BILL ANALYSIS                                                                                                                                                                                                    ”



                                                                      AB 506
                                                                      Page  
                                                                1

         CONCURRENCE IN SENATE AMENDMENTS
         AB 506 (Wieckowski)
         As Amended  September 8, 2011
         Majority vote
          
          ----------------------------------------------------------------- 
         |ASSEMBLY:  |48-27|(June 2, 2011)  |SENATE: |28-10|(September 9,  |
         |           |     |                |        |     |2011)          |
          ----------------------------------------------------------------- 
           
          Original Committee Reference:    L. GOV.  

          SUMMARY  :  Authorizes a local government to petition for bankruptcy 
         protection if it either participates in a neutral evaluation 
         process or declares a fiscal emergency.

          The Senate amendments  :  

         1)Allow a local public entity to file a petition and exercise 
           powers pursuant to applicable federal bankruptcy law, if either 
           of the following apply:

            a)   The local public entity has participated in a neutral 
              evaluation process, as specified; or,

            b)   The local public entity declares a fiscal emergency and 
              adopts a resolution by a majority vote, as specified.

         2)Allow a local public entity to file a bankruptcy petition if the 
           local public entity declares a fiscal emergency and adopts a 
           resolution by a majority vote of the governing board at a 
           noticed public hearing that includes findings that the financial 
           state of the entity jeopardizes the health, safety, or 
           well-being of the residents of that jurisdiction or service area 
           absent the protections of Chapter 9.

         3)Require, prior to a declaration of fiscal emergency, that the 
           local public entity place an item on the agenda of a noticed 
           public hearing on the fiscal condition of the entity, in order 
           to take public comment.

         4)Specify that the resolution declaring the fiscal emergency must 
           make findings that the public entity is or will be unable to pay 
           its obligations within the next 60 days.








                                                                      AB 506
                                                                      Page  
                                                                2


         5)Allow a local public entity to initiate the neutral evaluation 
           process if the local public entity is or likely will become 
           unable to meet its financial obligations as and when those 
           obligation are due or become due and owing.

         6)Require the local public entity to initiate the neutral 
           evaluation by providing notice by certified mail of a request 
           for neutral evaluation to all interested parties, as defined and 
           requires interested parties to respond within 10 business days 
           of receipt of notice.

         7)Specify that a local public entity and interested parties 
           agreeing to participate in the neutral evaluation shall, through 
           a mutually agreed upon process, select the neutral evaluator to 
           oversee the neutral evaluation process and facilitate all 
           discussions in an effort to resolve their disputes.

         8)Allow, if the local public entity and interested parties fail to 
           agree on an evaluator within seven days after the interested 
           parties have responded to the notification sent by the local 
           public entity, the public entity to select five qualified 
           evaluators and provide their names, references, and backgrounds 
           to the participating interested parties.

         9)Allow a majority of participating interested parties to strike 
           up to four names on the list, within three business days, and 
           specify the following:

            a)   If a majority of participating interested parties strike 
              four names, the remaining candidate will be the neutral 
              evaluator; or,

            b)   If the majority of participating parties strike fewer than 
              four names, the local public entity may choose which of the 
              remaining candidates is the neutral evaluator.

         10)Require the neutral evaluator to have experience in conflict 
           resolution and alternative dispute resolution and meet at least 
           one of the following qualifications:

            a)   At least 10 years of high-level business or legal practice 
              involving bankruptcy or service as a United States Bankruptcy 
              Judge; or,








                                                                      AB 506
                                                                      Page  
                                                                3


            b)   Professional experience or training in municipal finance 
              and one or more of the following issue areas:

              i)     Municipal organization;

              ii)    Municipal debt restructuring;

              iii)   Municipal finance dispute resolution;

              iv)    Chapter 9 bankruptcy;

              v)     Public finance;

              vi)    Taxation;

              vii)   California Constitutional law;

              viii)  California labor law; or,

              ix)    Federal labor law.

