BILL ANALYSIS                                                                                                                                                                                                    ”



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          ASSEMBLY THIRD READING
          AB 1692 (Wieckowski)
          As Amended  May 2, 2012
          Majority vote 

           LOCAL GOVERNMENT    5-3                                         
           
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          |Ayes:|Alejo, Bradford, Campos,  |     |                          |
          |     |Davis, Hueso              |     |                          |
          |     |                          |     |                          |
          |-----+--------------------------+-----+--------------------------|
          |Nays:|Smyth, Knight, Norby      |     |                          |
          |     |                          |     |                          |
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           SUMMARY  :  Revises recently enacted language relating to the 
          neutral evaluation process for local public entities contained 
          in AB 506 (Wieckowski), Chapter 675, Statutes of 2011.  
          Specifically,  this bill  :  

          1)Revises the definition of "neutral evaluation" to mean a "form 
            of alternative dispute resolution that is imposed upon the 
            parties and is a means whereby a neutral evaluator considers 
            the arguments and information presented by the parties and 
            offers a nonbinding opinion meant to assist in the resolution 
            of the issues in dispute."

          2)Requires interested parties, as part of the neutral 
            evaluation, to indicate their agreement to participate in the 
            neutral evaluation process once they are in receipt of notice 
            of the local public entity's request for neutral evaluation.

          3)Requires, in the mutually agreed upon process used to select 
            the neutral evaluator, to include, but not be limited to, an 
            opportunity for any interested party to submit neutral 
            evaluators for consideration by the interested parties.

          4)Allows, as part of the neutral evaluator's request for 
            documentation and other information from the parties, the 
            neutral evaluator to toll the limitation period for the 
            neutral evaluation process based upon a finding that the local 
            public entity or any interested parties' conduct in presenting 
            required information prevented the parties from effectively 








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            proceeding in the neutral evaluation process.

          5)Allows the neutral evaluator to request and control the 
            process of an independent investigation in an effort to obtain 
            meaningful financial information and explore other areas of 
            recovery.

          6)Adds, to the list of reasons requiring the end of the neutral 
            evaluation process, that the neutral evaluation process has 
            exceeded the agreed upon period, 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 agreed upon period.
           
          EXISTING LAW  :

          1)Allows a local public entity to initiate a neutral evaluation 
            process if the local public entity is or likely will become 
            unable to meet its financial obligations as and when those 
            obligations are due or become due and owing.
          2)Allows a local public entity to file a petition and exercise 
            powers pursuant to applicable federal bankruptcy law (Chapter 
            9) 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 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.

          3)Requires 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.

          4)Requires interested parties to respond within 10 business days 
            of receipt of notice of the local public entity's request for 
            neutral evaluation.

          5)Requires the local public entity and interested parties to 
            mutually agree upon a process and select the neutral evaluator 
            to oversee the neutral evaluation process and facilitate all 
            discussions in an effort to resolve their disputes.

          6)Requires a neutral evaluator to have experience and training 








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            in conflict resolution and alternative dispute resolution and 
            meet specified qualifications.

          7)Requires the neutral evaluator to be impartial, objective, 
            independent, and free from prejudice, and prohibits the 
            neutral evaluator from imposing a settlement on the parties.

          8)Requires the neutral evaluator to inform the local public 
            entity and all parties of the provisions of Chapter 9 relative 
            to other chapters of the federal bankruptcy codes.

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

          10)Requires the local public entity and interested parties 
            participating in the neutral evaluation process to negotiate 
            in good faith.

          11)Prohibits the neutral evaluation 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, and prohibits the neutral evaluation process from 
            lasting more than 90 days unless parties agree to an 
            extension.

          12)Requires the local public entity to pay 50% of the costs of 
            neutral evaluation, as specified.

          13)Requires the neutral evaluation process to end if any of the 
            following occur:

             a)   The parties execute a settlement or 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 
               the parties have not reached an agreement, and no agreement 
               is made to extend the process past the initial 60-day time 
               period;








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

             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 
               Chapter 9.

          14)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.

          15)Defines the term "municipality" as a political subdivision or 
            public agency or instrumentality of a state, pursuant to 
            federal law (11 U.S.C. Section 101 (40)).

          16)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.

           FISCAL EFFECT  :  None

           COMMENTS  :  

           Municipal Debtor  :  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:

          1)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;








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             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,

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

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

           Chapter 9  :  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.

           Federal and State Bankruptcy Law  :  Federal law regarding 
          municipal bankruptcy rose out of the financial crises of the 
          1930s. The provisions of Chapter 9 contained in federal law were 
          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 








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          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.

          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 became law in 2002.

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

          1)SB 1274 (Killea), 1995-1996 and AB 2 X2 (Caldera), 1995-1996 
            would have granted the broadest authority permissible under 
            federal law by adopting the federal definition of 
            "municipality."

          2)AB 29 X2 (Archie-Hudson), 1995-1996 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 Court." 

