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Italicized text includes proposed additions to law or the previous version of the bill.
Struck text includes proposed deletions to law or the previous version of the bill.

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AMENDED IN SENATE SEPTEMBER 8, 2011
AMENDED IN SENATE SEPTEMBER 2, 2011
AMENDED IN SENATE AUGUST 31, 2011
AMENDED IN SENATE AUGUST 15, 2011
AMENDED IN SENATE JULY 12, 2011
AMENDED IN SENATE JUNE 29, 2011
AMENDED IN ASSEMBLY MAY 31, 2011
AMENDED IN ASSEMBLY MARCH 31, 2011

INTRODUCED BY Assembly Member Wieckowski

FEBRUARY 15, 2011

An act to amend Section 53760 of, and to add Sections 53760.1,
53760.3, and 53760.5 53760.5, and 53760.7
to, the Government Code, relating to local government.


LEGISLATIVE COUNSEL'S DIGEST


AB 506, as amended, Wieckowski. Local government: bankruptcy:
neutral evaluation.
Under existing law, any taxing agency or instrumentality of the
state may file a petition and prosecute to completion bankruptcy
proceedings permitted under the laws of the United States.
This bill would prohibit a local public entity from filing under
federal bankruptcy law unless the local public entity has
participated in a specified neutral evaluation process with
interested parties, as defined, 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 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
bankruptcy protections.
Vote: majority. Appropriation: no. Fiscal committee: no.
State-mandated local program: no.


THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:

SECTION 1. The Legislature hereby finds and declares all of the
following:
(a) Filing for Chapter 9 can reduce service levels to the
taxpayers and residents of a municipality. In some circumstances, it
can have major short- and long-term fiscal consequences for the
municipality, the surrounding municipalities, and the state. Filing
for bankruptcy protection under Chapter 9 should be considered a last
resort, to be instituted only after other reasonable efforts have
been made to avoid a bankruptcy filing or otherwise appropriately
plan for it. It is in the interest of the state, local governments,
and the public that local governmental entities have sufficiently
sound financial capacity to provide required services to the public
and meet their contractual and other obligations during any
restructuring or financial reorganization process. Furthermore, it is
in the best interest of the public, the state, and local
governmental entities that employees, trade creditors, bondholders,
and other interest holders be included in an appropriate
restructuring process and have an adequate understanding of the
financial capacity of local governmental entities and their
obligations, as a clear understanding of both is necessary for any
restructuring or reorganization process.
(b) To the extent financial relief granted through Chapter 9 can
affect debt service payments, the bondholders have a direct interest
in the Chapter 9 process, particularly prior to filing. Therefore, it
is important for those parties to be able to participate in a
prefiling confidential neutral evaluation process that could assist
parties in reaching a settlement and avoiding a bankruptcy filing or
otherwise lead to a prenegotiated consensual plan of readjustment as
clearly contemplated by Section 109(c) of Title 11 of the United
States Code.
(c) To the extent financial relief granted through Chapter 9 could
affect public employee compensation, employees have a direct
interest in the Chapter 9 process, particularly prior to filing.
Therefore, it is important for those parties to be able to
participate in a prefiling confidential neutral evaluation process
that could assist parties in reaching a settlement or otherwise lead
to a prenegotiated, consensual plan of adjustment and avoid a Chapter
9 filing.
(d) Given the connection between state allocations and local
budgets, the state has a role in assisting municipalities to address
potential insolvency with the goal of averting municipality
bankruptcy filings where possible and providing a process designed to
make the debt restructuring process in or outside of a Chapter 9
bankruptcy as cost effective and efficient as possible for all
participants.
(e) California's taxpayers who rely on public safety, senior,
recreational, municipal health, library, and other public services,
as well as those who own and operate businesses in our communities,
deserve every reasonable and appropriate effort that state and local
government can make to avoid adverse consequences of Chapter 9
bankruptcy filings, particularly where a neutral evaluation may lead
to the avoidance of Chapter 9 filing by an out-of-court resolution of
outstanding obligations and disputes.
(f) Resolving municipal and state business and financial issues in
a timely, fair, and cost-effective manner is an integral part of a
successful government and is in the public interest. It has long been
recognized that alternative dispute resolution proceedings, like a
neutral evaluation, offer an economical, discreet, and expeditious
way to resolve potentially devastating situations.
(g) Through the neutral evaluation process, the neutral evaluator,
a specially trained, neutral third party, can assist the
municipality and its creditors and stakeholders to fully explore
alternatives, while allowing the interested parties to exchange
information in a confidential environment with the assistance and
supervision of a neutral evaluator to determine whether the
municipality's contractual and financial obligations can be
renegotiated on a consensual basis.
SEC. 2. Section 53760 of the Government Code is amended to read:
53760. A local public entity in this state may file a petition
and exercise powers pursuant to applicable federal bankruptcy law if
either of the following apply:
(a) The local public entity has participated in a neutral
evaluation process pursuant to subdivision (a) of
Section 53760.3.
(b) The local public entity declares a fiscal emergency and adopts
a resolution by a majority vote of the governing board pursuant to
Section 53760.5.
SEC. 3. Section 53760.1 is added to the Government Code, to read:
53760.1. As used in this article the following terms have the
following meanings:
(a) "Chapter 9" means Chapter 9 (commencing with Section 901) of
Title 11 of the United States Code.
(b) "Creditor" means either of the following:
(1) An entity that has a noncontingent 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
five million dollars ($5,000,000) or comprises more than 5 percent of
the local public entity's debt or obligations, whichever is less.
(2) An entity that may would have a
noncontingent claim against the municipality
arising out of
upon the rejection of an
executory contract or unexpired lease in a Chapter 9 case and whose
claim represents would represent at
least five million dollars ($5,000,000) or comprises more than 5
percent of the local public entity's debt or obligations, whichever
is less.
(c) "Debtor" means a local public entity that may file for
bankruptcy under Chapter 9.
(d) "Good faith" means participation by a party in the neutral
evaluation process with the intent to negotiate toward a resolution
of the issues that are the subject of the neutral evaluation process,
including the timely provision of complete and accurate information
to provide the relevant parties through the neutral evaluation
process with sufficient information, in a confidential manner, to
negotiate the readjustment of the municipality's debt.
(e) "Interested party" means 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. A
local public entity may 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 five million dollars ($5,000,000)
or comprise more than 5 percent of the local public entity's debt or
obligations, whichever is less.
(f) "Local public entity" means any county, city, district, public
authority, public agency, or other entity, without limitation, that
is a municipality as defined in Section 101(40) of Title 11 of the
United States Code (bankruptcy), or that qualifies as a debtor under
any other federal bankruptcy law applicable to local public entities.
For purposes of this article, "local public entity" does not include
a school district.
(g) "Local public entity representative" means the person or
persons designated by the local public agency with authority to make
recommendations and to attend the neutral evaluation on behalf of the
governing body of the municipality.
(h) "Neutral evaluation" is a form of alternative dispute
resolution that may be known as mandatory mediation. A "neutral
evaluator" may also be known as a mediator.

