BILL ANALYSIS
SENATE LOCAL GOVERNMENT COMMITTEE
Senator Dave Cox, Chair
BILL NO: AB 155 HEARING: 4/19/10
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), 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
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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.
On May 23, 2008, the City of Vallejo filed a Chapter 9
bankruptcy petition. The City subsequently asked the
bankruptcy court for permission to reject collective
bargaining agreements with four unions representing city
employees. Early last year, the City negotiated
supplemental labor agreements with two of those unions.
The City Council recently approved a new labor agreement
with a third union after reaching an agreement under which
the City rejected that union's collective bargaining
agreement. The fourth union is appealing the bankruptcy
court's ruling that the City can reject its collective
bargaining agreement, leaving the status of that agreement
unresolved. Vallejo remains under the bankruptcy court's
protection.
In response to concerns about Vallejo's decision to file
for 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
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Commission (CDIAC), and under CDIAC's terms and conditions,
to file a petition and exercise powers under federal
bankruptcy law.
I. Submitting a request . When a local public entity asks
CDIAC for approval to exercise its rights under federal
bankruptcy law, AB 155 requires local officials to submit:
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 to petition the federal
bankruptcy court for financial relief.
o Acknowledges that the state's fiscal and
financial responsibilities are not changed by the
application or CDIAC'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.
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
That CDIAC 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.
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III. Evaluation . AB 155 requires CDIAC 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, CDIAC'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
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 that a successful
petition will have on state and local finances,
including the impact on credit access and debt
service,
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 Bagley-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.
If CDIAC approves a request, it may 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
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Limiting the amount of relief to ensure the
protection of debt service payments.
If CDIAC disapproves a request, it must adopt specific
findings that address the deficiencies of the application.
If CDIAC denies a request, the local public entity may
reapply by adopting another resolution and submitting
documentation to address the deficiencies.
VI. Additional provisions . The bill requires CDIAC's
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 the bankrupt entity's
residents, on other local government entities, and on the
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state necessitates state oversight of local public
entities' bankruptcy filings. Because local and state
finances 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
forms the foundation for positive and stable labor
relations. The 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 affected 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 petition for bankruptcy
protection. 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 restructuring could
place the burden of fiscal recovery solely on cuts to
public services, which may not reflect local residents'
priorities. The Committee may wish to consider whether AB
155 is an unjustified state 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
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(2008). Since 1999, 19 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 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. However, despite
the recession and additional state-imposed burdens on local
finances, the Sierra Kings Health Care District is the only
California local government that has filed for bankruptcy
protection in the nearly two years since Vallejo entered
bankruptcy. The Committee may wish to consider whether
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 become a problem in the other
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 county, city, or district 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.
5. Regulation or prohibition ? Six states broadly require
some form of state approval before local governments can
petition for Chapter 9 bankruptcy protection: Connecticut,
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Kentucky, Louisiana, New Jersey, North Carolina, and Ohio.
Of the 76 local governments that have filed for Chapter 9
bankruptcy protection since 1999, only two received
approval from one of these states: the South Brunswick
Water & Sewer Authority (North Carolina, 2004) and the
Lower Cameron Hospital Service District (Louisiana, 1999).
Based on this recent pattern in other states, the Committee
may wish to consider whether requiring state approval of
Chapter 9 petitions filed by California local governments
would almost completely restrict access to municipal
bankruptcy protection in California.
6. Take two . The Senate Local Government Committee
considered AB 155 at its July 8, 2009 hearing. After
taking testimony from 24 witnesses, the Committee held the
bill at the request of the author. Although AB 155 has not
been amended, the Committee will again hear testimony on
the bill because two new members joined the Committee this
year.
Assembly Actions
Assembly Local Government Committee: 4 - 3
Assembly Appropriations Committee:12- 5
Assembly Floor: 47- 25
Support and Opposition (4/15/10)
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
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
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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 Bernardino, 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, Camarillo, Carmel-by-the-Sea, Carson, Carlsbad,
Chowchilla, Clayton, Cloverdale, Clovis, Coalinga,
Commerce, Concord, Costa Mesa, Cotati, Covina, Cypress,
Daly City, 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, Irwindale, Kingsburg, La Palma, La Puente, La
Verne, Laguna Hills, Lake Forest, Lafayette, Lakewood,
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, Novato, Oakdale,
Oakland, Ontario, Oroville, Palmdale, Palo Alto, Paradise,
Pasadena, Patterson, Pinole, Placentia, Pleasanton, Pomona,
Rancho Cordova, Rancho Cucamonga, Reedley, Ridgecrest,
Rialto, Rio Vista, Rohnert Park, Rolling Hills Estates,
Rosemead, Salinas, Sanger, San Luis Obispo, San Marcos,
San Pablo, Santa Cruz, Santa Maria, Santa Rosa, Seaside,
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Sebastopol, Shafter , Signal Hill, Stockton, Tehachapi,
Tiburon, Torrance, Tracy, Tulare , Tustin, Vacaville,
Vallejo, Villa Park, Visalia, Vista, Walnut Creek, Wasco,
West Covina, West Hollywood, Westminster, Windsor,
Woodlake, Woodland, Yorba Linda, Yountville, and Yucaipa,
Ambrose Recreation and Park District, Bell Canyon Community
Services District, El Dorado Hills Community Services
District, Goleta Sanitary District, Lincoln rural County
Fire Protection District, Mountain House Community Services
District, Squaw Valley Public Service District, Stallion
Springs Community Services District, Vista Irrigation
District, Association of California Health Care Districts,
Association of California Water Agencies, California
Chamber of Commerce, California Contract Cities
Association, California Public Securities 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.