BILL ANALYSIS                                                                                                                                                                                                    ”



                                                                      



           ------------------------------------------------------------ 
          |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 
          ›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], 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 ›Kopp], 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 HernŠndez, Hill, Huber, Hueso, 
            Huffman, Lara, Bonnie Lowenthal, Ma, Mendoza, Mitchell, 
            Monning, Pan, Perea, V. Manuel Pťrez, Portantino, 
            Skinner, Solorio, Swanson, Wieckowski, Williams, Yamada, 
            John A. Pťrez
          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