         11)Require the neutral evaluator to be impartial, objective, 
           independent, and free from prejudice and prohibits the neutral 
           evaluator from acting with partiality or prejudice based on any 
           participant's personal characteristics, background, values or 
           beliefs, or performance during the neutral evaluation process.

         12)Provide that if any party objects to the neutral evaluator, the 
           party must notify all other parties, including the neutral 
           evaluator, within 15 days of receipt of the notice from the 
           neutral evaluator and requires the neutral evaluator to withdraw 
           and a new neutral evaluator to be selected.

         13)Allow the neutral evaluator, subject to his or her discretion, 
           to make oral or written recommendations for settlement or plan 
           of readjustment to a party privately or to all parties jointly.

         14)Require the interested parties to maintain the confidentiality 
           of the neutral evaluation process and prohibits the parties form 
           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 of the following occur:








                                                                      AB 506
                                                                      Page  
                                                                4


            a)   All person that conduct or otherwise participate in the 
              neutral evaluation expressly agree in writing, or orally, as 
              specified, to disclosure of the communication, document, or 
              writing; or,

            b)   The information is deemed necessary by a judge presiding 
              over a bankruptcy proceeding to determine eligibility of a 
              municipality to proceed with a bankruptcy proceeding.

         15)Prohibit the neutral evaluation process from lasting more than 
           60 days following the date the evaluator is selected, unless the 
           local public entity or a majority of participating interested 
           parties elect to extend the process for up to 30 additional 
           days.

         16)Prohibit the neutral evaluation process from lasting more than 
           90 days following the date the evaluator is selected, unless the 
           local public entity and a majority of interested parties agree 
           to an extension.

         17)Provide that the local public entity shall pay 50% of the costs 
           of the neutral evaluation, including but not limited to the fees 
           of the evaluator, and provides that the creditors shall pay the 
           balance, unless otherwise agreed to by the parties.

         18)Require the neutral evaluation process to end if any of the 
           following occur:

            a)   The parties execute a settlement agreement;

            b)   The parties reach an agreement or proposed plan of 
              readjustment that requires the approval of a bankruptcy 
              judge;

            c)   The neutral evaluation process has exceeded 60 days and 
              neither the local public entity nor a majority of 
              participating interested parties elect to extend the neutral 
              evaluation process past the initial 60 day time period;

            d)   The local public entity initiated the neutral evaluation 
              process but no responses from interested parties were 
              received within the specified time frame; or,
              








                                                                      AB 506
                                                                      Page  
                                                                5

            e)   The fiscal condition of the local public entity 
              deteriorates to the point that a fiscal emergency is declared 
              and necessitates the need to file a petition for bankruptcy.

         19)Provide that if the neutral evaluation process does not resolve 
           all pending disputes with creditors, the local public entity may 
           file a petition if, in the opinion of the governing board of the 
           local public entity, a bankruptcy filing is necessary.

         20)Allow a county board of supervisors that places on its agenda a 
           noticed public hearing to declare a fiscal emergency to 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.

         21)Define the following terms:

            a)   "Creditor" means either of the following:

              i)     An entity that has a noncontingent 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 five million dollars or comprises 
                more than 5% of the local public entity's debt or 
                obligations, whichever is less; or,

              ii)    An entity that would have a noncontingent claim 
                against the municipality upon the rejection of an executor 
                contract or unexpired lease in a Chapter 9 case and whose 
                claim would represent five million dollars or comprises 
                more than 5% of the local public entity's debt or 
                obligations, whichever is less.

            b)   "Debtor" means a local public entity that may file for 
              bankruptcy under Chapter 9.

            c)   "Good faith" means participation by a party in the neutral 
              evaluation process with the intent to negotiate toward a 
              resolution of the issues that are the subject of the neutral 
              evaluation process, including the timely provisions of 
              complete and accurate information to provide the relevant 
              parties through the neutral evaluation process with 
              sufficient information, in a confidential manner, to 








                                                                      AB 506
                                                                      Page  
                                                                6

              negotiate the readjustment of the municipality's debt.

            d)   "Interested party" means a trustee, a committee of 
              creditors, 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.

            e)   "Local public entity" means any county, city, district, 
              public authority, public agency, or other entity, without 
              limitation, that is a municipality as defined in the United 
              States Bankruptcy Code, or that qualifies as a debtor under 
              any other federal bankruptcy law applicable to local public 
              entities.  States that "local public entity" does not include 
              a school district.

            f)   "Neutral evaluation" is a form of alternative dispute 
              resolution that may be known as mandatory mediation.  
              "Neutral evaluator" may also be known as a mediator.

