BILL ANALYSIS
SB 88
Page 1
SENATE THIRD READING
SB 88 (DeSaulnier)
As Amended September 4, 2009
Majority vote
SENATE VOTE : Vote not relevant
SUMMARY : Prohibits a local public entity, as defined, from
exercising its rights under applicable federal bankruptcy law
unless granted approval by the California Debt and Investment
Advisory Commission (CDIAC), and specifies procedures in which
the local public entity may override a decision of denial by
CDIAC. Specifically, this bill :
1)Allows a local public entity, if CDIAC approves, to file a
petition and exercise powers pursuant to applicable federal
bankruptcy law (chapter 9).
2)Requires CDIAC, upon request of a local public entity, to
advise, and if deemed appropriate by CDIAC, grant approval to
the local public entity to exercise its right pursuant to
chapter 9.
3)Provides that if CDIAC denies a local public entity's request
the governing body of a local public entity may do either of
the following:
a) Reapply to CDIAC, which includes adopting another
resolution and submit documentation to address the
deficiencies identified by CDIAC; or,
b) Hold a public hearing to override the decision adopted
by CDIAC and adopt a resolution to declare the public
entity's intent to exercise authority pursuant to
applicable federal bankruptcy law.
4)Requires, at the public hearing to override the decision by
CDIAC, the governing body to make public findings about the
necessity to override the decision of CDIAC.
5)Provides that if the governing body votes to exercise its
authority to file chapter 9 and makes findings to that effect,
both CDIAC's findings and the local public entity's findings
shall be submitted along with any filing of a petition for
bankruptcy.
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6)Requires, when requesting approval to file chapter 9, a local
public entity to submit to CDIAC all of the following:
a) A resolution or ordinance adopted by that governing body
at a public hearing held pursuant to the Ralph M. Brown Act
that does both of the following:
i) Requests authority through state law to petition the
federal bankruptcy court for financial relief under the
provisions of chapter 9 in federal law; and,
ii) Acknowledges that the state's fiscal and financial
responsibilities are not changed by the application or
CDIAC's decision.
b) A thorough analysis of the entity's request to petition
under the provisions of chapter 9 in federal law; in
addition to any other information it may provide, the
entity shall do all of the following:
i) Demonstrate that it is or will be unable to pay its
undisputed debts;
ii) Demonstrate that it has exhausted all options to
avoid seeking relief under chapter 9; and,
iii) Detail a specific plan for restoring the soundness
of entity's financial plans.
c) An itemization of creditors that may be impaired or may
seek damages as a result of the proposed plan.
d) Evidence of irreparable harm that may result during the
30-day evaluation period, and the 15 days allotted for a
hearing.
7)Requires CDIAC, upon receipt of the information listed in 6)
above, to evaluate the information presented within five days,
to notify the public entity of one of the following results:
a) Approval of the request; or,
b) CDIAC intends to proceed with a further evaluation based
on a finding that the local public entity did not provide
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sufficient evidence.
8)States that if CDIAC determines that it will proceed with a
further evaluation, CDIAC shall publish its evaluation within
30 business days.
9)Provides that if CDIAC does not respond to the request within
five days of receipt of the request, the request shall be
deemed approved.
10)Requires CDIAC staff to specifically evaluate the extent to
which the local public entity has done the following:
a) Demonstrated that it has exhausted other remedies;
b) Demonstrated that it has taken sufficient steps to
reduce the negative consequences of the proposed bankruptcy
relief;
c) Has anticipated the transfer of service responsibility
to other governments or parties and to what extend the
entity has documented the consequences for the transfer of
municipal and other government services;
d) Documented the likely effect a successful petition will
have on state and local finances, including the impact on
credit access and debt service; and,
e) Has proposed a remedy that it is appropriate and
proportionate to the entity's fiscal problems.
11)Requires CDIAC, after it conducts and publishes its
evaluation, to conduct a hearing and publish a decision within
15 days of, but not less than 10 days after the publication of
the staff evaluation; and requires that the hearing on the
application shall be held in convenient proximity of the
entity filing the application.
