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california legislation > AB 506

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Bill No: AB 506
Author: Wieckowski (D)
Amended: 8/31/11 in Senate
Vote: 21

AYES: Wolk, DeSaulnier, Hancock, Hernandez, Kehoe, Liu
NOES: Huff, Fuller, La Malfa

AYES: Kehoe, Alquist, Lieu, Pavley, Price, Steinberg
NOES: Walters, Emmerson, Runner

: 48-27, 6/2/11 - See last page for vote

SUBJECT : Local government: bankruptcy: neutral

SOURCE : Author

DIGEST : This bill prohibits a local public entity from
filing a petition and exercising powers under federal
bankruptcy law unless it participates in a neutral
evaluation process, and meets certain conditions.

ANALYSIS : Under Chapter 9 of the federal Bankruptcy
Code, a municipality receiving protection is shielded from
creditor claims while it works out a plan of adjustment
with its creditors. The plan of adjustment can involve a
reduction to amounts owed, an extension of debt payments,

AB 506

or a refinancing of debt. Creditors can include holders of
municipal debt, vendors, and counterparties in contracts.
Existing state law, SB 1323 (Ackerman), Chapter 94,
Statutes of 2002, allows a local public entity to file a
petition and exercise powers pursuant to federal law,
without any statewide approval or preconditions.

Existing law establishes California Debt and Investment
Advisory Commission (CDIAC) in the State Treasurer's Office
(STO) to provide information, education and technical
assistance on debt issuance and public fund investments to
local public agencies and other public finance
professionals. The CDIAC also serves as the state's
clearinghouse for public debt issuance information and to
assist state and local agencies with the monitoring,
issuance, and management of public debt and investments.
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 BSA audit cannot be released to the public
until the audit is completed.

This bill prohibits a local public entity from filing a
petition pursuant to federal bankruptcy law unless the
entity has participated in a neutral evaluation process and
meets other conditions.

This bill:

1. Prohibits a local entity from filing for bankruptcy
protection unless it participates in a neutral
evaluation process, and receives certification of good
faith participation:

A. Reaches an out of court agreement with all
interested parties.

B. Is unable to reach an out of court agreement with
all interested parties and the neutral evaluator
certifies that the parties participated in good

C. The local entity initiated, but the interested

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parties did not participate in the neutral evaluation

2. Prescribes the qualifications for neutral evaluators and
requires the CDIAC to maintain a list of qualified
neutral evaluators on its website.

3. Authorizes a local public entity to initiate the neutral
evaluation process, as specified, when the entity is
unable or unlikely to become able to meet financial

4. Authorizes the neutral evaluator to consult with
specified expert entities, including CDIAC, in
connection with the evaluation on issues that are not

5. Require the participation of at least one representative
of each interested party and the local entity at all
neutral evaluation conferences.

6. Authorizes a local public entity to file for bankruptcy
protection if the entity's financial difficulties
jeopardize the health, safety, or well-being of
residents, upon written approval of the Local Agency
Bankruptcy Committee (LABC), as specified.

7. Requires the LABC to approve or deny of a local entity's
request to file for bankruptcy protection within five
calendar days of a request. If the LABC fails to
respond within seven days, the request would be
considered approved.

8. Requires the LABC to provide at least 24 hours advance
public notice of a meeting to consider a local entity's
request, notwithstanding requirements in existing law
that require at least 10 days advance notice, as

This bill contains legislative findings and declarations
supporting the need to impose a limitation on the public's
right of access to the meetings of public bodies or the
writings of public officials and agencies within the
meaning of Section 3 of Article I of the California

AB 506

Constitution. Pursuant to that constitutional provision,
the Legislature makes the following findings to demonstrate
the interest protected by this limitation and the need for
protecting that interest: To facilitate the process to
avoid municipal bankruptcy, it is necessary to provide for
secure documents.


Chapter 9 gives government debtors time to come up with
repayment plans, providing them a breathing spell from
creditors' collection efforts. Only a municipality, which
federal law defines as a political subdivision, public
agency, or instrumentality of a state, can initiate a
Chapter 9 proceeding. The municipality must be insolvent
and desire to affect a plan to adjust its debts.

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], Chapter 94, Statues of 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

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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.

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], 1995-96 Session). 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. Last year, AB 155 (Mendoza), 2009-10
Session, would have required either the approval of a state
commission or the completion of a state audit before a
local public entity could file for bankruptcy. That bill
died on the Senate Floor.