         22)Make legislative findings and declarations.

          EXISTING LAW  :
          
          1)Allows a local public entity in California to file a petition 
           and exercise powers pursuant to applicable federal bankruptcy 
           law, without any statewide approval or pre-conditions.

         2)Defines a "local public entity" as a county, city, district, 
           public authority, public agency, or other entity, without 
           limitation, that is a municipality as defined in paragraph (40) 
           of Section 101 of Title 11 of the United States Code (U.S.C.), 
           or that qualifies as a debtor under any other federal bankruptcy 
           law applicable to local public entities.

         3)Allows a legislative body authorized to conduct a proceeding 
           pursuant to this chapter (Government Code Section 59125) to file 
           a petition and exercise powers under applicable federal 
           bankruptcy law as provided by Section 53760.

         4)Defines the term "municipality" as a political subdivision or 








                                                                      AB 506
                                                                      Page  
                                                                7

           public agency or instrumentality of a state, in federal law (11 
           U.S.C. Section 101 (40)).

         5)Allows the Superintendent of Public Instruction to assume 
           control of a school district that becomes insolvent to ensure 
           the district's return to fiscal solvency.
              
          AS PASSED BY THE ASSEMBLY  , this bill:  

         1)Prohibited a local public entity, as defined, from filing a 
           petition and exercising powers applicable to federal bankruptcy 
           law unless the local public entity has participated in a neutral 
           evaluation process and received a good faith certification from 
           the neutral evaluator, and requires one of the following to 
           apply:

            a)   The local public entity has reached an out-of-court 
              agreement with all interested parties regarding a plan of 
              adjustment pursuant to provisions of this bill; 

            b)   The local public entity and the interested parties were 
              unable to reach an out-of-court agreement and the neutral 
              evaluator has certified in writing that the parties have 
              participated in the neutral evaluation process in good faith 
              pursuant to provisions of this bill; or,

            c)   The local public entity initiated the neutral evaluation 
              process and interested parties did not participate in the 
              neutral evaluation process as specified in provisions of this 
              bill, and has disclosed documents arising from the neutral 
              evaluation process as specified.

         2)Prohibited the local public entity from filing a petition and 
           exercising powers under 1) above 
         if the neutral evaluator determines a local entity has failed to 
           participate in the neutral evaluation process in good faith.

         3)Specified that a failure to participate in good faith includes, 
           but is not limited to, 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.









                                                                      AB 506
                                                                      Page  
                                                                8

         4)Provided that the California Debt and Investment Advisory 
           Commission (CDIAC), when requested by a local public entity or a 
           neutral evaluator, shall serve as a neutral third party to 
           provide technical assistance in any neutral evaluation process 
           conducted pursuant to provisions of the bill.

         5)Allowed a local public entity to initiate the neutral evaluation 
           process and provides that a neutral evaluator shall oversee the 
           neutral evaluation process and shall facilitate all of the 
           following requirements:

            a)   The local public entity shall make complete disclosure of 
              all documentation necessary to clearly demonstrate whether 
              the local public entity is solvent, including, but not 
              limited to, financial reports, expenditures, assets, and any 
              other relevant documentation; 

            b)   The local public entity and any interested party shall 
              make present information to each other, which shall include, 
              but is not limited to, the status of funds of the local 
              public agency that clearly distinguishes between general 
              funds and special funds; 

            c)   The local public entity and any interested party shall 
              present its proposed plan of readjustment; and,

            d)   The local public entity and any interested party shall 
              negotiate in good faith.

         6)Provided that the neutral evaluation process shall be 
           confidential and is subject to specified provisions contained in 
           the Evidence Code. 

