BILL ANALYSIS Ó
AB 506
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CONCURRENCE IN SENATE AMENDMENTS
AB 506 (Wieckowski)
As Amended September 8, 2011
Majority vote
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|ASSEMBLY: |48-27|(June 2, 2011) |SENATE: |28-10|(September 9, |
| | | | | |2011) |
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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.
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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,
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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:
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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,
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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
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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
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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.
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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
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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.
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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
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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.
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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
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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,
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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.
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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
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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
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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 Ýfor 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
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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
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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 Ýthe 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 ÝVallejo'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
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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