help



join the cool folks
and advertise on aroundthecapitol.com

california political news & opinion
california legislation > AB 506

Microsoft Word version




------------------------------------------------------------
|SENATE RULES COMMITTEE | AB 506|
|Office of Senate Floor Analyses | |
|1020 N Street, Suite 524| |
|(916) 651-1520 Fax: (916) | |
|327-4478 | |
------------------------------------------------------------


THIRD READING


Bill No: AB 506
Author: Wieckowski (D)
Amended: 9/8/11 in Senate
Vote: 21


SENATE GOVERNANCE & FINANCE COMMITTEE : 6-3, 7/6/11
AYES: Wolk, DeSaulnier, Hancock, Hernandez, Kehoe, Liu
NOES: Huff, Fuller, La Malfa

SENATE APPROPRIATIONS COMMITTEE : 6-3, 8/25/11
AYES: Kehoe, Alquist, Lieu, Pavley, Price, Steinberg
NOES: Walters, Emmerson, Runner

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


SUBJECT : Local government: bankruptcy: neutral
evaluation

SOURCE : Author


DIGEST : This bill authorizes a local public entity to
file a petition and exercise powers pursuant to applicable
federal bankruptcy law if it either participates in a
neutral evaluation process, or declares a fiscal emergency.

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,
CONTINUED





AB 506
Page
2

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
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.

Specifies of this bill:

This bill authorizes a local public entity to file a
petition and exercise powers pursuant to applicable federal
bankruptcy law if it either:

Participates in a neutral evaluation process, or
Declares a fiscal emergency.

1. Neutral evaluation process .

This bill authorizes a local public entity to initiate a
neutral evaluation process if it is, or likely will
become, unable to meet its financial obligations when
those obligations are due or become due.

This bill 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 bankruptcy law, or that qualifies
as a debtor under any other federal bankruptcy law

CONTINUED





AB 506
Page
3

applicable to local public entities. This bill
specifies that a "local public entity" does not include
a school district.
This bill requires a local public entity to initiate the
neutral evaluation by providing notice by certified mail
of a request for neutral evaluation to all interested
parties. This bill requires interested parties to
respond within 10 business days of receipt of notice of
the local public entity's request for neutral
evaluation.

This bill defines "interested party" as a trustee, a
committee of creditors, an affected creditor, an
indenture trustee, a pension fund, a bondholder, a union
that, under its collective bargaining agreements, has
standing to initiate contract or debt restructuring
negotiations with the municipality, or a representative
selected by an association of retired employees of the
public entity who receive income from the public entity
convening the neutral evaluation.

This bill defines "creditor" as either of the following:

An entity that has a claim against a municipality
that arose at the time of or before the commencement
of the neutral evaluation process and whose claim
represents at least $5 million or comprises more than
five percent of the local public entity's debt or
obligations, whichever is less.

An entity that would have a non-contingent claim
against the municipality arising out of rejection of
an executory contract or unexpired lease in a Chapter
9 case and whose claim would represent at least $5
million or comprises more than five percent of the
local public entity's debt or obligations, whichever
is less.

This bill allows a local public entity to invite holders
of contingent claims to participate as interested
parties in the neutral evaluation if the local public
entity determines that the contingency is likely to
occur and the claim may represent $5 million or comprise
more than five percent of the local public entity's debt

CONTINUED





AB 506
Page
4

or obligations, whichever is less.

This bill requires the local public entity and all
interested parties participating in the neutral
evaluation process to negotiate in good faith.

This bill requires the local public entity and
interested parties to provide a representative of each
party to attend all neutral evaluation sessions. Each
party's representative must have the authority to settle
and resolve disputes or be in a position to present any
proposed settlement or plan of readjustment to the
parties participating in the neutral evaluation.

This bill requires the parties to maintain the
confidentiality of the neutral evaluation process. This
bill prohibits parties from disclosing statements made,
information disclosed, or documents prepared or
produced, during the neutral evaluation process, at the
conclusion of the neutral evaluation process, or during
any bankruptcy proceeding unless either:

All persons that conduct or otherwise participate
in the neutral evaluation expressly agree in writing,
or orally, to disclosure of the communication,
document, or writing.

The information is deemed necessary by a judge
presiding over a bankruptcy proceeding pursuant
federal bankruptcy law to determine eligibility of a
municipality to proceed with a bankruptcy proceeding.


