BILL ANALYSIS
SENATE LOCAL GOVERNMENT COMMITTEE
Senator Patricia Wiggins, Chair
BILL NO: AB 155 HEARING: 7/8/09
AUTHOR: Mendoza FISCAL: Yes
VERSION: 7/1/09 CONSULTANT:
Weinberger
LOCAL GOVERNMENT BANKRUPTCY
Background and Existing Law
Federal bankruptcy law for public agencies (Chapter 9)
gives government debtors time to come up with repayment
plans, providing them a breathing spell from creditors'
collection efforts. Unlike private bankruptcy law (Chapter
11), however, municipal bankruptcy law must respect the
states' sovereign powers. Consequently, the states can
control their local agencies' access to federal bankruptcy
protection.
Like 11 other states, California grants its local public
agencies the broadest possible access to federal bankruptcy
available. The state statutes broadly authorizing
bankruptcy filings by local governments were first enacted
in 1939 (SB 338, Phillips, 1939) and codified in 1949 (SB
768, Cunningham, 1949). In 2001, after studying the state
statutes authorizing bankruptcy filings by local public
entities, the California Law Revision Commission
recommended revisions to conform the statutes to changes in
federal bankruptcy law and to reaffirm the intent of the
statute to provide the broadest possible access to
municipal debt relief under federal law. Legislators
approved the Commission's recommendations the following
year (SB 1323, Ackerman, 2002).
Because one municipality's bankruptcy may have a negative
effect on other local governments' borrowing power, some
states limit or prohibit their local governments to access
federal protections. Local governments in 22 states do not
have access to municipal bankruptcy, while 16 other states
impose some conditions on municipal bankruptcy filings.
The conditions imposed by other states range from a
requirement that a local entity's legislative body must
pass an ordinance or resolution before filing for
bankruptcy to a requirement that a state commission grant
approval before a local government may file for bankruptcy
AB 155 -- 7/1/09 -- Page 2
After the 1994 Orange County bankruptcy, the Legislature
tried to establish state oversight for municipal bankruptcy
filings. The bill passed, but Governor Pete Wilson vetoed
it (SB 349, Kopp, 1996). The Law Revision Commission's
2001 study also considered proposals to require prefiling
approval by the Governor or a governmental committee, but
did not recommend any substantive reforms.
The California Debt and Investment Advisory Commission
(CDIAC) provides information, education, and technical
assistance on debt issuance and public fund investments to
local public agencies. The Commission has nine members,
including the State Treasurer, the Governor or the Director
of Finance, the State Controller, two local government
finance officials, two Assembly Members, and two Senators.
The State Treasurer serves as the Chairperson and appoints
the two local government officials. The Assembly Speaker
appoints the Assembly's representatives and the Senate
Rules Committee appoints the Senate's representatives.
In response to concerns about the City of Vallejo's recent
decision to file bankruptcy and the potential for
additional municipal bankruptcy filings, labor unions and
others want to require state oversight of local
governments' bankruptcy petitions.
Proposed Law
Assembly Bill 155 authorizes a local public entity, with
the approval of the California Debt and Investment Advisory
Commission (CDIAC), and under CDIAC's terms and conditions,
to file a petition and exercise powers pursuant to
applicable federal bankruptcy law.
I. Submitting a request . AB 155 requires a local public
entity, upon making a request to CDIAC for approval to
exercise its rights under federal bankruptcy law, to submit
all of the following to the Commission:
A resolution or ordinance, adopted by the governing
body at a public hearing held pursuant to the Ralph M.
Brown Act that does both of the following:
o Requests authority pursuant to statute to
petition the federal bankruptcy court for financial
relief.
AB 155 -- 7/1/09 -- Page 3
o Acknowledges that the state's fiscal and
financial responsibilities are not changed by the
application or the Commission's decision.
A thorough analysis of the entity's request to
petition under federal bankruptcy law. The entity
must:
o Demonstrate that it is or will be unable to pay
its undisputed debts.
o Demonstrate that it has exhausted all options
to avoid seeking relief under Chapter 9.
o Detail a specific plan for restoring the
soundness of the entity's financial plans.
