BILL ANALYSIS
SENATE LOCAL GOVERNMENT COMMITTEE
BILL NO: AB 155 HEARING: 8/24/10
AUTHOR: Mendoza FISCAL: Yes
VERSION: 8/20/10 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
AB 155 -- 8/20/10 -- 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.
The Bureau of State Audits (BSA) conducts performance,
financial, and compliance audits that are either mandated
by statute or requested by the Legislature through the
Joint Legislative Audit Committee (JLAC). Information
relating to any audit conducted by the BSA cannot be
released to the public until the audit is completed.
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.
AB 155 -- 8/20/10 -- Page 3
Proposed Law
Assembly Bill 155 authorizes a local public entity to file
a petition and exercise powers under federal bankruptcy
law:
With the approval of the California Debt and Investment
Advisory Commission (CDIAC), and under CDIAC's terms and
conditions, or
By overriding CDIAC's denial of the local public entity's
request, or
After the completion of an audit by the State Auditor.
I. Submitting a request to CDIAC . 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.
AB 155 -- 8/20/10 -- Page 4
II. Initial CDIAC 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.
III. CDIAC 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. CDIAC 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.
AB 155 -- 8/20/10 -- Page 5
V. CDIAC 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 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
either:
Reapply by adopting another resolution and
submitting documentation to address the deficiencies.
Hold a public hearing, make findings regarding the
necessity to override CDIAC's decision, and adopt a
resolution to declare the public entity's intent to
exercise authority pursuant to applicable federal
bankruptcy law.
If the local public entity's governing body votes to
override CDIAC's decision and makes findings to that
effect, both CDIAC's findings and the local
public entity's findings must be submitted with any filing
of a petition for bankruptcy.
VI. Additional CDIAC 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
AB 155 -- 8/20/10 -- Page 6
representative who meets the qualifications for membership
on the Commission.
VII. Alternative state audit process . As an alternative
to submitting a request to CDIAC, a local public entity may
file a petition and exercise powers under federal
bankruptcy law after the Bureau of State Audits (BSA)
completes an audit. Under this alternative process, a
local public entity must submit information to the State
Auditor describing the local entity's current financial
position, including analyses of:
The local entity's petition to exercise powers
under applicable federal bankruptcy law.
The local entity's ability to pay its undisputed
debts.
The options that the local entity has considered to
avoid seeking relief.
The local entity's plan for restoring the soundness
of the local its financial position.
An itemized list of creditors that may be impaired
or may seek damages as a result of the proposed plan.
The State Auditor must audit the analyses and the local
public entity's financial position. The State Auditor must
work with the local public entity to establish a deadline
for the audit work. An audit of a local public entity's
analyses and financial positions take precedent over any
pending audit requested by the Joint Legislative Audit
Committee.
The amendments allow a local public entity to file a
petition to exercise powers pursuant to federal bankruptcy
law only after the State Auditor has notified the local
public entity of completion of its audit work and made
public the findings of that audit work.
AB 155 defines "local public entity" as any county, city,
district, public authority, public agency, or other entity,
without limitation, that is a municipality, as defined in
federal law.
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.
AB 155 -- 8/20/10 -- Page 7
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
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 CDIAC 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. Alternatively, the State Audit process
produces an independent and public assessment of a local
entity's financial position, which may either support the
local entity's bankruptcy claim or identify alternatives to
bankruptcy. By requiring state review of local bankruptcy
filings, 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 a local entity's restructuring could place
the burden of fiscal recovery solely on cuts to public
AB 155 -- 8/20/10 -- Page 8
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 new ? Since the Committee last heard AB 155, it
has been amended to remove CDIAC's authority to impose
terms and conditions on a local entity's bankruptcy
proceedings. The August 20 amendments added the
alternative process requiring a state audit before a local
entity may petition for federal bankruptcy. This
alternative allows for an independent and confidential
state review of a local entity's potential bankruptcy
filing, in contrast to the more public CDIAC review and
hearing process. However, some local officials worry that
a local government's decision to submit information to the
state auditor may be subject to disclosure under the Brown
Act, the state's open meeting law. Local officials also
worry that a local government's bankruptcy-related
information that it submits to the BSA may be subject to
the Public Records Act. Additionally, AB 155 doesn't set
any deadline for the state audit process. In some cases,
local entities must act quickly to seek bankruptcy
protection in response to sudden and unexpected changes in
their fiscal condition. If the alternative state audit
process is lengthy and not entirely confidential, the
Committee may wish to consider whether it constitutes a
viable option.
4. 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). 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
AB 155 -- 8/20/10 -- Page 9
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 two years since Vallejo entered
bankruptcy. The Committee may wish to consider whether the
recent frequency and purpose of municipal bankruptcy
filings justify the changes that AB 155 makes to the
state's long-standing municipal bankruptcy statute.
5. 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.
6. Regulation or prohibition ? Six states broadly require
some form of state approval before local governments can
petition for Chapter 9 bankruptcy protection: Connecticut,
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.
AB 155 -- 8/20/10 -- Page 10
7. Take three . 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. At its April 19, 2010
hearing, after taking additional testimony, the Committee
approved the bill by a 3-2 vote. Because the August 20
amendments rewrote AB 155 by adding the alternative state
audit process, the Senate Rules Committee referred AB 155
back to the Senate Local Government Committee under Senate
Rule 29.10.
Assembly Actions
Assembly Local Government Committee: 4-3
Assembly Appropriations Committee: 12-5
Assembly Floor: 47-25
Support and Opposition (8/23/10)
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
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
AB 155 -- 8/20/10 -- Page 11
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, Albany, Apple Valley,
Atascadero, Atherton, Arvin, Bellflower, Belmont, Benicia,
Berkeley, Beverly Hills, Blythe, Brea, Burbank, Burlingame,
California City, Calistoga, Camarillo, Campbell,
Carmel-by-the-Sea, Carson, Carlsbad, Chowchilla, Chula
Vista, Clayton, Cloverdale, Clovis, Coachella, Coalinga,
Colton, Commerce, Concord, Coronado, Costa Mesa, Cotati,
Covina, Cypress, Daly City, Danville, Delano, Diamond Bar,
Dixon, El Segundo, Encinitas, Exeter, Fairfield, Fontana,
Fountain Valley, Fowler, Fremont, Fullerton, Glendora,
Goleta, Greenfield, Guadalupe, Hanford, Healdsburg, Hermosa
Beach, Highland, Hollister, Hughson, Huntington Park,
Huntington Beach, Irvine, Irwindale, Kingsburg, La Mirada,
La Palma, La Puente, La Verne, Laguna Hills, Lake Forest,
Lafayette, Lakewood, Lathrop, Lawndale, Lemoore, Lindsay,
Livermore, Lodi, Long Beach, Los Banos, 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, 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
AB 155 -- 8/20/10 -- Page 12
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, Regional Council of
rural Counties, South Bay Cities Council of Governments,
Urban Counties Caucus.