This bill prohibits a neutral evaluation from lasting
for more than 60 days following the date the evaluator
is selected, elect to extend the process for up to 30
additional days. The neutral evaluation process shall
not last for more than 90 days following the date the
evaluator is selected unless the local public entity and
a majority of the interested parties agree to an
extension.

This bill requires an end to the neutral evaluation
process must end if any of the following occur:

CONTINUED





AB 506
Page
5


The parties execute a settlement agreement.

The parties reach an agreement or proposed plan of
readjustment that requires the approval of a
bankruptcy judge.

The neutral evaluation process has exceeded 60
days following the date the neutral evaluator was
selected, 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 initial 60 day time
period.

The local public entity initiated the neutral
evaluation process and received no responses from
interested parties within the specified time.

The fiscal condition of the local public entity
deteriorates to the point that the municipality
declares a fiscal emergency.

This bill specifies that if the 60 day time period for
neutral evaluation has expired, including any extension
agreed to by the local public entity, and the neutral
evaluation is complete with differences resolved, the
neutral evaluation shall be concluded. If the neutral
evaluation process does not resolve all pending disputes
with creditors, the local public entity may file a
petition and exercise powers pursuant to applicable
federal bankruptcy law if, in the opinion of the
governing board of the local public entity, a bankruptcy
filing is necessary.

This bill requires the local public entity to pay 50
percent of the costs of neutral evaluation, including
but not limited to the fees of the evaluator, and the
creditors must pay the balance, unless otherwise agreed
to by the parties.

2. Neutral evaluator selection and removal .

This bill requires the local public entity and the

CONTINUED





AB 506
Page
6

interested parties who agree to participate in the
neutral evaluation through a mutually agreed upon
process to select the neutral evaluator to oversee the
neutral evaluation process. The interested parties must
facilitate all discussions in an effort to resolve their
disputes. The board of supervisors of a county that
intends to take action pursuant to this section and
places a notice on an agenda regarding a proposed
resolution to declare a fiscal emergency may require
local agencies with funds invested in the county
treasury to provide a five-day notice of withdrawal
before the county is required to comply with a request
for withdrawal of funds by that local agency.

If at any time during the neutral evaluation process the
local public entity and a majority of the
representatives of the interested parties participating
in the neutral evaluation wish to remove the neutral
evaluator, this bill allows the local public entity or
any interested party to request that the neutral
evaluator be removed. If the local public entity and
the majority of the interested parties agree that the
neutral evaluator should be removed, the parties must
select a new neutral evaluator.

If a neutral evaluator is informed of any facts that a
reasonable individual would consider likely to create a
potential or actual conflict of interest, this bill
requires the neutral evaluator to disclose these facts
in writing to the local public entity and all interested
parties involved in the neutral evaluation. If any
party to the neutral evaluation objects to the neutral
evaluator, that party must notify all other parties,
including the neutral evaluator, within 15 days of
receiving the notice from the neutral evaluator, the
neutral evaluator must withdraw, and a new neutral
evaluator must be selected.

3. Neutral evaluator requirements .

This bill requires that a neutral evaluator must have
experience and training in conflict resolution and
alternative dispute resolution and must meet at least
one of the following qualifications:

CONTINUED





AB 506
Page
7


At least 10 years of high-level business or legal
practice involving bankruptcy or service as a United
States Bankruptcy Judge.

Professional experience or training in municipal
finance and one or more of the following issue areas:

o Municipal organization.
o Municipal debt restructuring.
o Municipal finance dispute resolution.
o Chapter 9 bankruptcy.
o Public finance.
o Taxation.
o California constitutional law.
o California labor law.
o Federal labor law.

This bill provides that a neutral evaluator:

Must be impartial, objective, independent, and
free from prejudice.

Cannot act with partiality or prejudice based on
any participant's personal characteristics,
background, values or beliefs, or performance during
the neutral evaluation process.

Must avoid a conflict of interest, or the
appearance of a conflict of interest, during the
neutral evaluation process and must make a reasonable
inquiry to determine whether there are any facts that
a reasonable individual would consider likely to
create a potential or actual conflict of interest.

Cannot, before the neutral evaluation process,
establish another relationship with any of the
parties in a manner that would raise questions about
the integrity of the neutral evaluation, except that
the neutral evaluator may conduct further neutral
evaluations regarding other potential local public
entities that may involve some of the same or similar
constituents to a prior mediation.