         7)Allowed a local public entity to initiate a neutral evaluation 
           process when the local public entity is or is likely to become 
           unable to meet its financial obligations when those obligations 
           are due or become due and owing.

         8)Provided that the neutral evaluation process will be conducted 
           through an alternative dispute resolution program within the 
           state and in accordance with provisions of the bill.

         9)Provided that the role of the neutral evaluator shall be to 
           assist all interested parties in reaching an equitable 








                                                                      AB 506
                                                                      Page  
                                                                9

           settlement to avert a Chapter 9 filing.

         10)Provided that the neutral evaluator may consult with alternate 
           dispute resolution service providers, CDIAC, 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.

         11)Required a neutral evaluator to meet all of the following 
           qualifications:

            a)   At least 10 years of high level business or legal practice 
              involving bankruptcy;

            b)   Experience and training in conflict resolution and 
              alternative dispute resolution; and,

            c)   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.

         12)Stated that the neutral evaluator shall be impartial, 
           objective, independent, and free from prejudice, and shall not 
           act with partiality or prejudice based on any participant's 
           personal characteristic, background, values or beliefs, or 
           performance during the neutral evaluation process.

         13)Required the neutral evaluator to avoid a conflict of interest 
           or the appearance of a conflict of interest during and after a 
           neutral evaluation and requires the neutral evaluator to 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.

         14)Required, prior to neutral evaluation, that the neutral 
           evaluator shall not 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 neutral evaluation.








                                                                      AB 506
                                                                      Page  
                                                                10


         15)Required the neutral evaluator to conduct the neutral 
           evaluation in a manner that promotes voluntary, uncoerced 
           decisionmaking in which each party makes free and informed 
           choices regarding the process and outcome.

         16)Prohibited the neutral evaluator from imposing a settlement on 
           the parties and requires the neutral evaluator to use his or her 
           best efforts to assist the parties to reach a satisfactory 
           resolution of their disputes.


         17)Allowed, subject to the discretion of the neutral evaluator, 
           the neutral evaluator may make oral or written recommendations 
           for settlement or plan of readjustment to a party privately or 
           to all parties jointly.


         18)Specified that the neutral evaluator has a duty to instruct and 
           inform the local public entity and all parties of the 
           limitations of Chapter 9 relative to other chapters of the 
           bankruptcy codes and requires that this instruction 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.


         19)Required the neutral evaluator to request from the parties 
           documentation and other information that the neutral evaluator 
           believes may be helpful in assisting the parties to address the 
           obligations between them.


         20)Allowed, in the event a complete settlement of all or some 
           issues in dispute is not achieved within the scheduled neutral 
           evaluation session or sessions, the neutral evaluator, at the 
           neutral evaluator's discretion, to continue to communicate with 
           the parties in an ongoing effort to facilitate a complete 
           settlement in order to avoid a Chapter 9 filing.


         21)Required the neutral evaluator to provide counsel and guidance 








                                                                      AB 506
                                                                      Page  
                                                                11

           to all parties and specifies that the neutral evaluator shall 
           not be a legal representative of any party and shall not have a 
           fiduciary duty to any party.


         22)Allowed, in the event of a settlement with all interested 
           parties, the neutral evaluator to assist the parties in 
           negotiating a prepetition, preagreed plan of readjustment in 
           connection with a potential Chapter 9 filing.


         23)Required the neutral evaluator to maintain the confidentiality 
           of all the information obtained by the neutral evaluator in the 
           neutral evaluation process, unless otherwise agreed to by the 
           parties.

         24)Required parties 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, and allows the neutral evaluator to request the 
           submission or exchange of memoranda on issues, including the 
           underlying interests, and the history of the parties' prior 
           negotiations.

         25)Allowed information that a party wishes to keep confidential to 
                                                   be sent to the neutral evaluator in a separate communication 
           clearly marked "CONFIDENTIAL."

         26)Required each interested party to provide at least one 
           representative to attend all neutral evaluation conferences, and 
           states that each party's representative shall have authority to 
           settle and resolve disputes or shall be in a position to present 
           any proposed settlement or plan of readjustment to the governing 
           body or membership for approval and implementation.