12)Specifies that CDIAC shall, in a recorded vote on the date of
the hearing, approve or deny the request of the local public
entity.
13)Requires CDIAC to adopt specific findings that address the
deficiencies of the application, if the application is denied.
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14)Requires that the hearing held by CDIAC be subject to the
provisions of the Bagley-Keene Open Meeting Act.
15)Requires, after CDIAC receives an application from a local
public entity, the executive director to record costs incurred
by CDIAC to make and publish the evaluation and conduct the
public hearing; and requires the director to report the costs
to CDIAC at the next regularly scheduled CDIAC hearing.
16)Allows the executive director of CDIAC, upon denial of the
request, to assess a fee on the requesting entity to cover
some or all of the costs associated with making the findings
and conducting the hearing.
17)Requires that fee revenue be deposited in the CDIAC Fund.
18)Allows CDIAC to propose regulations pursuant to this bill.
19)Declares that in enacting this bill, the state assumes no new
or additional fiscal responsibilities for local entities that
may apply to CDIAC.
20)Specifies that the bill shall only apply to a local public
entity on or after the effective date of the bill.
21)Provides that if a member of CDIAC is also employed as a
local government finance officer by an entity requesting
approval, the Treasurer shall replace that member, for
purposes of the application of the local government that also
employs the member, with a person employed by a city, county,
or city and county, within the state, experienced in the
issuance and sale of municipal bonds and nominated by
associations affiliated with these agencies, to preside over
that application.
22)Defines "local public entity" to mean any city, county, city
and county, district public authority, public agency, or other
entity that is a "municipality" within the meaning of federal
bankruptcy law applicable to local public entities.
23)Makes findings and declarations relating to municipal
bankruptcies.
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EXISTING LAW :
1)Allows a local public entity in California to file a petition
and exercise powers pursuant to applicable federal bankruptcy
law, without any statewide approval or pre-conditions.
2)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, or
that qualifies as a debtor under any other federal bankruptcy
law applicable to local public entities.
3)Allows a legislative body authorized to conduct a proceeding
pursuant to this chapter (Government Code Section 59125) to
file a petition and exercise powers under applicable federal
bankruptcy law as provided by Section 53760.
4)Defines the term "municipality" as a political subdivision or
public agency or instrumentality of a state, in federal law
(11 U.S.C. Section 101 (40)).
5)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.
COMMENTS :
MUNICIPAL BANKRUPTCY 101 UNDER FEDERAL LAW
1)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:
First, 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;
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c) Is insolvent;
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.
A municipality must meet all of these conditions for the
bankruptcy petition to be accepted by the court.
1)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.
2)Federal law regarding municipal bankruptcy rose out of the
financial crises of the 1930s.
Chapter 9 federal law was 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.
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In 1994, Congress amended 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.
CALIFORNIA'S RESPONSE TO CHAPTER 9
3)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 streamline
California law with federal law requiring specific
authorization:
a) SB 1274 (Killea, 1995-1996) and AB X2 2 (Caldera,
1995-1996) would have granted the broadest authority
permissible under federal law by adopting the federal
definition of "municipality;"
b) AB X2 29 (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 Code;" and,
c) 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 contained
the Treasurer, Controller and Director of Finance. The
bill passed the Legislature, but was vetoed by
then-Governor Wilson.
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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
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
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.
4)Currently, California state law authorizes federal bankruptcy
filing by a "local public entity" - "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, or
that qualifies as a debtor under any other federal bankruptcy
law applicable to local public entities". As referenced,
federal law defines "municipality" as a political subdivision
or public agency or instrumentality of a state (11 U.S.C.
101 (40)). However, the California Law Revision Commission
notes that the definitions in state and federal law create
some ambiguity as to what exactly falls under the definition
of "municipality" and can therefore seek financial relief
through the chapter 9 bankruptcy process.