CONTINUED





AB 506
Page
8

Must conduct the neutral evaluation process in a
manner that promotes voluntary, uncoerced
decisionmaking in which each party makes free and
informed choices regarding the process and outcome.

Cannot impose a settlement on the parties.

Must use his/her best efforts to assist the
parties to reach a satisfactory resolution of their
disputes.

May make oral or written recommendations for
settlement or plan of readjustment to a party
privately or to all parties jointly.

Must inform the local public entity and all
parties of the provisions of Chapter 9 relative to
other chapters of the bankruptcy codes. This
instruction must highlight the limited authority of
United States bankruptcy judges in Chapter 9, such as
the lack of flexibility available to judges to reduce
or cram down debt repayments and similar efforts not
available to reorganize the operations of the city
that may be available to a corporate entity.

May request documentation and other information
from the parties that the neutral evaluator believes
may be helpful in assisting the parties to address
the obligations between them. This documentation may
include the status of funds of the local public
entity that clearly distinguishes between general
funds and special funds, and the proposed plan of
readjustment prepared by the local public entity.

Must provide counsel and guidance to all parties,
shall not be a legal representative of any party, and
shall not have a fiduciary duty to any party.

May, in the event of a settlement with all
interested parties, assist the parties in negotiating
a prepetitioned, preagreed plan of readjustment in
connection with a potential Chapter 9 filing.

4. Fiscal emergency declaration .

CONTINUED





AB 506
Page
9


As an alternative to the neutral evaluation process,
this bill authorizes a local public entity to file a
petition and exercise powers pursuant to federal
bankruptcy law if the local public entity declares a
fiscal emergency and adopts a resolution by a majority
vote of the governing board.

The resolution must:

Be adopted at a noticed public hearing.

Include 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.

Make findings that the public entity is or will be
unable to pay its obligations within the next 60
days.

Before declaring a fiscal emergency and adopting a
resolution, the local public entity must place an item
on the agenda of a noticed public hearing on the fiscal
condition of the entity to take public comment.

5. Definitions .

This bill defines numerous terms used in this bill.

6. Findings and declarations .

This bill contains extensive legislative findings and
declarations supporting the need to establish a neutral
evaluation process for municipalities in fiscal
distress. As constitutionally required by Proposition
59 (2004), this bill also includes legislative findings
and declarations regarding the necessity of maintaining
the confidentiality of neutral evaluation proceedings.

This bill specifies that it does not impose any
liability or responsibility, in law or equity, upon the
state, any department, agency, or other entity of the

CONTINUED





AB 506
Page
10

state, or any officer or employee of the state, for any
action taken by any local public entity pursuant to this
article, for any violation of the provisions of this
article by any local public entity, or for any failure
to comply with the provisions of this article by any
local public entity. No cause of action against the
state, or any department, agency, entity of the state,
or any officer or employee of the state acting in their
official capacity may be maintained for any activity
authorized by this article, or for the act of a local
public entity filing under Chapter 9 of Title 11 of the
United States Code, including any proceeding following a
local public entity's filing.

Background

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

CONTINUED





AB 506
Page
11

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.

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
completed.

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
soon.

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

CONTINUED





AB 506
Page
12

local officials to participate in a neutral alternative
dispute resolution process before filing for bankruptcy.

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

SUPPORT : (Verified 9/7/11 - per Senate Governance and
Finance Committee analysis of 9/2/11)

California Conference Board of The Amalgamated Transit
Union
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
Police Officers Research Association of California
Professional and Technical Engineers
Unite Here!
United Food and Commercial Workers Region 8 States Council
Utility Workers Union of America, Local 132


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,
Fletcher, Beth Gaines, Garrick, Grove, Hagman, Halderman,
Harkey, Jeffries, Jones, Knight, Logue, Mansoor, Miller,
Morrell, Nestande, Nielsen, Norby, Olsen, Silva, Smyth,
Valadao, Wagner

CONTINUED





AB 506
Page
13

NO VOTE RECORDED: Buchanan, Gordon, Gorell, Hall, Torres


AGB:kc 9/9/11 Senate Floor Analyses

SUPPORT/OPPOSITION: SEE ABOVE

**** END ****





































CONTINUED