         27)Required the local public entity to provide a representative 
           who shall represent the local public entity's interest in the 
           neutral evaluation and who shall be in a position to propose any 
           settlement or plan of readjustment to the governing body of the 
           local public entity.

         28)Allowed an interested party to be represented by legal counsel, 
           but must inform all parties of the representation.








                                                                      AB 506
                                                                      Page  
                                                                12


         29)Required the parties to maintain the confidentiality of the 
           neutral evaluation process and prohibits the parties from 
           disclosing statements made, information disclosed, or documents 
           prepared or produced during the neutral evaluation process as 
           specified in provisions of the Evidence Code related to 
           mediation, unless all parties consent in writing to the 
           disclosure.

         30)Required the neutral evaluation process to end if any of the 
           following occur:

            a)   The parties execute an agreement of settlement;

            b)   The parties reach an agreement or proposed plan of 
              readjustment that requires the approval of a bankruptcy 
              judge;

            c)   The neutral evaluator certifies in writing 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 a 
              resolution of the parties' dispute;

            d)   The neutral evaluator certifies in writing 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; or,

            e)   The neutral evaluator certifies in writing that a neutral 
              evaluation was initiated by the local public entity, but that 
              no interested parties participated.

         31)Added a new section that defines terms related to provisions of 
           the bill.

         32)Stated that the Legislature finds and declares that certain 
           sections contained in the bill impose a limitation on the 
           public's right of access to the meetings of public bodies or the 
           writings of public officials and agencies pursuant to the 
           California Constitution Article I, Section 3 and provides that 
           the reason to demonstrate the interest protected by this 
           limitation and the need for protecting that interest is to 








                                                                      AB 506
                                                                      Page  
                                                                13

           facilitate the process to avoid municipal bankruptcy; therefore, 
           it is necessary to provide for secure documents.

         33)Makes other legislative findings and declarations.

          FISCAL EFFECT  :  None
          
         COMMENTS  :

          MUNICIPAL BANKRUPTCY UNDER FEDERAL LAW
          
         1)The list of eligibility requirements for a "municipal debtor" in 
           federal law under chapter 9 is contained in 11 U.S.C  Section 
           109(c) and specifies the following:

           First, an entity may be a debtor under Chapter 9 only if such 
         entity:

            a)   Is a municipality;

            b)   Is specifically authorized, in its capacity as a 
              municipality or by name, to be a debtor under such chapter by 
              state law, or by a governmental officer or organization 
              empowered by state law to authorize such entity to be a 
              debtor;

            c)   Is insolvent;

            d)   Desires to effect a plan to adjust such debts; and,

            e)   Has obtained the agreement of creditors holding at least a 
              majority in amount of the claims of each class that such 
              entity intends to impair under a plan in case under such 
              chapter:

              i)     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;

              ii)    Is unable to negotiate with creditors because such 
                negotiation is impracticable; or,









                                                                      AB 506
                                                                      Page  
                                                                14

              iii)   Reasonably believes that a creditor may attempt to 
                obtain a transfer that is avoidable under section 547 of 
                this title.

           A municipality must meet all of these conditions for the 
           bankruptcy petition to be accepted by the court.

         1)According to the U.S. Courts, "the purpose of Chapter 9 is to 
           provide a financially-distressed municipality protection from 
           its creditors while it develops and negotiates a plan for 
           adjusting its debts.  Reorganization of the debts of a 
           municipality is typically accomplished either by extending debt 
           maturities, reducing the amount of principal or interest, or 
           refinancing the debt by obtaining a new loan."

           Chapter 9 provides a municipal debtor with two primary benefits: 
            a) a breathing spell with the automatic stay; and, b) the power 
           to readjust debts through a bankruptcy plan process. The process 
           enables municipalities to continue to provide essential public 
           services while allowing them to adjust their debts.

