BILL ANALYSIS �
AB 1692
Page 1
Date of Hearing: April 25, 2012
ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT
Cameron Smyth, Chair
AB 1692 (Wieckowski) - As Amended: April 16, 2012
SUBJECT : Bankruptcy.
SUMMARY : Adds successor agencies to the list of local public
entities that may file for federal bankruptcy protection, if
specified conditions are met, and revises recently enacted
language relating to the neutral evaluation process contained in
AB 506 (Wieckowski), Chapter 675, Statutes of 2011.
Specifically, this bill :
1)Expands the definition of "local public entity," to include a
successor agency, as defined in the Health and Safety Code
related to the dissolution of redevelopment agencies and
designation of successor agencies, for the purpose of an
entity eligible to file for federal bankruptcy (Chapter 9), in
specified circumstances.
2)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."
3)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.
4)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.
5)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.
6)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.
7)Allows the neutral evaluator to grant an extension beyond the
existing 90-day limitation on the neutral evaluation process
if requested by the majority of the participating interested
parties.
8)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
or 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
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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
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
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is made to extend the process past the initial 60-day time
period;
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, 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. � 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 : Unknown. This bill is keyed fiscal.
COMMENTS :
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
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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 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.
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 harmonize
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 Court;"
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 been
comprised of the Treasurer, the Controller and the Director
of Finance. The bill passed the Legislature, but was
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vetoed by then-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
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.
5)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.
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6)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
Stockton and interested parties jointly selected a neutral
evaluator.
The Committee 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.
7)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, as specified, and
would authorize the neutral evaluator to grant an extension of
the process beyond 90 days if requested by the majority of the
participating interested parties. In this way, the process
could be extended without the consent of the local public
entity.
The Committee may wish to consider the implications of
allowing a majority of the interested parties to extend the
neutral evaluation process against the will of the local
public entity.
8)According to the author, the purpose of this bill is two-fold.
First, with the winding up of redevelopment agencies (RDAs),
the author believes that the neutral evaluation process could
prove to be useful for interested parties. The author notes
that more than 400 RDAs have been eliminated and there is a
potentially staggering debt load left over. The author points
to growing concerns over how successor agencies will manage
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the financial obligations from the former RDAs, such as making
bond payments, being forced to default on these payments, or
handling the modifications of contracts.
The second part of the bill deals with the implementation of
AB 506, which the author believes needs 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. According to the author, the bill seeks to clarify
whether approval of a majority of participating parties is
sufficient to extend the process or if the local public entity
must approve the extension as well. The bill is
author-sponsored.
9)Currently, California state law authorizes federal bankruptcy
filing, if specified conditions are met, 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 noted that the definitions in state and
federal law create some ambiguity as to what entities falls
under the definition of "municipality" and which can therefore
seek financial relief through the Chapter 9 bankruptcy
process.
The Committee may wish to consider whether a successor agency
qualifies as a debtor under federal bankruptcy law. If the
author's intent is to allow successor agencies to use the
neutral evaluation process, then that should be made explicit
in the bill, rather than the current language which counts
successor agencies as part of the definition of "local public
entity" for purposes of Chapter 9 filings.
10)The California Professional Firefighters, in support, write
that "as evidenced by the experience in the City of Stockton,
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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
explore other areas of recovery."
11)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 �the 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."
12)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.
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REGISTERED SUPPORT / OPPOSITION :
Support
California Professional Firefighters
California Dispute Resolution Council
Opposition
Association of California Healthcare Districts
California State Association of Counties
California Special Districts Association
City of Stockton
League of California Cities
Regional Council of Rural Counties
Urban Counties Caucus
Analysis Prepared by : Debbie Michel / L. GOV. / (916)
319-3958