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california legislation > AB 506

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Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair

AB 506 (Wieckowski)

Hearing Date: 08/25/2011 Amended: 08/15/2011
Consultant: Mark McKenzie Policy Vote: G&F 6-3 (not
relevant)
_________________________________________________________________
____
BILL SUMMARY: AB 506 would prohibit a local public entity from
filing a petition pursuant to federal bankruptcy law unless the
entity has completed a neutral evaluation process with
interested parties, as specified. The bill would alternatively
authorize a local entity to file for bankruptcy if the health,
safety, or well-being of its residents are in jeopardy and
written approval is granted by a Local Agency Bankruptcy
Committee, which is created by this bill.
_________________________________________________________________
____
Fiscal Impact (in thousands)

Major Provisions 2011-12 2012-13 2013-14 Fund
CDIAC: qualifying evaluators $29 $57
$57Special*
CDIAC: consultations absorbable costs Special*
Bankruptcy Committee
STO $57 one-timeGeneral
STO/SCO/DOF Minor periodic costs as Committee
meetsGeneral
____________
* California Debt and Investment Advisory Committee Fund
_________________________________________________________________
____

STAFF COMMENTS: SUSPENSE FILE. AS PROPOSED TO BE AMENDED.

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, 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 of 2002, allows a local public entity to file a petition and
exercise powers pursuant to federal law, without any statewide








AB 506 (Wieckowski)
Page 1


approval or preconditions.

Existing law establishes 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 commission
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.
AB 506 would prohibit 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. Among other things, this bill would:
Prohibit a local entity from filing for bankruptcy protection
unless it participates in a neutral evaluation process, and
receives certification of good faith participation, and :
1.) Reaches an out of court agreement with all interested
parties; or
2.) Is unable to reach an out of court agreement with all
interested parties and the neutral evaluator certifies that
the parties participated in good faith; or
3.) The local entity initiated, but the interested parties did
not participate in the neutral evaluation process.
Prescribes the qualifications for neutral evaluators and
requires the California Debt and Investment Advisory
Commission (CDIAC) to maintain a list of qualified neutral
evaluators on its website.
Authorize 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 obligations.
Authorize the neutral evaluator to consult with specified
expert entities, including CDIAC, in connection with the
evaluation on issues that are not confidential.
Require the participation of at least one representative of
each interested party and the local entity at all neutral
evaluation conferences.
Require the State Auditor, upon request of the local public
entity, to audit the public entity's finances, and require the








AB 506 (Wieckowski)
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State Controller (SCO) to transfer sufficient funds from the
General Fund to the State Auditor to cover the audit costs.
Authorize 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.
Require 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.
Require 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 specified.

Staff notes that the bill creates several barriers to bankruptcy
protection that may be insurmountable. Specifically, the bill
requires a local public entity to enter into a neutral
evaluation process with no prescribed deadlines for resolution
and requirements to reach a settlement, or come to an impasse
with all interested parties prior to initiating bankruptcy
proceedings. Bankruptcy protection is designed to shield the
local entity from debtors by instituting an automatic stay of
financial obligations while the courts determine appropriate
debt restructuring measures. The lack of finite deadlines for
the evaluation process in the bill would expose a local entity
to compounded financial obligations and increased risk of
default. To complicate things further, the bill does not
specify which parties would pay for the services of a neutral
evaluator. Without statutory direction, staff assumes this
added expense would fall to the local entity that initiates the
neutral evaluation process.

The California Debt and Investment Advisory Commission Fund
(0956-001-0171) receives fees for assisting state or local
government units in the planning, preparation, marketing and
sale of new debt issues to reduce cost and to assist in
protecting the issuer's credit. The fee is the lesser of one
fortieth of one percent of the principal amount of the issue or
$5,000.

CDIAC indicates that it could incur annual costs of
approximately $57,000 and 0.5 PY to develop, post, and maintain








AB 506 (Wieckowski)
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a list of qualified neutral evaluators. It is likely that the
commission would need to develop administrative policies and
procedures to implement a nomination, selection, and
certification process, as well as maintain the list and keep it
current. CDIAC would also be required to consult with a neutral
evaluator that requests assistance, but these costs are likely
to be absorbable and within the commission's current expertise.
CDIAC could also be involved with the STO's participation on the
Local Agency Bankruptcy Commission, as needed. CDIAC would
likely incur one-time costs to develop procedures for
determining the merits of a local entity's request for
permission to file for bankruptcy protection as a result of
residents' health, safety, and well-being. Staff estimates an
additional 0.5 PY of staff time at a cost of $57,000.

The SCO and Department of Finance, as the other members of the
LABC, would also incur costs to the extent the body is requested
to consider a local entity's request to enter into bankruptcy
proceedings. Since the timeframes to approve or deny a request
are so short, and the incidence of local agency bankruptcy is so
rare, the LABC is not likely to incur significant costs. Staff
notes that the 24 hour notice requirements provide insufficient
notice to the public for meetings to consider a local entity
request. The Brown Act, to which this bill provides an
exception, typically requires at least 10 days of public notice.

AB 506 authorizes a local public entity to request that the
State Auditor conduct an audit of the entity's finances for
purposes of assisting the entity in the neutral evaluation
process. The bill requires the SCO to transfer sufficient funds
from the General Fund to the State Auditor for reimbursement of
audit costs. This process is highly irregular. Existing law
requires the State Auditor to conduct an audit of a state or
local governmental entity that is requested by JLAC, to the
extent that funding is available and in accordance with
priorities established by JLAC. Existing law also requires the
State Auditor to conduct specified financial and performance
audits directed in statute. Any auditing costs associated with
the bill would be impossible to predict and would depend upon
how many local entities would attempt to file for bankruptcy
protection and request an audit. This provision could also
impact the State Auditor's statutory duties to perform
discretionary audits at the direction of JLAC if local request
audits were deemed to be necessary on an emergency basis. This








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could also create inefficiencies by interrupting current audit
work in favor of the audits prescribed under this bill. While
actual costs are unknown and would depend upon the number and
complexity of local entities' requests for audits, staff
estimates average audit costs would be in the range of $250,000
per audit.

Staff notes that this bill appears to violate the Legislature's
sole constitutional authority to appropriate funds.
Specifically, the bill directs the Controller to "transfer"
funds from the General Fund to the State Auditor when a local
agency requests an audit. This is an unconstitutional
delegation of legislative authority.

PROPOSED AUTHOR AMENDMENTS would delete provisions authorizing a
local entity to request that the State Auditor conduct an audit
of the entity's finances.