An itemization of creditors that may be impaired or
may seek damages as a result of the proposed plan.
Evidence of irreparable harm that may result during
the 30-day evaluation period and the 15 days allotted
for a hearing authorized by the bill.
AB 155 allows a county that requests approval from CDIAC to
require local agencies with funds invested in the county
treasury to provide a five-day notice of withdrawal before
the county must comply with a request for withdrawal of
funds.
II. Initial review . Within five days of receiving the
information that must accompany a local public entity's
request, CDIAC must evaluate the information and notify the
entity of one of the following results:
Approval of the request, or
The Commission will proceed with a further
evaluation based on a finding that the local public
entity did not provide sufficient evidence of
irreparable harm.
If CDIAC does not respond within five days, the request is
deemed approved.
III. Evaluation . AB 155 requires the Commission to
publish its evaluation within 30 business days of receiving
the information that must accompany a local public entity's
request. After notifying the local public entity of its
intent to further evaluate a request, the Commission's
staff must specifically evaluate the extent to which the
local public entity has done the following:
Demonstrated that it has exhausted other remedies,
Demonstrated that it has taken sufficient steps to
reduce the negative consequences of its proposed
AB 155 -- 7/1/09 -- Page 4
bankruptcy relief,
Anticipated the transfer of service responsibility
to other governments or parties and to what extent the
entity has documented the consequences for the
transfer of municipal and other government services,
Documented the likely effect a successful petition
will have on state and local finances, including the
impact on credit access and debt service, and
Proposed a remedy that is appropriate and
proportionate to the entity's fiscal problems.
IV. Hearing . AB 155 requires CDIAC to hold a public
hearing to consider a local public entity's request for
approval to file a petition and exercise powers pursuant to
federal bankruptcy law. The hearing must:
Occur at least 10 days, but not more than 15 days,
after the publication of CDIAC's staff evaluation of
the request,
Comply with the provisions of the Bagely-Keene Open
Meeting Act and additional public notice provisions,
Provide sufficient time for public testimony, and
Be held in convenient proximity of the local public
entity.
V. Approval or denial . AB 155 requires CDIAC, in a
recorded vote on the date of the public hearing, to approve
or deny the local entity's request.
AB 155 authorizes the Commission, if it approves a request,
to order the entity, as a condition of approving the
request, to limit the nature and extent of relief provided
through Chapter 9 bankruptcy proceedings, including:
Limiting changes to a contract,
Prohibiting the abrogation of contracts, and
Limiting the amount of relief to ensure the
protection of debt service payments.
If CDIAC disapproves a request, AB 155 requires the
Commission to adopt specific findings that address the
deficiencies of the application. If CDIAC denies its
request, a governing board of a local public entity may
reapply for approval by adopting another resolution and
submitting documentation to address the deficiencies
identified by the Commission.
VI. Additional provisions . The bill requires CDIAC's
AB 155 -- 7/1/09 -- Page 5
executive director, after the Commission receives a local
public entity's request for review and approval of a
bankruptcy filing, to record the costs incurred by CDIAC in
conducting an evaluation of and holding a hearing on the
request. The director must report those costs to the
Commission at its next regularly scheduled hearing. Upon
denial of the request, the director or Commission may
assess the requesting entity a fee to cover some or all of
CDIAC's costs. Fee revenue must be deposited in a
specified fund.
AB 155 allows CDIAC to propose regulations to govern the
request and review process enacted by the bill.
AB 155 states that, in enacting the bill, the state assumes
no new or additional fiscal responsibilities for local
entities that may apply to CDIAC for review.
The bill requires the State Treasurer to temporarily
replace a local government finance officer serving on CDIAC
who is employed by an entity requesting CDIAC's approval to
petition for bankruptcy with another local government
representative who meets the qualifications for membership
on the Commission.
The bill contains extensive legislative findings and
declarations regarding the interdependence of state and
local finances and the state's interest in various impacts
of municipal bankruptcy.