The CDIAC provides information, education, and technical
assistance on debt issuance and public fund investments to
local public agencies. The BSA conducts performance,
financial, and compliance audits that are either mandated
by statute or requested by the Legislature through the
JLAC. Information relating to any audit conducted by the
BSA cannot be released to the public until the audit is

In 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. After more
than three years, Vallejo remains under the bankruptcy
court's protection, although it may emerge from bankruptcy

In response to the length, cost, and consequences of
Vallejo's bankruptcy and the potential for additional
municipal bankruptcy filings, labor unions and others want
local officials to participate in a neutral alternative
dispute resolution process before filing for bankruptcy.

FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No

According to the Senate Appropriations Committee:

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Fiscal Impact (in thousands)

Major Provisions 2011-12 2012-13 2013-14 Fund

- qualifying evaluators $29
$57 $57 Special*
- consultations absorbable costs

Bankruptcy Committee
- STO $57
one-time General
- STO/SCO/DOF Minor periodic costs as
Committee General

* California Debt and Investment Advisory Committee Fund

SUPPORT : (Verified 8/31/11)

Association for Los Angeles Deputy Sheriffs
California Conference Board of the Amalgamated Transit
California Conference of Machinists
California Dispute Resolution Council
California Labor Federation
California Nurses Association
California Official Court Reporters Association
California Professional Firefighters
California Teamsters Public Affairs Council
Estero Municipal Improvement District
International Federation of Professional and Technical
Engineers, Local 21
International Longshore and Warehouse Union
Los Angeles County Probation Officers Union
Orange County Professional Firefighters Association
Police Officers Research Association of California
Professional and Technical Engineers
Riverside Sheriff's Association
Unite Here!
United Food and Commercial Workers Region 8 States Council
Utility Workers Union of America, Local 132

AB 506

OPPOSITION : (Verified 8/31/11)

Association of California Healthcare Districts
California Chamber of Commerce
California Contract Cities Association
California Special Districts Association
California State Association of Counties
Cities of: American Canyon, Antioch, Apple Valley,
Atherton, Azusa, Bellflower, Beverly Hills, Burlingame,
Campbell, Ceres, Clayton, Cloverdale, Costa Mesa, Culver
City, Danville, Diamond Bar, Encinitas, Fontana, Foster
City, Fountain Valley, Fresno, Goleta, Gustine, Half Moon
Bay, Healdsburg, Hermosa Beach, Highland, Huron, Laguna
Hills, Lakewood, Lathrop, Livingston, Lodi, Long Beach,
Los Altos Hills, Madera, Merced, Monterey Park, Moreno
Valley, Mountain View, Murrieta, Newman, Norwalk, Pamona,
Pasadena, Pinole, Placentia, Rancho Cucamonga, Red Bluff,
Redding, Redwood City, Santa Clara, Santa Rosa, Signal
Hill, South San Francisco, Stockton, Sunnyvale, Tracy,
Tulare, Upland, Vista, Wasco, West Hollywood, Whittier,
Counties of: Monterey, Orange, Sacramento, San
Bernardino, Santa Clara, Los Angeles
Howard Jarvis Taxpayers Association
League of California Cities
Long Beach Area Chamber of Commerce
Los Angeles County Business Federation
Marin County Council of Mayors and Councilmembers
Regional Council of Rural Counties
Urban Counties Caucus

ASSEMBLY FLOOR : 48-27, 6/2/11
AYES: Alejo, Allen, Ammiano, Atkins, Beall, Block,
Blumenfield, Bonilla, Bradford, Brownley, Butler, Charles
Calderon, Campos, Carter, Cedillo, Chesbro, Davis,
Dickinson, Eng, Feuer, Fong, Fuentes, Furutani, Galgiani,
Gatto, Hayashi, Roger HernŠndez, Hill, Huber, Hueso,
Huffman, Lara, Bonnie Lowenthal, Ma, Mendoza, Mitchell,
Monning, Pan, Perea, V. Manuel Pťrez, Portantino,
Skinner, Solorio, Swanson, Wieckowski, Williams, Yamada,
John A. Pťrez
NOES: Achadjian, Bill Berryhill, Conway, Cook, Donnelly,

AB 506

Fletcher, Beth Gaines, Garrick, Grove, Hagman, Halderman,
Harkey, Jeffries, Jones, Knight, Logue, Mansoor, Miller,
Morrell, Nestande, Nielsen, Norby, Olsen, Silva, Smyth,
Valadao, Wagner
NO VOTE RECORDED: Buchanan, Gordon, Gorell, Hall, Torres

AGB:kc 8/31/11 Senate Floor Analyses


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