BILL ANALYSIS Ó ------------------------------------------------------------ |SENATE RULES COMMITTEE | AB 506| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ THIRD READING Bill No: AB 506 Author: Wieckowski (D) Amended: 9/8/11 in Senate Vote: 21 SENATE GOVERNANCE & FINANCE COMMITTEE : 6-3, 7/6/11 AYES: Wolk, DeSaulnier, Hancock, Hernandez, Kehoe, Liu NOES: Huff, Fuller, La Malfa SENATE APPROPRIATIONS COMMITTEE : 6-3, 8/25/11 AYES: Kehoe, Alquist, Lieu, Pavley, Price, Steinberg NOES: Walters, Emmerson, Runner ASSEMBLY FLOOR : 48-27, 6/2/11 - See last page for vote SUBJECT : Local government: bankruptcy: neutral evaluation SOURCE : Author DIGEST : This bill authorizes a local public entity to file a petition and exercise powers pursuant to applicable federal bankruptcy law if it either participates in a neutral evaluation process, or declares a fiscal emergency. ANALYSIS : 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, CONTINUED AB 506 Page 2 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, Statutes of 2002, allows a local public entity to file a petition and exercise powers pursuant to federal law, without any statewide approval or preconditions. Existing law establishes California Debt and Investment Advisory Commission (CDIAC) in the State Treasurer's Office to provide information, education and technical assistance on debt issuance and public fund investments to local public agencies and other public finance professionals. The CDIAC 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. Specifies of this bill: This bill authorizes a local public entity to file a petition and exercise powers pursuant to applicable federal bankruptcy law if it either: Participates in a neutral evaluation process, or Declares a fiscal emergency. 1. Neutral evaluation process . This bill authorizes a local public entity to initiate a neutral evaluation process if it is, or likely will become, unable to meet its financial obligations when those obligations are due or become due. This bill defines "local public entity" as any county, city, district, public authority, public agency, or other entity, without limitation, that is a municipality as defined in federal bankruptcy law, or that qualifies as a debtor under any other federal bankruptcy law CONTINUED AB 506 Page 3 applicable to local public entities. This bill specifies that a "local public entity" does not include a school district. This bill requires a local public entity to initiate the neutral evaluation by providing notice by certified mail of a request for neutral evaluation to all interested parties. This bill requires interested parties to respond within 10 business days of receipt of notice of the local public entity's request for neutral evaluation. This bill defines "interested party" as a trustee, a committee of creditors, an affected creditor, an indenture trustee, a pension fund, a bondholder, a union that, under its collective bargaining agreements, has standing to initiate contract or debt restructuring negotiations with the municipality, or a representative selected by an association of retired employees of the public entity who receive income from the public entity convening the neutral evaluation. This bill defines "creditor" as either of the following: An entity that has a claim against a municipality that arose at the time of or before the commencement of the neutral evaluation process and whose claim represents at least $5 million or comprises more than five percent of the local public entity's debt or obligations, whichever is less. An entity that would have a non-contingent claim against the municipality arising out of rejection of an executory contract or unexpired lease in a Chapter 9 case and whose claim would represent at least $5 million or comprises more than five percent of the local public entity's debt or obligations, whichever is less. This bill allows a local public entity to invite holders of contingent claims to participate as interested parties in the neutral evaluation if the local public entity determines that the contingency is likely to occur and the claim may represent $5 million or comprise more than five percent of the local public entity's debt CONTINUED AB 506 Page 4 or obligations, whichever is less. This bill requires the local public entity and all interested parties participating in the neutral evaluation process to negotiate in good faith. This bill requires the local public entity and interested parties to provide a representative of each party to attend all neutral evaluation sessions. Each party's representative must have the authority to settle and resolve disputes or be in a position to present any proposed settlement or plan of readjustment to the parties participating in the neutral evaluation. This bill requires the parties to maintain the confidentiality of the neutral evaluation process. This bill prohibits parties from disclosing statements made, information disclosed, or documents prepared or produced, during the neutral evaluation process, at the conclusion of the neutral evaluation process, or during any bankruptcy proceeding unless either: All persons that conduct or otherwise participate in the neutral evaluation expressly agree in writing, or orally, to disclosure of the communication, document, or writing. The information is deemed necessary by a judge presiding over a bankruptcy proceeding pursuant federal bankruptcy law to determine eligibility of a municipality to proceed with a