SEC. 4. Section 53760.3 is added to the Government Code, to read:
53760.3. (a) A local public entity may initiate the 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. The local public entity
shall initiate the neutral evaluation by providing notice by
certified mail of a request for neutral evaluation to all interested
parties as defined in Section 53760.1.
(b) Interested parties shall respond within 10 business days of
receipt of notice of the local public entity's request for neutral
evaluation.
(c) Interested (1)
The local public entity and the interested
parties agreeing to
participate in the neutral evaluation shall , through a mutually
agreed upon process,
select the neutral evaluator to oversee
the neutral evaluation process and shall
facilitate all discussions in an effort to resolve their disputes.

(2) If the local public entity and interested parties fail to
agree on a neutral evaluator within seven days after the interested
parties have responded to the notification sent by the public entity,
the public entity shall select five qualified neutral evaluators and
provide their names, references, and backgrounds to the
participating interested parties. Within three business days, a
majority of participating interested parties may strike up to four
names from the list. If a majority of participating interested
parties strikes four names, the remaining candidate shall be the
neutral evaluator. If the majority of participating parties strikes
fewer than four names, the local public entity may choose which of
the remaining candidates shall be the neutral evaluator.

(d) A neutral evaluator shall have experience and training in
conflict resolution and alternative dispute resolution and shall meet
at least one of the following qualifications:
(1) At least 10 years of high-level business or legal practice
involving bankruptcy or service as a United States Bankruptcy Judge.
(2) Professional experience or training in municipal finance and
one or more of the following issue areas:
(A) Municipal organization.
(B) Municipal debt restructuring.
(C) Municipal finance dispute resolution.
(D) Chapter 9 bankruptcy.
(E) Public finance.
(F) Taxation.
(G) California constitutional law.
(H) California labor law.
(I) Federal labor law.
(e) The neutral evaluator shall be impartial, objective,
independent, and free from prejudice. The neutral evaluator shall not
act with partiality or prejudice based on any participant's personal
characteristics, background, values or beliefs, or performance
during the neutral evaluation process.
(f) The neutral evaluator shall avoid a conflict of interest or
the appearance of a conflict of interest during the neutral
evaluation process. The neutral evaluator shall 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. Notwithstanding subdivision (n), if the neutral
evaluator is informed of the existence of any facts that a
reasonable individual would consider likely to create a potential or
actual conflict of interest, the neutral evaluator shall 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 shall
notify all other parties to the neutral evaluation, including the
neutral evaluator, within 15 days of receipt of the notice from the
neutral evaluator, the neutral evaluator shall withdraw and a new
neutral evaluator shall be selected pursuant to subdivisions (a) and
(b) of Section 53761.3.
(g) Prior to the neutral evaluation process, the neutral evaluator
shall not 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.
(h) The neutral evaluator shall 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.
(i) The neutral evaluator shall not impose a settlement on the
parties. The neutral evaluator shall use his or her best efforts to
assist the parties to reach a satisfactory resolution of their
disputes. Subject to the discretion of the neutral evaluator, the
neutral evaluator may make oral or written recommendations for
settlement or plan of readjustment to a party privately or to all
parties jointly.
(j) The neutral evaluator shall inform the local public entity and
all parties of the provisions of Chapter 9 relative to other
chapters of the bankruptcy codes. This instruction shall 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.
(k) The neutral evaluator may request from the parties
documentation and other information 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.
(l) The neutral evaluator shall 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.
(m) In the event of a settlement with all interested parties, the
neutral evaluator may assist the parties in negotiating a
prepetitioned, preagreed plan of readjustment in connection with a
potential Chapter 9 filing.