         2)Federal law regarding municipal bankruptcy rose out of the 
           financial crises of the 1930s. 
         Chapter 9 federal law was created in 1934 and after several 
           revisions, was made a permanent part of the Bankruptcy Act in 
           1946, and incorporated into the new Bankruptcy Code in 1978.  In 
           1994, Congress amended the Bankruptcy Code to require that 
           municipalities be "specifically authorized" under state law to 
           file a petition under Chapter 9 - this was an express invitation 
           to the states to revisit the types of local agencies that could 
           seek federal relief.  SB 1323 (Ackerman), Chapter 94, Statutes 
           of 2002, sponsored by the California Law Revision Commission 
           (CLRC), accomplished this by bringing state law in line with the 
           "specific authorization" as required under federal law.

          CALIFORNIA'S RESPONSE TO CHAPTER 9  
          
          3)In response to the federal creation of Chapter 9, the California 
           Legislature enacted bankruptcy authorization for municipalities 
           in 1934.  The general state statutes authorizing bankruptcy 
           filings by local governments were codified in 1949 and those 
           provisions were not amended until SB 1323 (Ackerman) became law 
           in 2002.









                                                                      AB 506
                                                                      Page  
                                                                15

           There were several attempts in the 1990s to streamline 
           California law with federal law requiring specific 
           authorization:

            a)   SB 1274 (Killea) of 1995 and AB 2 X2 (Caldera) of 1995 
              would have granted the broadest authority permissible under 
              federal law by adopting the federal definition of 
              "municipality;"

            b)   AB 29 X 2 (Archie-Hudson) of 1995 would have provided 
              authority for a municipality as defined by federal law to 
              file "with specific statutory approval of the Legislature" 
              and required the plan for adjustment of debts under 
              Bankruptcy Code Section 941 to be "submitted to the 
              appropriate policy committees of the Legislature prior to 
              being submitted to the United States Bankruptcy Code;" and,

            c)   SB 349 (Kopp) of 1995 would have modernized the obsolete 
              references and adopted the "municipality" definition language 
              in federal law.  The bill would have established a Local 
              Agency Bankruptcy Committee to determine whether to permit a 
              municipality to file a Chapter 9 petition, and the Committee 
              would have contained the State Treasurer, State Controller 
              and Director of the Department of Finance.  The bill passed 
              the Legislature, but was vetoed by then-Governor Wilson.

           These bills were introduced mainly in response to the Orange 
           County bankruptcy filing in 1994.  According to a study done by 
           the Public Policy Institute of California on the Orange County 
           bankruptcy, "the financial difficulties leading to the 
           bankruptcy were the direct result of an enormous gamble with 
           public funds taken by a county treasurer who was seriously 
           under-qualified to deal in the kinds of investments he chose."  
           At that time, Orange County and its investment pool - which 
           suffered nearly $1.7 billion in investment losses - filed for 
           bankruptcy protection on December 6 in two separate cases.  The 
           bankruptcy judge ruled that only the County, and not the 
           investment pool, could file for bankruptcy.

           The California Law Revision Commission (CLRC) studied 
           California's municipal bankruptcy statute and released their 
           report in 2001.  CLRC recommended that the Legislature revise 
           the state law to conform to the federal provisions and what 
           resulted was SB 1323 by Senator Ackerman.  However, the CLRC's 








                                                                      AB 506
                                                                      Page  
                                                                16

           report only suggested that California law be updated to provide 
           explicit authority for municipalities, per the federal statute 
           requiring states to have explicit authorization.  The report did 
           not recommend any other substantive policy changes or 
           pre-conditions, or "gate-keeping" in order to access the federal 
           bankruptcy process, and instead, the report noted that "there 
           does not appear to be any general agreement on the best approach 
           to reform, or even as to the need for additional protections or 
           controls."

           The California State Legislature has a long history, dating back 
           to the Orange County bankruptcy filing in 1994, of debating 
           access to federal municipal bankruptcy laws every few years (see 
           Comments under 3) and 4)) above, and ultimately in 2002, made 
           the decision to seek the broadest authority for municipal 
           bankruptcies that exists under federal law.

