BILL ANALYSIS                                                                                                                                                                                                    Ó




                   Senate Appropriations Committee Fiscal Summary
                           Senator Christine Kehoe, Chair

                                          AB 506 (Wieckowski)
          
          Hearing Date: 08/25/2011        Amended: 08/15/2011
          Consultant: Mark McKenzie       Policy Vote: G&F 6-3 (not 
          relevant)
          _________________________________________________________________
          ____
          BILL SUMMARY: AB 506 would prohibit a local public entity from 
          filing a petition pursuant to federal bankruptcy law unless the 
          entity has completed a neutral evaluation process with 
          interested parties, as specified.  The bill would alternatively 
          authorize a local entity to file for bankruptcy if the health, 
          safety, or well-being of its residents are in jeopardy and 
          written approval is granted by a Local Agency Bankruptcy 
          Committee, which is created by this bill.
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                            Fiscal Impact (in thousands)

           Major Provisions         2011-12      2012-13       2013-14     Fund
           CDIAC: qualifying evaluators      $29         $57       
          $57Special*
          CDIAC: consultations   absorbable costs                 Special*
          Bankruptcy Committee
               STO                          $57 one-time          General
               STO/SCO/DOF       Minor periodic costs as Committee 
          meetsGeneral
          ____________
          * California Debt and Investment Advisory Committee Fund
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          STAFF COMMENTS:  SUSPENSE FILE.  AS PROPOSED TO BE AMENDED. 

          Under Chapter 9 of the federal Bankruptcy Code, a municipality 
          receiving protection is shielded from creditor claims while it 
          works out a plan of adjustment with its creditors.  The plan of 
          adjustment can involve a reduction to amounts owed, an extension 
          of debt payments, or a refinancing of debt.  Creditors can 
          include holders of municipal debt, vendors, and counterparties 
          in contracts.  Existing state law, SB 1323 (Ackerman), Chapter 
          94 of 2002, allows a local public entity to file a petition and 
          exercise powers pursuant to federal law, without any statewide 








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          approval or preconditions.

          Existing law establishes CDIAC in the State Treasurer's Office 
          (STO) to provide information, education and technical assistance 
          on debt issuance and public fund investments to local public 
          agencies and other public finance professionals.  The commission 
          also serves as the state's clearinghouse for public debt 
          issuance information and to assist state and local agencies with 
          the monitoring, issuance, and management of public debt and 
          investments.  The Bureau of State Audits (BSA) conducts 
          performance, financial, and compliance audits that are either 
          mandated by statute or requested by the Legislature through the 
          Joint Legislative Audit Committee (JLAC).  Information relating 
          to any BSA audit cannot be released to the public until the 
          audit is completed.
          AB 506 would prohibit a local public entity from filing a 
          petition pursuant to federal bankruptcy law unless the entity 
          has participated in a neutral evaluation process and meets other 
          conditions.  Among other things, this bill would:
           Prohibit a local entity from filing for bankruptcy protection 
            unless it participates in a neutral evaluation process,  and  
            receives certification of good faith participation,  and  : 
          1.) Reaches an out of court agreement with all interested 
            parties;  or  
          2.) Is unable to reach an out of court agreement with all 
            interested parties and the neutral evaluator certifies that 
            the parties participated in good faith;  or  
          3.) The local entity initiated, but the interested parties did 
            not participate in the neutral evaluation process.
           Prescribes the qualifications for neutral evaluators and 
            requires the California Debt and Investment Advisory 
            Commission (CDIAC) to maintain a list of qualified neutral 
            evaluators on its website.
           Authorize a local public entity to initiate the neutral 
            evaluation process, as specified, when the entity is unable or 
            unlikely to become able to meet financial obligations.
           Authorize the neutral evaluator to consult with specified 
            expert entities, including CDIAC, in connection with the 
            evaluation on issues that are not confidential.
           Require the participation of at least one representative of 
            each interested party and the local entity at all neutral 
            evaluation conferences.
           Require the State Auditor, upon request of the local public 
            entity, to audit the public entity's finances, and require the 








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            State Controller (SCO) to transfer sufficient funds from the 
            General Fund to the State Auditor to cover the audit costs.
           Authorize a local public entity to file for bankruptcy 
            protection if the entity's financial difficulties jeopardize 
            the health, safety, or well-being of residents, upon written 
            approval of the Local Agency Bankruptcy Committee (LABC), as 
            specified.
           Require the LABC to approve or deny of a local entity's 
            request to file for bankruptcy protection within five calendar 
            days of a request.  If the LABC fails to respond within seven 
            days, the request would be considered approved.
           Require the LABC to provide at least 24 hours advance public 
            notice of a meeting to consider a local entity's request, 
            notwithstanding requirements in existing law that require at 
            least 10 days advance notice, as specified.

