BILL ANALYSIS Ó
AB 1692
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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 | | |
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|-----+--------------------------+-----+--------------------------|
|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 Ýthe 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
FN: 0003580
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