Comments
1. Compelling state interest . Municipal bankruptcy's
broad and significant impact on residents within the
bankrupt entity's jurisdiction, on other local government
entities, and on the state necessitates state oversight of
local public entities' bankruptcy filings. Because local
and state finances in California are inextricably linked,
the state has a direct interest in the fiscal health of its
local governments. A municipal bankruptcy can have
statewide repercussions, including higher borrowing costs
for other local entities and the state. The state also has
a compelling interest in ensuring the validity and
enforceability of contracts negotiated through the
collective bargaining process, which provides the
foundation for positive and stable labor relations. The
AB 155 -- 7/1/09 -- Page 6
review process authorized by AB 155 could help local
officials find alternative strategies to address short-term
fiscal challenges in ways that avoid the broad and lasting
spillover effects of municipal bankruptcy. AB 155 follows
a model used successfully in other states to protect the
interests of a broad coalition of stakeholders who are
impacted by municipal bankruptcies.
2. Local control . By authorizing CDIAC to either deny, or
impose conditions on, a local public entity's bankruptcy
filing, AB 155 critically undermines local officials'
discretion in responding to fiscal crises. Local elected
officials are directly accountable to residents within
communities affected by a municipal bankruptcy. As a
result, a decision to enter bankruptcy is a last resort
that those officials do not take lightly. High legal
costs, damaged credit ratings, and a lasting stigma that
can deter investment and growth in a community all weigh
heavily against a decision to authorize a bankruptcy
filing. The principal benefit of federal bankruptcy is the
automatic stay of financial obligations which allows a
local entity some breathing space to formulate a debt
readjustment plan that is consistent with the fiscal
interests and priorities of the local community. Allowing
CDIAC to deny, or limit, a local entity's bankruptcy
restructuring could place the burden of fiscal recovery
solely on cuts to public services, which might not reflect
local residents' priorities. The Committee may wish to
consider whether AB 155 constitutes an unjustifiable
intrusion into local affairs.
3. What's changed ? Local officials have used municipal
bankruptcy protection sparingly during the 70 years that it
has been available to local public entities in California.
Only three general purpose governments have filed for
municipal bankruptcy protection: Orange County (1994), the
City of Desert Hot Springs (2001), and the City of Vallejo
(2008). During the past decade, 18 local public entities
have filed for bankruptcy; more than half were small health
care districts. This recent average of fewer than two
municipal bankruptcy filings per year from among the
thousands of local public entities in California may
reflect the substantial, inherent disadvantages of
resorting to bankruptcy. Proponents of AB 155 argue that
this history of bankruptcy filings and the inherent
disincentives are not reliable indicators of future
AB 155 -- 7/1/09 -- Page 7
behavior. The immense fiscal challenges now confronting
many local governments and the precedent set by Vallejo's
bankruptcy may open the door to more widespread, and less
responsible, use of bankruptcy protection in the near
future. The Committee may wish to consider whether these
potential changes to the frequency and purpose of municipal
bankruptcy filings justify the changes that AB 155 makes to
the state's long-standing municipal bankruptcy statute.
4. What happens next ? It is unclear what might happen
after CDIAC denies a local public entity's request to file
for bankruptcy, or imposes conditions on a bankruptcy
filing that make restructuring impossible. As mentioned in
Governor Wilson's veto of the 1996 Kopp bill, some
opponents of state oversight of municipal bankruptcy argue
that a denial of eligibility for bankruptcy "could raise
questions of liability of the state to creditors of the
public agency." However, there is no evidence that this
theoretical concern has, in fact, become a problem in
states that block access to municipal bankruptcy.
Regardless of whether the state may incur legal liability,
it may face heightened political pressure to provide fiscal
assistance to a local entity that can't seek bankruptcy
protection. Legislators may feel obligated to intervene to
ensure that an insolvent local entity doesn't stop
providing vital public services. The Committee may wish to
consider whether the state oversight authorized by AB 155
to protect limited state interests could result in expanded
state obligations to struggling local entities.