         4)Currently, California state law authorizes federal bankruptcy 
           filing by a "local public entity" - "a county, city, district, 
           public authority, public agency, or other entity, without 
           limitation, that is a municipality as defined in paragraph (40) 
           of Section 101 of Title 11 of the United States Code, or that 
           qualifies as a debtor under any other federal bankruptcy law 
           applicable to local public entities".  As referenced, federal 
           law defines "municipality" as a political subdivision or public 
           agency or instrumentality of a state (11 U.S.C. Section 101 
           (40)).  However, the California Law Revision Commission notes 
           that the definitions in state and federal law create some 
           ambiguity as to what exactly falls under the definition of 
           "municipality" and can therefore seek financial relief through 
           the Chapter 9 bankruptcy process.
          
         BANKRUPTCY PRACTICES IN OTHER STATES  

         5)The 10th amendment to the United States Constitution says that  
           "the powers not delegated to the United States by the 
           Constitution, nor prohibited by it to the states, are reserved 
           to the states respectively, or to the people," otherwise known 
           as the sovereign rights of the states.  In the context of 
           municipal bankruptcy filing, it is up to each state to decide 
           whether to empower its municipalities to utilize federal 
           bankruptcy laws.

           Other states approach authorization for municipalities in 








                                                                      AB 506
                                                                      Page  
                                                                17

           various ways - some explicitly authorize municipalities and 
           provide unlimited access, or explicitly authorize certain types 
           of municipalities, some states are silent, one state expressly 
           prohibits municipalities from filing, and yet others have their 
           own state pre-conditions, processes or "gate-keeping" 
           requirements.

           Those states comparable to California in terms of population, 
           like Texas and Florida, provide explicit authorization for 
           municipalities in their state statutes.  The state of New York 
           allows a municipality or its emergency financial control board 
           to file any petition within any United States district court or 
           court of bankruptcy and explicitly notes in the statute that 
           "nothing contained in this title shall be construed to limit the 
           authorization granted by this section ›for municipalities to 
           file a petition under federal bankruptcy law]."
          
         RECENT LEGISLATION
          
         6)The Legislature saw two municipal bankruptcy bills in the 
           2009-10 legislative session, 
         AB 155 (Mendoza) and SB 88 (DeSaulnier), Chapter 304, Statutes of 
           2000, following on the heels of the City of Vallejo bankruptcy 
           filing in May of 2008.  Both bills would have prohibited a local 
           public entity from exercising its rights under applicable 
           federal bankruptcy law unless granted approval by CDIAC, and 
           would have specified procedures in which the local public entity 
           could override a decision of denial by CDIAC.  AB 155 (Mendoza) 
           died on the Senate Third Reading File and SB 88, was chaptered 
           but no longer included provisions relating to municipal 
           bankruptcy.

         7)For both AB 155 (Mendoza) and SB 88 (DeSaulnier), the authors 
           argued that a municipal bankruptcy filing has repercussions in 
           terms of credit rating and spillover effects that will raise 
           borrowing costs for other California municipalities and the 
           state.  Arguably, a municipal bankruptcy, depending on the size 
           of the entity, could potentially affect other local agencies and 
           the state as a whole.  
          
         PROPOSED LAW  
          
          8)AB 506 (Wieckowski) places conditions on how and when a local 
           public entity could seek Chapter 9 relief under federal 








                                                                      AB 506
                                                                      Page  
                                                                18

           bankruptcy law.  Current law authorizes local governments to 
           file a petition under the federal bankruptcy process without any 
           prior state approval or pre-conditions to filing.  Instead of 
           full and unfettered access, this bill requires a local 
           government go through a 60-day neutral evaluation process first. 
            The bill's provisions alternatively allow a local government to 
           declare a fiscal emergency and adopt a resolution by a majority 
           vote of the governing board, at a noticed public hearing, that 
           includes findings that the financial state of the local public 
           entity jeopardizes the health, safety or well-being of the 
           residents in that jurisdiction absent the protections of Chapter 
           9.

