SAN FRANCISCO - A bill that would make it tougher for California municipalities to declare bankruptcy passed the state Assembly last week and now moves to the Senate.
The labor-backed bill has drawn protest from bankruptcy lawyers, local government groups and investors, who say it would make it harder to resolve a distressed municipality's financial woes and would effectively ban municipal bankruptcy. Public employee unions are pushing the bill in reaction to Vallejo, Calif.'s bankruptcy, which has allowed the city to slash worker pay to balance its budget.
The legislation - AB 155 - would require local governments that want to declare bankruptcy to get permission from the California Debt and Investment Advisory Commission and would give the commission the power to block city attempts to reject contracts.
The bill's sponsor, Assemblyman Tony Mendoza, D-Norwalk, said it would prevent the abuse of bankruptcy and prevent a local government from declaring bankruptcy without considering the impacts on other governments and their access to capital. Critics say the bill would prevent a distressed municipality from using bankruptcy to restructure its debts, but doesn't offer alternative solutions to a municipality's financial problems.
"This absolutely doesn't protect investors," said Jon Schotz, chief investment officer at Saybrook Capital LLC in Santa Monica, Calif.
He said bankruptcy hasn't been abused by California municipalities and can actually improve the prospects that a bondholder will be repaid by a distressed debtor.
"The reason you go into bankruptcy is to preserve assets," Schotz said. "The longer you wait stay out - once you decide you have to go in - the more your assets bleed out, the less protection your creditors actually have."
The bill has drawn the support of a host of major labor unions, including the California Labor Federation, the FIRE and the California Nurses Association. But it has drawn opposition from local government groups, including the League of California Cities and the California State Association of Counties.
Chapter 9 of the U.S. bankruptcy code, which governs municipal bankruptcies, requires local governments to get state permission before filing for protection from creditors. California is one of just 12 states that allow localities to declare bankruptcy without any state oversight.
AB 155 would require CDIAC to assess a municipality's finances and propose alternatives to bankruptcy before giving the government permission to file. Local government groups said the bill takes decision-making authority away from local officials, who best know a community's financial situation, in favor of a board that's largely composed of state politicians.
CDIAC includes two local government finance officers and five state officials: the controller, the treasurer, the governor's director of finance, and a member from each house of the Legislature.
The Assembly passed the bill in a 47-to-25 vote after being amended to include timelines for a CDIAC response to a bankruptcy request, to declare that the state assumed no financial responsibilities under the act and to give the commission the power to block the use of bankruptcy to reject contracts.
The Assembly vote was mostly along party lines, with no Republicans supporting the measure. While the state Senate is also controlled by Democrats, Gov. Arnold Schwarzenegger, a Republican, hasn't said whether he supports or opposes the bill.
