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. _________________________________________________________________ ____ 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 _________________________________________________________________ ____ 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 AB 506 (Wieckowski) Page 1 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 AB 506 (Wieckowski) Page 2 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 AB 506 (Wieckowski) Page 3 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 AB 506 (Wieckowski) Page 4 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.