
               course of, or pursuant to, a neutral evaluation, is 
               not made inadmissible, or protected from disclosure, 
               if the agreement is signed by the settling parties and 
               any of the following conditions are satisfied:
                  o         The agreement provides that it is 
                    admissible or subject to disclosure, or words to 
                    that effect.
                  o         The agreement provides that it is 
                    enforceable or binding or words to that effect.
                  o         All parties to the agreement expressly 
                    agree to its disclosure.
                  o         The agreement is used to show fraud, 
                    duress, or illegality that is relevant to an 
                    issue in dispute.
                 An oral agreement made in the course of, or 
               pursuant to, a neutral evaluator is not made 
               inadmissible, or protected from disclosure, if any of 
               the following conditions are satisfied:
                  o         The oral agreement is recorded by a court 
                    reporter or reliable means of audio recording.
                                                                                  o         The terms of the oral agreement are 
                    recited on the record in the presence of the 
                    parties and the mediator, and the parties express 
                    on the record that they agree to the terms 
                    recited.





          AB 506 - 6/2911 -- Page 11



                  o         The parties to the oral agreement 
                    expressly state on the record that the agreement 
                    is enforceable or binding, or words to that 
                    effect.
                  o         The recording is reduced to writing and 
                    the writing is signed by the parties within 72 
                    hours after it is recorded.
                  o         The agreement is used to show fraud, 
                    duress, or illegality that is relevant to an 
                    issue in dispute.
                 Anything said, any admission made, or any writing 
               that is inadmissible, protected from disclosure, and 
               confidential before a neutral evaluation ends, must 
               remain inadmissible, protected from disclosure, and 
               confidential to the same extent after the neutral 
               evaluation ends.
                 If a person subpoenas or otherwise seeks to compel 
               a neutral evaluator to testify or produce a writing, 
               as defined in state law, and the court or other 
               adjudicative body determines that the testimony or 
               writing is inadmissible under this section, or 
               protected from disclosure under this section, the 
               court or adjudicative body making the determination 
               must award reasonable attorney's fees and costs to the 
               neutral evaluator against the person seeking the 
               testimony or writing.
                 Any reference to a neutral evaluation during any 
               subsequent trial is an irregularity in the proceedings 
               of the trial for the purposes of state law.  Any 
               reference to a neutral evaluation during any other 
               subsequent noncriminal proceeding is grounds for 
               vacating or modifying the decision in that proceeding 
               and granting a new or further hearing on all or part 
               of the issues, if the reference materially affected 
               the substantial rights of the party requesting relief.


          VI.   State Auditor  .  After a local entity has initiated the 
          neutral evaluation process, to help ensure that a local 
          public entity meets the insolvency requirement in federal 
          law and to assist the local entity and the interested 
          parties in the neutral evaluation process, AB 506 
          authorizes a local public entity to submit information to 
          the State Auditor describing the public entity's current 
          financial position, including analyses of:
                 The local public entity's revenues and estimated 





          AB 506 - 6/2911 -- Page 12



               revenues for the relevant time period.
                 The local public entity's anticipated ongoing 
               expenses.
                 The local public entity's proposed plan for 
               restoring the soundness of the local public entity's 
               financial position if they have one.
                 An itemized list of creditors that may be impaired 
               or may seek damages as a result of the proposed plan.
                 Any additional information the auditor deems 
               necessary to complete the audit in a timely manner.
               ݧ13]

          The State Auditor must audit the analyses and financial 
          position of the local public entity and must work with the 
          local public entity to establish a deadline for the audit 
          work.  AB 506 requires that this audit must take precedent 
          over any pending audit requested by the Joint Legislative 
          Audit Committee.  The auditor's report must become public 
          at the time of filing for bankruptcy or prior to filing, at 
          the public entity's discretion. ݧ13]

          AB 506 requires, if a local public entity requests an 
          audit, that the State Controller must transfer sufficient 
          funds from the General Fund to the State Auditor to 
          reimburse the State Auditor for the audit activities.  The 
          State Controller must use General Fund revenues that are 
          payable to the state from local public entities during the 
          fiscal year in which the audit is performed. AB 506 
          specifies that it does not create an additional fiscal 
          obligation to the local public entity. ݧ13]

          AB 506 contains legislative findings declaring that the 
          duties of the State Auditor that arise under the bill's 
          provisions must be initially funded from the State Audit 
          Fund, pursuant to state law, which meets the requirements 
          of specified Legislative Joint Rules. ݧ15]

          VII.   Definitions  .  AB 506 defines numerous terms used in 
          the bill. ݧ14]


          VIII.   Findings and declarations  .  AB 506 contains 
          extensive legislative findings and declarations supporting 
          the need to establish a neutral evaluation process for 
          municipalities in fiscal distress. ݧ1]  As 
          constitutionally required by Proposition 59 (2004), AB 506 





          AB 506 - 6/2911 -- Page 13



          also includes legislative findings and declarations 
          regarding the necessity of maintaining the confidentiality 
          of neutral evaluation proceedings. ݧ16]


                               State Revenue Impact
           
          No estimate.