bankruptcy proceeding. This bill prohibits a neutral evaluation from lasting for more than 60 days following the date the evaluator is selected, elect to extend the process for up to 30 additional days. The neutral evaluation process shall not last for more than 90 days following the date the evaluator is selected unless the local public entity and a majority of the interested parties agree to an extension. This bill requires an end to the neutral evaluation process must end if any of the following occur: CONTINUED AB 506 Page 5 The parties execute a settlement agreement. The parties reach an agreement or proposed plan of readjustment that requires the approval of a bankruptcy judge. The neutral evaluation process has exceeded 60 days following the date the neutral evaluator was selected, the parties have not reached an agreement, and neither the local public entity or a majority of the interested parties elect to extend the neutral evaluation process past the initial 60 day time period. The local public entity initiated the neutral evaluation process and received no responses from interested parties within the specified time. The fiscal condition of the local public entity deteriorates to the point that the municipality declares a fiscal emergency. This bill specifies that if the 60 day time period for neutral evaluation has expired, including any extension agreed to by the local public entity, and the neutral evaluation is complete with differences resolved, the neutral evaluation shall be concluded. If the neutral evaluation process does not resolve all pending disputes with creditors, the local public entity may file a petition and exercise powers pursuant to applicable federal bankruptcy law if, in the opinion of the governing board of the local public entity, a bankruptcy filing is necessary. This bill requires the local public entity to pay 50 percent of the costs of neutral evaluation, including but not limited to the fees of the evaluator, and the creditors must pay the balance, unless otherwise agreed to by the parties. 2. Neutral evaluator selection and removal . This bill requires the local public entity and the CONTINUED AB 506 Page 6 interested parties who agree to participate in the neutral evaluation through a mutually agreed upon process to select the neutral evaluator to oversee the neutral evaluation process. The interested parties must facilitate all discussions in an effort to resolve their disputes. The board of supervisors of a county that intends to take action pursuant to this section and places a notice on an agenda regarding a proposed resolution to declare a fiscal emergency may require local agencies with funds invested in the county treasury to provide a five-day notice of withdrawal before the county is required to comply with a request for withdrawal of funds by that local agency. If at any time during the neutral evaluation process the local public entity and a majority of the representatives of the interested parties participating in the neutral evaluation wish to remove the neutral evaluator, this bill allows the local public entity or any interested party to request that the neutral evaluator be removed. If the local public entity and the majority of the interested parties agree that the neutral evaluator should be removed, the parties must select a new neutral evaluator. If a neutral evaluator is informed of any facts that a reasonable individual would consider likely to create a potential or actual conflict of interest, this bill requires the neutral evaluator to disclose these facts in writing 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. 3. Neutral evaluator requirements . This bill requires that a neutral evaluator must have experience and training in conflict resolution and alternative dispute resolution and must meet at least one of the following qualifications: CONTINUED AB 506 Page 7 At least 10 years of high-level business or legal practice involving bankruptcy or service as a United States Bankruptcy Judge. Professional experience or training in municipal finance and one or more of the following issue areas: o Municipal organization. o Municipal debt restructuring. o Municipal finance dispute resolution. o Chapter 9 bankruptcy. o Public finance. o Taxation. o California constitutional law. o California labor law. o Federal labor law. This bill provides that a neutral evaluator: Must be impartial, objective, independent, and free from prejudice. Cannot 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. Cannot, before the neutral evaluation process, 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. CONTINUED AB 506 Page 8 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. Cannot impose a settlement on the parties. Must use his/her best efforts to assist the parties to reach a satisfactory resolution of their disputes. May make oral or written recommendations for settlement or plan of readjustment to a party privately or to all parties jointly. Must inform the local public entity and all parties of the provisions 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. This documentation may include the status of funds of the local public entity that clearly distinguishes between general funds and special funds, and the proposed plan of readjustment prepared by the local public entity. Must provide counsel and guidance to all parties, shall not be a legal representative of any party, and shall not have a fiduciary duty to any party. May, in the event of a settlement with all interested parties, assist the parties in negotiating a prepetitioned, preagreed plan of readjustment in connection with a potential Chapter 9 filing. 