          3)SB 349 (Kopp), 1995-1996 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 been comprised of the Treasurer, the Controller and 
            the Director of Finance.  The bill passed the Legislature, but 
            was vetoed by 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 








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          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 had 
          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, seeing that the 
          investment pool did not meet the definition of a municipal 
          debtor under federal bankruptcy law.

          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.  

           Neutral Evaluation Process  :  Existing law prohibits a local 
          public entity from filing under federal bankruptcy law unless 
          the local public entity has participated in a neutral evaluation 
          process with interested parties, or the local public entity has 
          declared a fiscal emergency and has adopted a resolution by a 
          majority vote of the governing board at a noticed public 
          hearing.  The requirements for a neutral evaluation process or 
          fiscal emergency declaration were put into place by AB 506 
          (Wieckowski), Chapter 675, Statutes of 2011.  The language in 
          the final version of AB 506 was a compromise brokered between 
          Senator Wolk as Chair of the Senate Governance and Finance 
          Committee, and the Governor's Office, local government 
          organizations, and the author's office.  With the compromise 
          language, local governments removed their opposition.

          Prior to AB 506, local public entities in California had 
          unfettered access to filing under Chapter 9 provisions of 
          federal bankruptcy law, meaning that there was no state 
          involvement or state-mandated requirements placed on the local 
          entity in order to file for Chapter 9.  The provisions of AB 506 
          took effect on January 1, 2012.

          Two local governments, the City of Stockton and the Town of 
          Mammoth Lakes, have recently entered into the newly-created 
          neutral evaluation process enacted by AB 506.  On February 29, 
          2012, the City of Stockton commenced the AB 506 process, with 
          the 60-day mediation period starting on March 27th after 








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          Stockton and interested parties jointly selected a neutral 
          evaluator.

          The Legislature may wish to consider, in light of the fact that 
          parties engaged in the AB 506 process are under confidentiality 
          agreements, whether this bill is premature.  If the goal of the 
          bill is to clarify the process based on what is currently 
          happening in Stockton, it may be best to wait until proceedings 
          are finished in order to draw from that experience prior to 
          making changes to the AB 506 process.

           Purpose of the bill  :  This bill revises and recasts the 
          bankruptcy procedures that apply to the neutral evaluation 
          process.  The bill authorizes the neutral evaluator to toll the 
          limitation period for the neutral evaluation process based upon 
          a finding that the local public entity or any interested 
          parties' conduct in presenting information prevented the parties 
          from effectively proceeding in the neutral evaluation process.  
          In essence, this means that the neutral evaluator would be given 
          the authority to "stop the clock" during the 60-day window.  
          This bill also authorizes the neutral evaluator to request and 
          control the process of an independent investigation.

          According to the author, this bill contains clarifying and 
          supplemental language to be added to the neutral evaluation 
          process.  The author notes that there is uncertainty as to how 
          the initial 60-day window is to be counted, and whether or not 
          the neutral evaluator can require all parties to provide 
          necessary access to information before the clock starts ticking. 
           The bill is author-sponsored.

          The California Professional Firefighters, in support, write that 
          "as evidenced by the experience in the City of Stockton, there 
          are key areas where a clarification under current law is needed. 
           The amendments to AB 1692 seek to give the neutral evaluator 
          the tools necessary to fulfill the obligations of their 
          assignment by giving the neutral evaluator the authority to toll 
          the limitation period for the mediation process if the local 
          public entity or any interested party does not present the 
          information required and thereby prevents the parties from 
          effectively proceeding in the neutral evaluation process and 
          permitting the neutral evaluator, when he or she believes it 
          necessary, to request and oversee an independent investigation 
          in an effort to obtain meaningful financial information and 








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          explore other areas of recovery."

          The League of California Cities, in opposition, write that the 
          "agreement on AB 506 was a notable compromise in the 
          Legislature, because it had been preceded by three years of 
          intense legislative battles.  When ›the League] agreed in good 
          faith to the compromise?the expectation was that the matter has 
          been resolved."

          The League notes that the amendments adopted on April 16, 2012, 
          "unravel key features of last year's agreement on AB 506?.and 
          revert to concepts that were advanced in earlier versions of AB 
          506 which local governments strongly opposed.  Such changes 
          include the removal of the reference to mandatory mediation and 
          "mediator" as terms that describe the neutral party, the effort 
          to empower the neutral evaluator with independent 
          decision-making authority, and changing the circumstances in 
          which the parties agreed to continue the mediation, by removing 
          the required concurrence by the affected public entity."

           Support arguments  :  Supporters argue for the need to make 
          clarifying and conforming changes to the neutral evaluation 
          process which, when practically applied, strengthen this 
          confidential forum through which the neutral evaluator can 
          provide assistance to help California's public agencies avert a 
          destructive bankruptcy declaration.

           Opposition arguments  :  According to the California State 
          Association of Counties, Regional Council of Rural Counties, and 
          Urban Counties Caucus, this bill would create more uncertainty 
          in the neutral evaluation process and would make it impossible 
          for a local agency choosing to use this process to know when the 
          process would end.

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


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