The California Senate plans to hold hearings Wednesday on a bill that would limit municipal bankruptcies in the state.

AB 155 would require the state’s municipalities to secure the approval of the California Debt and Investment Advisory Commission before seeking protection from creditors under Chapter 9 of the U.S. Bankruptcy Code.

The state Assembly approved the bill last year, but its sponsors declined to bring it to a vote in the Senate because they didn’t have the votes to clear the Local Government Committee.

The panel’s membership has changed, and proponents of the bill now believe they have enough support to send it to the full Senate and to Gov. Arnold Schwarzenegger, who has not taken a position on the legislation.

The bill’s supporters — including major public employee unions and state Treasurer Bill Lockyer — say it would prevent unnecessary bankruptcies that tarnish the reputation of California’s local governments and potentially raise borrowing costs for other governments.

“Federal law requires states to approve municipal bankruptcies,” said Assembly member Tony Mendoza, D-Norwalk, the bill’s main sponsor. “California is currently among 12 states that provides this approval in advance without question. AB 155 simply moves California into the category of states that provide some level of oversight to the process.”

Opponents — including local governments and some municipal bond investors — say the bankruptcy courts are better able to decide if a local government is bankrupt than a committee of politicians and political appointees that are beholden to public employee unions.

“They have no particular expertise in municipal finance,” said Jean Kinney Hurst, the California State Association of Counties’ legislative representative for revenue and taxation. “This is political.”

Public employee unions, including the California Professional Firefighters, began pushing for the legislation after Vallejo successfully abrogated its labor contracts in Chapter 9 bankruptcy. The San Francisco Bay area city declared bankruptcy in May 2008.

Opponents say there’s no need for the law because California local governments haven’t abused bankruptcy. They say only three general purpose governments — Vallejo, Orange County in 1994 and Desert Hot Springs in 2001 — have ever used the law.

They also say bond investors have more certainty and better prospects in bankruptcy than in an uncontrolled insolvency, noting that revenue bonds backed by pledged revenues are considered secured creditors in a bankruptcy.

But Lockyer, who as state treasurer manages California’s debt portfolio, supports making it harder for municipalities to file Chapter 9 because he believes high-profile bankruptcies can push up borrowing costs for both the state and other local governments.

“Municipal bankruptcies produce negative perceptions among investors about the state’s credit risk,” said Lockyer spokesman Tom Dresslar. “They would take that out of our hides when we went to market. That’s the concern.”

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