SAN FRANCISCO - Under recently proposed legislation, California lawmakers may make it more difficult for municipalities to declare bankruptcy like Vallejo did last year.

The California State Assembly Committee on Local Government will hold hearings this week on AB 155, which would require local governments to get permission to declare bankruptcy from the California Debt and Investment Advisory Commission.

The bill, sponsored by Assembly member Tony Mendoza, D-Norwalk, has drawn the support of a host of major labor unions, including the California Labor Federation 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.

"If one city declares bankruptcy, we're all going to be negatively affected," Mendoza said. "That's why we're trying to make sure that before they do file bankruptcy that it is the best and last resort for any community."

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. Other states either prohibit bankruptcy or require municipalities to seek help from state fiscal authorities before declaring Chapter 9.

Specifically, Mendoza's bill would require CDIAC to assess a municipality's finances and propose alternatives to bankruptcy before giving the government permission to file under Chapter 9. It would also require local governments to submit a debt restructuring plan to CDIAC, along with a list of creditors that would be impaired, before the commission could authorize a bankruptcy.

Local government groups said the bill sets too high a hurdle for municipal bankruptcy and takes decision-making authority away from local officials, who best know a community's budget situation, in favor of a board that's largely composed of state politicians.

The California Debt and Investment Advisory Commission 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.

"If that had been in place it probably would have prevented or substantially stalled Vallejo's going into bankruptcy," said Dwight Stenbakken, deputy executive director of the League of California Cities. That's a problem because local governments need to act quickly when they're on the brink of insolvency.

He said only three cities or counties in California have declared bankruptcy, and they only sought federal court protection after exhausting other options. In addition to Vallejo last year, Desert Hot Springs in Riverside County declared bankruptcy in 2001 and Orange County declared the biggest municipal bankruptcy in history in 1994.

Vallejo plays a big role in discussions of the new bill. The San Francisco Bay Area city declared bankruptcy last May, and has been locked in a legal battle with public employee unions that don't believe the city is really broke. The city has asked the federal bankruptcy court for permission to reject its collective bargaining agreements.

The bill "is unnecessary," Stenbakken said. "It's primarily a political move by labor unions that don't want to have their contracts changed."

He said California - which has been unable to balance its own budgets for most of the past year - is in no position to tell local governments how to run their finances. He said bankruptcy judges are better able to assess a community's solvency and to force the communities and creditors to work out a plan to adjust debts.

But Mendoza said municipal bankruptcies aren't just a local issue. He said they hurt neighboring communities by reducing their property values and access to credit, and they harm local residents who depend on public services, especially children and seniors.

"When a city declares bankruptcy, it affects the surrounding cities and communities," he said. "This is not just a labor bill ... Everybody gets affected by bankruptcy."

He said local governments would still be allowed to seek Chapter 9 protection under his bill, but only as a last resort.

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