          Staff notes that the bill creates several barriers to bankruptcy 
          protection that may be insurmountable.  Specifically, the bill 
          requires a local public entity to enter into a neutral 
          evaluation process with no prescribed deadlines for resolution 
          and requirements to reach a settlement, or come to an impasse 
          with  all  interested parties prior to initiating bankruptcy 
          proceedings.  Bankruptcy protection is designed to shield the 
          local entity from debtors by instituting an automatic stay of 
          financial obligations while the courts determine appropriate 
          debt restructuring measures.  The lack of finite deadlines for 
          the evaluation process in the bill would expose a local entity 
          to compounded financial obligations and increased risk of 
          default.  To complicate things further, the bill does not 
          specify which parties would pay for the services of a neutral 
          evaluator.  Without statutory direction, staff assumes this 
          added expense would fall to the local entity that initiates the 
          neutral evaluation process.

          The California Debt and Investment Advisory Commission Fund 
          (0956-001-0171) receives fees for assisting state or local 
          government units in the planning, preparation, marketing and 
          sale of new debt issues to reduce cost and to assist in 
          protecting the issuer's credit.  The fee is the lesser of one 
          fortieth of one percent of the principal amount of the issue or 
          $5,000.

          CDIAC indicates that it could incur annual costs of 
          approximately $57,000 and 0.5 PY to develop, post, and maintain 








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          a list of qualified neutral evaluators.  It is likely that the 
          commission would need to develop administrative policies and 
          procedures to implement a nomination, selection, and 
          certification process, as well as maintain the list and keep it 
          current.  CDIAC would also be required to consult with a neutral 
          evaluator that requests assistance, but these costs are likely 
          to be absorbable and within the commission's current expertise.  
          CDIAC could also be involved with the STO's participation on the 
          Local Agency Bankruptcy Commission, as needed.  CDIAC would 
          likely incur one-time costs to develop procedures for 
          determining the merits of a local entity's request for 
          permission to file for bankruptcy protection as a result of 
          residents' health, safety, and well-being.  Staff estimates an 
          additional 0.5 PY of staff time at a cost of $57,000.

          The SCO and Department of Finance, as the other members of the 
          LABC, would also incur costs to the extent the body is requested 
          to consider a local entity's request to enter into bankruptcy 
          proceedings.  Since the timeframes to approve or deny a request 
          are so short, and the incidence of local agency bankruptcy is so 
          rare, the LABC is not likely to incur significant costs.  Staff 
          notes that the 24 hour notice requirements provide insufficient 
          notice to the public for meetings to consider a local entity 
          request.  The Brown Act, to which this bill provides an 
          exception, typically requires at least 10 days of public notice.

          AB 506 authorizes a local public entity to request that the 
          State Auditor conduct an audit of the entity's finances for 
          purposes of assisting the entity in the neutral evaluation 
          process.  The bill requires the SCO to transfer sufficient funds 
          from the General Fund to the State Auditor for reimbursement of 
          audit costs.  This process is highly irregular.  Existing law 
          requires the State Auditor to conduct an audit of a state or 
          local governmental entity that is requested by JLAC, to the 
          extent that funding is available and in accordance with 
          priorities established by JLAC.  Existing law also requires the 
          State Auditor to conduct specified financial and performance 
          audits directed in statute.  Any auditing costs associated with 
          the bill would be impossible to predict and would depend upon 
          how many local entities would attempt to file for bankruptcy 
          protection and request an audit.  This provision could also 
          impact the State Auditor's statutory duties to perform 
          discretionary audits at the direction of JLAC if local request 
          audits were deemed to be necessary on an emergency basis.  This 








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          could also create inefficiencies by interrupting current audit 
          work in favor of the audits prescribed under this bill.  While 
          actual costs are unknown and would depend upon the number and 
          complexity of local entities' requests for audits, staff 
          estimates average audit costs would be in the range of $250,000 
          per audit.  

          Staff notes that this bill appears to violate the Legislature's 
          sole constitutional authority to appropriate funds.  
          Specifically, the bill directs the Controller to "transfer" 
          funds from the General Fund to the State Auditor when a local 
          agency requests an audit.  This is an unconstitutional 
          delegation of legislative authority.
          
          PROPOSED AUTHOR AMENDMENTS would delete provisions authorizing a 
          local entity to request that the State Auditor conduct an audit 
          of the entity's finances.