(n) 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, the local public entity or any
interested party may make a request to the other interested parties
to remove the neutral evaluator. If the local public entity and the
majority of the interested parties agree that the neutral evaluator
should be removed, the parties shall select a new neutral evaluator.
(o) The local public entity and all interested parties
participating in the neutral evaluation process shall negotiate in
good faith.
(p) The local public entity and interested parties shall provide a
representative of each party to attend all neutral evaluation
sessions. Each representative shall have the authority to settle and
resolve disputes or shall be in a position to present any proposed
settlement or plan of readjustment to the
parties participating in the neutral evaluation.
(q) The parties shall maintain the confidentiality of the neutral
evaluation process and shall not disclose 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
of the following occur:
(1) All persons that conduct or otherwise participate in the
neutral evaluation expressly agree in writing, or orally in
accordance with Section 1118 of the Evidence Code, to disclosure of
the communication, document, or writing.
(2) The information is deemed necessary by a judge presiding over
a bankruptcy proceeding pursuant to Chapter 9 of Title 11 of the
United States Code to determine eligibility of a municipality to
proceed with a bankruptcy proceeding pursuant to Section 109(c) of
Title 11 of the United States Code.
(r) The neutral evaluation established by this process shall not
last for more than 60 days following the date the evaluator is
selected, unless the local public entity or a majority of
participating
interested parties want to continue and
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.
(s)The

(s) The local public entity shall
pay 50 percent of the costs of neutral evaluation, including but not
limited to the fees of the evaluator, and the creditors shall pay
the balance, unless otherwise agreed to by the parties.
(t) The neutral evaluation process shall end if any of the
following occur:
(1) The parties execute an settlement agreement.
(2) The parties reach an agreement or proposed plan of
readjustment that requires the approval of a bankruptcy judge.
(3) The neutral evaluation process has exceeded 60 days following
the date the neutral evaluator was selected, the parties have not
reached an agreement, and the parties do not agree on
extension of
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.
(4) The neutral evaluator confirms that a neutral evaluation was
initiated by the local public entity but that no interested parties
participated.

(4) The local public entity initiated the neutral evaluation
process pursuant to subdivision (a) and received no responses from
interested parties within the time specified in subdivision (b).

(5) The fiscal condition of the local public entity deteriorates
to the point that a fiscal emergency is declared pursuant to Section
53076.5 and necessitates the need to file a petition and exercise
powers pursuant to applicable federal bankruptcy law.
(u) If the 60 day time period for neutral evaluation has expired,
including any extension agreed to by the local public entity
of the neutral evaluation past the initial 60 day
time period pursuant to subdivision (r)
, 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.
SEC. 4. SEC. 5. Section 53760.5 is
added to the Government Code, to read:
53760.5. Notwithstanding Section 53760.3, a local public entity
may file a petition and exercise powers pursuant to applicable
federal bankruptcy law, 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. The
resolution shall make findings that the public entity is or will be
unable to pay its obligations within the next 60 days. Prior to a
declaration of fiscal emergency and adoption of a resolution, the
local public entity shall place an item on the agenda of a noticed
public hearing on the fiscal condition of the entity to take public
comment. The board of supervisors of a county that int
ends 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.

SEC. 6. Section 53760.7 is added to the
Government Code
, to read:
53760.7. This article shall not impose any liability or
responsibility, in law or equity, upon the state, any department,
agency, or other entity of the 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.

SEC. 5. SEC. 7. The Legislature
finds and declares that Section 4 of this act which adds Section
53760.3 to the Government Code, 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 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.