According to the 2001 report produced by the California Law
Revision Commission, there is some debate about how broad the
definition of "municipality" and "local public entity" is - it
may be that the definition includes anything from library
districts, parking districts, public cemetery districts,
community service districts and the like. The Legislature may
wish to discuss whether there is a legitimate statewide
interest in preventing these small local government entities
from filing for bankruptcy.
BANKRUPTCY PRACTICES IN OTHER STATES
5)The 10th amendment to the United States Constitution says that
"the powers not delegated to the United States by the
Constitution, nor prohibited by it to the States, are reserved
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to the States respectively, or to the people," otherwise known
as the sovereign rights of the states. In the context of
municipal bankruptcy filing, it is up to each state to decide
whether to empower its municipalities to utilize federal
bankruptcy laws.
Other states approach authorization for municipalities in
various ways - some explicitly authorize municipalities and
provide unlimited access, or explicitly authorize certain
types of municipalities, some states are silent, one state
expressly prohibits municipalities from filing, and yet others
have their own state pre-conditions, processes or
"gate-keeping" requirements.
Those states comparable to California in terms of population,
like Texas and Florida, provide explicit authorization for
municipalities in their state statutes. The state of New York
allows a municipality or its emergency financial control board
to file any petition within any United States district court
or court of bankruptcy and explicitly notes in the statute
that "nothing contained in this title shall be construed to
limit the authorization granted by this section [for
municipalities to file a petition under federal bankruptcy
law]."
For those states with preconditions or "gatekeeping"
provisions, the following is a sample of the wide range of
state statutes:
Iowa : Permits "a city, county, or other political
subdivision" to become a chapter 9 debtor only if it is
rendered insolvent as a result of debt (a defined term in the
state statute) involuntarily incurred.
Michigan : Requires notice to be given to the local emergency
financial assistance loan board and authorization from the
emergency financial manager.
Montana : Applies to a "local entity." The local entity's
legislative body must pass an ordinance or resolution
declaring that it meets all eligibility requirements found in
109 of the federal Bankruptcy Code.
New Jersey : Applies to "any county, municipality, school
district or other political subdivision of this State." The
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political subdivision must get the approval of the municipal
finance commission before filing the petition. Also, the
governing body of the political subdivision must pass an
ordinance authorizing the filing by a not less than two-thirds
vote of all the members elected to the governing body. The
municipal finance commission must approve the plan of
adjustment before the political subdivision files it with the
court and the commission must approve in writing each payment
for attorneys, agents, committees, or other representatives of
creditors.
North Carolina : Applies to "any taxing district, local
improvement district, school district, county, city, town, or
village." The local unit must get the approval of the Local
Government Commission of North Carolina, which oversees local
government debt and financial management.
PROPOSED LAW
6)This bill places conditions on how and when a municipality
could seek chapter 9 relief under federal bankruptcy law.
Current law authorizes municipalities to file a petition under
the federal bankruptcy process without any prior state
approval or pre-conditions to filing. This bill creates
"gatekeeper" provisions by granting a state entity - CDIAC -
the authority to allow or disallow a municipality from
exercising its rights to file a petition under federal chapter
9.
This bill mandates that a local public entity that is seeking
to file chapter 9 go to CDIAC for approval. Under the
provisions of the bill, the entity would be required to submit
certain paperwork to CDIAC in order for CDIAC to evaluate the
entity's request. The provisions of the bill also place a
time limit for CDIAC to approve or deny the request, and
provide for certain factors that CDIAC would be required to
use to evaluate the entity's request. If CDIAC denies the
local public entity's request, the bill provides the entity an
opportunity to override CDIAC's decision, or to re-file their
request. This bill also contains public noticing requirements
for both CDIAC and the local public entity, in the event that
the entity decides to override the decision adopted by CDIAC
in a public meeting. CDIAC's denial findings and the local
public entity's override findings would be submitted along
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with any filing of a petition for bankruptcy to the federal
bankruptcy court.
7)CDIAC, under the purview of the State Treasurer's office,
currently collects data on municipal finance, conducts
research, and provides information and technical assistance to
local public agencies and their finance professionals. Since
CDIAC has expertise in the financial health of local
governments, it makes sense to put the review process in their
hands. CDIAC's Board is comprised of the State Treasurer as
Chair, and other members including the State Controller, the
Governor, two members each from the Senate and Assembly, and
two local government officials with expertise in debt
issuance.