           The bill allows a local public entity to initiate the neutral 
           evaluation process if the entity is or likely will become unable 
           to meet its financial obligations.  The entity initiates the 
           neutral evaluation by providing notice to all interested parties 
           and requires those parties to respond within 10 business days.  
           Through a mutually agreed upon process, as specified, the local 
           public entity and interested parties would select the neutral 
           evaluator to facilitate the process.  The bill requires that the 
           neutral evaluator have experience in conflict resolution and 
           alternative dispute resolution, as well as other qualifications, 
           and sets up a process for the interested party or local public 
           entity to object to the chosen evaluator.

           The bill's provisions prohibit the neutral evaluation process 
           from lasting more than 60 days from the date the evaluator is 
           selected, unless the local public entity or a majority of 
           participating interested parties elect to extend the process for 
           30 more days.  Costs of the neutral evaluation, including the 
           fees of the evaluator, would be split between the local public 
           entity (50%) and the remaining about would be paid for by the 
           creditors, unless otherwise agreed to by the parties.  

           The bill requires the neutral evaluation process to end in any 
           of the following situations:  1) The parties execute a 
           settlement agreement; 2) The parties reach an agreement or 
           proposed plan of readjustment that requires the approval of a 
           bankruptcy judge; 3) The neutral evaluation has exceeded 60 days 
           and neither the entity nor a majority of participating 
           interested parties elect to extend the neutral evaluation 
           process; 4) The local public entity initiated the neutral 
           evaluation process but no responses from interested parties were 








                                                                      AB 506
                                                                      Page  
                                                                19

           received within the specified time frame; or, 5) The fiscal 
           condition of the local public entity deteriorates to the point 
           that a fiscal emergency is declared and necessitates the need to 
           file a petition for bankruptcy.

         9)The author argues that the state has a vested interest in 
           protecting taxpayers from the effects of an ill-advised 
           bankruptcy and believes that this bill will help local public 
           entities and elected officials make the most responsible 
           decisions for the communities they represent.  Additionally, the 
           author notes that "in the absence of clear standards or 
           oversight, local elected officials considering bankruptcy and 
           the communities impacted by such a bankruptcy have little 
           guidance about whether ›the bankruptcy] is merited or 
           necessary."  The author argues that under current law, there is 
           nothing to prevent a frivolous bankruptcy petition or one that 
           is politically motivated. 

         10)The California Professional Firefighters, writes that the "2008 
           bankruptcy filing by the City of Vallejo has only serviced to 
           further devastate a struggling community, including local 
           businesses that were already feeling the adverse impact of a 
           stagnant economy."  As well, "Upon ›Vallejo's bankruptcy filing] 
           the city's bond interest rates converted to their maximums and 
           the city's filing claimed a deficit of approximately $12 
           million, and Vallejo's litigation costs have escalated to over 
           $9.5 million, thereby further encumbering an already dried-up 
           general fund budget."

         11)Support arguments:  According to the California Labor 
           Federation, in support, "in the absence of clear standards or 
           oversight, local elected officials considering bankruptcy and 
           the communities impacted by such a bankruptcy have little 
           guidance about whether it is merited or necessary."  
           Additionally, "the state has a vested interest in protecting 
           taxpayers from the effects of an ill-advised bankruptcy, and all 
           major creditors, workers, retirees, and investors have a stake 
           in reaching a fair resolution without resorting to bankruptcy, 
           as do local elected officials."

           Opposition arguments:  In order for a bankruptcy petition to be 
           accepted by the court for a Chapter 9 filing, certain conditions 
           must be met by the local public entity.  The local public entity 
           must be insolvent, have the desire to effect a plan to adjust 








                                                                      AB 506
                                                                      Page  
                                                                20

           debts, and must attempt to negotiate in good faith with 
           creditors, as long as such negotiation is not impracticable.  In 
           situations where the local public entity has not met these 
           conditions, the court can reject the bankruptcy petition.  The 
           Legislature may wish to consider whether the bill's neutral 
           evaluation process is duplicative of what is already required 
           for local governments before they can file a bankruptcy petition 
           for Chapter 9 protection.

          
         Analysis Prepared by  :    Debbie Michel / L. GOV. / (916) 319-3958 

                                                                 FN: 0002848