Assembly Actions
Assembly Local Government Committee: 4-3
Assembly Appropriations Committee:12-5
Assembly Floor: 47-25
Support and Opposition (7/2/09)
Support : California Professional Firefighters, CDF
Firefighters Local 2881, California Labor Federation,
California State Treasurer Bill Lockyer, AARP, American
Federation of State, County and Municipal Employees,
AFL-CIO, Association for Los Angeles Deputy Sheriffs,
California Alliance for Retired Americans, California
AB 155 -- 7/1/09 -- Page 8
Association of Highway Patrolmen, California Conference
Board of the Amalgamated Transit Union, AFL-CIO, California
Nurses Association, California Reinvestment Coalition,
California School Employees Association, California State
Employees Association, California State Firefighters'
Association, Inc., California Teamsters Public Affairs
Council, Consumer Federation of California, Engineers and
Scientists of California, Glendale City Employees
Association, International Longshore & Warehouse Union,
Kern County Fire Fighters Union, Inc., Los Angeles County
Probation Officers Union, Livermore-Pleasanton Firefighters
Local 1974, Los Angeles County Fire Fighters Local 1014,
Los Angeles Police Protective League, National Nurses
Organizing Committee, North Bay Labor Council, AFL-CIO,
Orange County Employees Association, Orange County
Professional Firefighters Association, Organization of SMUD
Employees, Peace Officers Research Association of
California, Production Strategies, Inc., Professional and
Technical Engineers Local 21, Professional Engineers in
California Government, Riverside Sheriffs' Association, San
Bernardino Public Employees Association, San Diego
Municipal Employee's Association, San Francisco Labor
Council, San Luis Obispo County Employees Association,
Santa Rosa City Employees Association, Service Employees
International Union, State Building and Construction Trades
Council of California, UNITE HERE, United Food and
Commercial Workers Union, Western States Council.
Opposition : Counties of Butte, Imperial, Nevada, Madera,
Orange, Riverside, San Luis Obispo, Yolo, Cities of
Antioch, Adelanto, Apple Valley, Atascadero, Arvin,
Bellflower, Belmont, Benicia, Berkeley, Beverly Hills,
Blythe, Brea, Burbank, Burlingame, California City,
Calistoga, Carmel-by-the-Sea, Carson, Carlsbad, Chowchilla,
Clayton, Cloverdale, Clovis, Coalinga, Commerce, Concord,
Cotati, Covina, Cypress, Danville, Diamond Bar, Dixon, El
Segundo, Encinitas, Exeter, Fairfield, Fontana, Fountain
Valley, Fowler, Fremont, Fullerton, Glendora, Greenfield,
Guadalupe, Hanford, Healdsburg, Hermosa Beach, Highland,
Hollister, Hughson, Huntington Park, Huntington Beach,
Irvine , Kingsburg, La Palma, La Puente, La Verne, Laguna
Hills, Lake Forest, Lafayette, Lathrop, Lawndale, Lemoore,
Lindsay, Livermore, Long Beach, Madera, Mammoth Lakes,
Manhattan Beach, Manteca, Merced, Mendota, Mill Valley,
Modesto , Moreno Valley, Murrieta, Napa, Newport Beach,
Norco, Norwalk, Oakdale, Oakland, Ontario, Oroville,
AB 155 -- 7/1/09 -- Page 9
Palmdale, Palo Alto, Paradise, Patterson, Pinole,
Placentia, Pleasanton, Pomona, Rancho Cordova, Rancho
Cucamonga, Reedley, Ridgecrest, Rialto, Rio Vista, Rohnert
Park, Rolling Hills Estates, Rosemead, Salinas, San
Francisco, Sanger, San Luis Obispo, San Marcos, San Pablo,
Santa Cruz, Santa Maria, Santa Rosa, Seaside, Sebastopol,
Shafter , Signal Hill, Stockton, Tehachapi, Torrance,
Tracy, Tulare , Tustin, Vacaville, Villa Park, Visalia,
Walnut Creek, Wasco, West Hollywood, Westminster, Windsor,
Woodlake, Yorba Linda, Yountville, and Yucaipa, Association
of California Health Care Districts, Association of
California Water Agencies, California Contract Cities
Association, California Society of Municipal Finance
Officers, California State Association of Counties,
California Special Districts Association, Howard Jarvis
Taxpayers Association, League of California Cities, League
of California Cities Inland Empire Division, League of
California Cities Orange County Division, Marin County
Council of Mayors and Councilmembers, South Bay Cities
Council of Governments.