                                     Comments  

          1.   Purpose of the bill  .  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.  These state interests justify a state role in 
          prescribing conditions under which local entities may seek 
          Chapter 9 protection.  The neutral evaluation authorized by 
          AB 506 helps local officials find alternative strategies to 
          address short-term fiscal challenges in ways that avoid the 
          broad and lasting spillover effects of municipal 
          bankruptcy.  By providing an opportunity for good faith 
          negotiation over a restructuring plan, the neutral 
          evaluation process expedites the Chapter 9 process for 
          local entities that eventually file for bankruptcy.  AB 
          506's state audit process produces an independent and 
          public assessment of a local entity's financial position, 
          which may either support the local entity's bankruptcy 
          claim or identify alternatives to bankruptcy.  AB 506 
          offers municipalities facing financial distress a faster, 
          cheaper, better alternative to the path recently taken by 
          Vallejo and protects the interests of a broad coalition of 
          stakeholders who are affected by municipal bankruptcies.

          2.   Local control  .  By imposing conditions on a local 
          officials' access to bankruptcy protection, AB 506 
          critically undermines their 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 





          AB 506 - 6/2911 -- Page 14



          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.  The neutral evaluation process and 
          optional audit process proposed by AB 506 could delay a 
          local government's ability to obtain protection under the 
          stay of financial obligations.  The Committee may wish to 
          consider whether AB 506 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 
          (2008).  Since 1991, 24 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.  Despite the Great 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 
          three years since Vallejo entered bankruptcy.  Vallejo's 
          experience may serve as a cautionary example, encouraging 
          fiscally distressed local governments to find alternative 
          approaches to fiscal restructuring.  The Committee may wish 
          to consider whether the recent frequency and purpose of 
          municipal bankruptcy filings justify the changes that AB 
          506 makes to the state's long-standing municipal bankruptcy 
          statute.

          4.  What happens next  ?  It is unclear what might happen if 
          a local entity that is participating in a neutral 
          evaluation process becomes unable to pay its obligations 
          before the process is completed.  As mentioned in Governor 
          Wilson's veto of the 1996 Kopp bill, some opponents of 





          AB 506 - 6/2911 -- Page 15



          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 because it has not 
          completed the neutral evaluation process.  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 conditions imposed by AB 506 to protect limited 
          state interests could result in expanded state obligations 
          to struggling local entities.


                                 Assembly Actions  

          Assembly Local Government Committee: 5-3
          Assembly Appropriations Committee:           12-5
          Assembly Floor:                               48-27


                         Support and Opposition  (6/30/11)

           Support  :  California Professional Firefighters; California 
          Conference Board of The Amalgamated Transit Union; 
          California Conference of Machinists; California Dispute 
          Resolution Council; California Labor Federation; California 
          Official Court Reporters Association; California Nurses 
          Association; California Teamsters Public Affairs Council; 
          Estero Municipal Improvement District; International 
          Longshore and Warehouse Union; Police Officers Research 
          Association of California; Professional and Technical 
          Engineers; IFPTE Local 21; United Food and Commercial 
          Workers Region 8 States Council; Unite Here!; Utility 
          Workers Union of America, Local 132.

           Opposition  :  Association of California Healthcare 
          Districts; California Chamber of Commerce; California 
          Contract Cities Association; California Special Districts 
          Association; California State Association of Counties; 
          Howard Jarvis Taxpayers Association; League of California 
          Cities; Long Beach Area Chamber of Commerce; Los Angeles 





          AB 506 - 6/2911 -- Page 16



          County Business Federation; Marin County Council of Mayors 
          and Councilmembers; Regional Council of Rural Counties; 
          Urban Counties Caucus.
               Cities of: American Canyon; Antioch; Apple Valley; 
          Atherton; Azusa; Bellflower; Beverly Hills; Burlingame; 
          Campbell; Ceres; Clayton; Cloverdale; Culver City; 
          Danville; Diamond Bar; Encinitas; Fontana; Foster City; 
          Fountain Valley; Fresno; Goleta; Gustine; Half Moon Bay; 
          Healdsburg; Hermosa Beach; Highland; Huron; Lakewood; 
          Lathrop; Livingston; Lodi; Long Beach; Los Altos Hills; 
          Madera; Merced; Monterey Park; Moreno Valley; Mountain 
          View; Murrieta; Newman; Norwalk; Pasadena; Pinole; 
          Placentia; Rancho Cucamonga; Red Bluff; Redding; Redwood 
          City; Santa Clara; Santa Rosa; Signal Hill; South San 
          Francisco; Stockton; Sunnyvale; Tracy; Tulare; Upland; 
          Vista; Wasco; West Hollywood; Whittier; Yucaipa.
               Counties of: Monterey; Orange; Sacramento; Santa 
          Clara.