4. Fiscal emergency declaration . CONTINUED AB 506 Page 9 As an alternative to the neutral evaluation process, this bill authorizes a local public entity to file a petition and exercise powers pursuant to federal bankruptcy law if the local public entity declares a fiscal emergency and adopts a resolution by a majority vote of the governing board. The resolution must: Be adopted at a noticed public hearing. Include findings that the financial state of the local public entity jeopardizes the health, safety, or well-being of the residents of the local public entity's jurisdiction or service area, absent the protections of Chapter 9. Make findings that the public entity is or will be unable to pay its obligations within the next 60 days. Before declaring a fiscal emergency and adopting a resolution, the local public entity must place an item on the agenda of a noticed public hearing on the fiscal condition of the entity to take public comment. 5. Definitions . This bill defines numerous terms used in this bill. 6. Findings and declarations . This bill contains extensive legislative findings and declarations supporting the need to establish a neutral evaluation process for municipalities in fiscal distress. As constitutionally required by Proposition 59 (2004), this bill also includes legislative findings and declarations regarding the necessity of maintaining the confidentiality of neutral evaluation proceedings. This bill specifies that it does not impose any liability or responsibility, in law or equity, upon the state, any department, agency, or other entity of the CONTINUED AB 506 Page 10 state, or any officer or employee of the state, for any action taken by any local public entity pursuant to this article, for any violation of the provisions of this article by any local public entity, or for any failure to comply with the provisions of this article by any local public entity. No cause of action against the state, or any department, agency, entity of the state, or any officer or employee of the state acting in their official capacity may be maintained for any activity authorized by this article, or for the act of a local public entity filing under Chapter 9 of Title 11 of the United States Code, including any proceeding following a local public entity's filing. Background 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 affect a plan to adjust its debts. 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 broadest possible access to federal bankruptcy available. The state statutes broadly authorizing bankruptcy filings by local governments were first enacted in 1939 (SB 338 ÝPhillips, 1939]) and codified in 1949 (SB 768 ÝCunningham, 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 ÝAckerman], Chapter 94, Statues of 2002). Because one municipality's bankruptcy may have a negative CONTINUED AB 506 Page 11 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 ÝKopp], 1995-96 Session). 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), 2009-10 Session, 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 CDIAC provides information, education, and technical assistance on debt issuance and public fund investments to local public agencies. The BSA conducts performance, financial, and compliance audits that are either mandated by statute or requested by the Legislature through the JLAC. Information relating to any audit conducted by the BSA 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 CONTINUED AB 506 Page 12 local officials to participate in a neutral alternative dispute resolution process before filing for bankruptcy. FISCAL EFFECT : Appropriation: No Fiscal Com.: No Local: No SUPPORT : (Verified 9/7/11 - per Senate Governance and Finance Committee analysis of 9/2/11) California Conference Board of The Amalgamated Transit Union California Conference of Machinists California Dispute Resolution Council California Labor Federation California Nurses Association California Official Court Reporters Association California Professional Firefighters California Teamsters Public Affairs Council Estero Municipal Improvement District International Federation of Professional and Technical Engineers, Local 21 International Longshore and Warehouse Union Police Officers Research Association of California Professional and Technical Engineers Unite Here! United Food and Commercial Workers Region 8 States Council Utility Workers Union of America, Local 132 ASSEMBLY FLOOR : 48-27, 6/2/11 AYES: Alejo, Allen, Ammiano, Atkins, Beall, Block, Blumenfield, Bonilla, Bradford, Brownley, Butler, Charles Calderon, Campos, Carter, Cedillo, Chesbro, Davis, Dickinson, Eng, Feuer, Fong, Fuentes, Furutani, Galgiani, Gatto, Hayashi, Roger Hernández, Hill, Huber, Hueso, Huffman, Lara, Bonnie Lowenthal, Ma, Mendoza, Mitchell, Monning, Pan, Perea, V. Manuel Pérez, Portantino, Skinner, Solorio, Swanson, Wieckowski, Williams, Yamada, John A. Pérez NOES: Achadjian, Bill Berryhill, Conway, Cook, Donnelly, Fletcher, Beth Gaines, Garrick, Grove, Hagman, Halderman, Harkey, Jeffries, Jones, Knight, Logue, Mansoor, Miller, Morrell, Nestande, Nielsen, Norby, Olsen, Silva, Smyth, Valadao, Wagner CONTINUED AB 506 Page 13 NO VOTE RECORDED: Buchanan, Gordon, Gorell, Hall, Torres AGB:kc 9/9/11 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END **** CONTINUED