8)The California Law Revision Commission produced a report
studying California's municipal bankruptcy statute 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. However, CLRC's report only
suggested that California law be updated to provide explicit
authority for municipalities, per the federal statute
requiring states to have explicit authorization. The report
did not recommend any other substantive policy changes or
pre-conditions, or "gate-keeping" in order to access the
federal bankruptcy process, and instead, the report noted that
"there does not appear to be any general agreement on the best
approach to reform, or even as to the need for additional
protections or controls."
The California State Legislature has a long history, dating
back to the Orange County bankruptcy filing in 1994, of
debating access to federal municipal bankruptcy laws every few
years (see Comments under 3) and 4) above, and ultimately in
2002, made the decision to seek the broadest authority for
municipal bankruptcies that exists under federal law.
9)Supporters of the topic argue that a municipal bankruptcy
filing will have repercussions in terms of credit rating and
spillover effects that will raise borrowing costs for other
California municipalities and the state. Arguably, a
municipal bankruptcy, depending on the size of the entity,
could potentially affect other local agencies and the state as
a whole. Supporters argue that the state government should
have the opportunity to consider whether bankruptcy is the
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best approach to the problem, since municipal affairs are of
interest to the state and should not be left to the sole
discretion of the municipality.
10)The issue of state liability is of great concern. As noted
in Governor Wilson's veto of
SB 349 (Kopp) in 1996, state interference in municipal
bankruptcy "could raise questions
of the liability of the state to creditors of the public agency
if eligibility for bankruptcy is denied. State denial of
access to chapter 9 may create the implication that the state
has assumed responsibility for the debts of the distressed
municipality."
11)Opposition to this topic note that it is an unwarranted and
unjustified intrusion on local control and that the
determination to pursue protection under federal bankruptcy
law should be left to the discretion of the local agency.
Opposition to this topic believe that changes to current law,
like what is being proposed in this bill, undercut local
authority by giving the state the right to intervene in local
decisions. Voters elect their local representatives and expect
that their local elected officials know best about the
municipality's financial condition, which will vary from
jurisdiction to jurisdiction based on unique local needs.
12)The chapter 9 process under federal law has rarely been used
- only three filings by cities and counties since the adoption
of the state Bankruptcy Code in 1949 - Orange County in 1994
(See Comment #4), the City of Desert Hot Springs in 2001
because of a judgment against the city, and the City of
Vallejo in May of 2008.
13)In a March 13, 2009, memorandum, Michael McManus, the U.S.
Bankruptcy Judge assigned to the Vallejo case, addressed
whether chapter 9 of the Bankruptcy Code permits municipality
to reject collective bargaining agreements with its public
employee unions. He found that "if a municipality is
authorized by the state to file a chapter 9 petition, it is
entitled to fully utilize 11 U.S.C. 365 (Section 365) to
accept or reject its executory contracts" and that "unexpired
collective bargaining agreements are executory contracts
subject to rejection under Section 365."
14)This bill is substantially similar to AB 155 (Mendoza), which
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was heard on the Assembly Floor June 3, 2009. However, there
are a number of major changes between the version heard on the
Assembly Floor and this bill, including:
a) The addition of language allowing a local public entity
to hold a public hearing to override the decision adopted
by CDIAC, if CDIAC denies the local public entity from
seeking relief under chapter 9;
b) The addition of language that specifies a timeline for
CDIAC to respond to a local public entity seeking to file
under chapter 9;
c) The deletion of language that would allow CDIAC, if a
request to file was approved, to limit the nature and
extent of relief provided through chapter 9 to the local
public entity, including limiting changes to a contract,
prohibition of the abrogation of contracts, and limiting
the amount of relief to ensure the protection of debt
service payments.
Analysis Prepared by : Debbie Michel / L. GOV. / (916)
319-3958
FN: 0003015