Bankruptcy Bill Hijacked By Senate

JULY 15, 2011

By KATY GRIMES

An Assembly bill requiring cities and counties to go through a mediation process before filing for bankruptcy has been hijacked by the Senate Rules Committee, but the reason why is fuzzy.

In February, freshman Democratic Assemblyman Bob Wieckowski of Freemont introduced AB 506, which would require all municipalities to go through a 90-day “neutral” mediation process, as well as meet certain requirements and procedures before filing for Chapter 9 bankruptcy protection.

In an interview, Wieckowski said that he has already made numerous amendments to the bill after working on it with Assembly colleagues. But apparently now the Senate leadership is uncomfortable with it.

Wieckowski said that what he is trying to accomplish is to create a bankruptcy mediation process before a city or municipality seeks bankruptcy as the final option. Wieckowski said that while no city considers bankruptcy without weighing the options and the scope of the financial problems, his bill helps cities go through a 90-day process, under the leadership of a bankruptcy workout expert, before making a final decision to choose bankruptcy or some other workout avenue.

As a bankruptcy attorney, Wieckowski said that by the time a city is talking about bankruptcy, so many mistakes and bad moves have been made that the mess is not only overwhelming, it’s too late for council members to work the financial troubles out.  By bringing in a professional bankruptcy mediator, and authorizing a representative of each of the interested parties to participate in a “readjustment plan,” Wieckowski’s goal is to help cities, counties or municipalities prevent filing bankruptcy. Or, if bankruptcy is inevitable, Wieckowski said that it will become evident during the mediation, and the city can better prepare for it.

‘Interested Parties’

Wieckowski explained that “interested parties” include public employee unions, firefighters and other employee groups dependent on city government. Each group would send one representative authorized to make decisions, who would represent only one voice at the mediation table.

“By this time, it’s obvious that city council or supervisors clearly did not have the political will to effectively deal with these groups,” said Wieckowski. “And while this is not a super deal for unions, this is a readjustment plan, and not a reorganization.”

In legislative committee hearings, Wieckowski has expressed concern about the effects of bankruptcy on other municipalities as well as the borrowing power of those municipalities.

In the Senate Governance and Finance Committee last week, it was apparent that there had been behind-the-scenes meetings between Democratic leadership and Wieckowski prior to the hearing. Wieckowski’s bill ended up getting pulled and sent back to the Senate Rules Committee for remodeling.

“I don’t want the Rules Chair taking over the bill,” Wieckowski told Sen. Lois Wolk, the committee chairwoman, during the hearing.

“He’s not a bad person to take over the bill,” answered Wolk, referring to Sen. Pres. Pro Tem Darrell Steinberg, D-Sacramento, chairman of the Rules Committee.

Within 24 hours of the hijacking, most of the old language had been stricken from the bill.

Wieckowski explained that he had already collaborated a great deal with colleagues and stakeholders on the bill, and had made many amendments prior to the hearing.

Acknowledging that Steinberg indeed had hijacked his bill, Wieckowski said that he is working on amendments — for a third time.

“Sen. Wolk asked me to make the bill optional,” Wieckowski said. But that would take the purpose out of the bill.

Updating

In 1978 federal bankruptcy law was updated, but Wieckowski said nothing much was done with Chapter 9, bankruptcy for municipalities. He said that the federal government has allowed each state to address municipalities’ bankruptcy issues, and his bill seeks to refine the process in a responsible way.

However, the League of California Cities and many local officials do not like AB 506. They say that it undermines their discretion in responding to a fiscal crisis. Taxpayer advocacy groups, Chambers of Commerce and healthcare districts are also in opposition.

With the city of Vallejo’s bankruptcy in 2008, many lawmakers appear skittish about California municipalities filing for federal bankruptcy protection. But Wieckowski said preventing cities from filing is not a good option either.

Several bills in the last few years have been introduced attempting to prevent cities from filing for bankruptcy, or severely undermining the intent of federal bankruptcy. Last year Assemblyman Tony Mendoza, D-Artesia, authored AB 155, which would have given one state agency the ability to deny any municipal bankruptcy filing. Wieckowski said he was not in favor of Mendoza’s bill.

In a CalWatchDog.com story explaining the pitfalls of Mendoza’s bankruptcy bill, one Capitol source said, “Simply put, AB155 undermines the principal benefits of federal bankruptcy: the automatic stay of financial obligations and time to allow a debtor some ‘breathing space’ to formulate a debt readjustment plan. And limiting financially-stressed agencies’ flexibility to address their primary expense — personnel costs — would set perverse policy.”

And Jon Coupal, president of the Howard Jarvis Taxpayers Association, expressed taxpayer opposition to AB155: “Bargaining with yourself works out well, right up until the point when the private sector can no longer afford these extravagant demands. Then your government benefactors become your enemies.”

By August 15, Wieckowski expects to have the latest round of amendments done and ready for the Senate Rules Committee.

What form the bill takes after the new amendements is anyone’s best guess. In a sincere effort to create an option to municipal bankruptcy for cities and counties, Wieckowski appears to have authored an effective bill. But that is a moot point now. With the latest round of legislative intervention, don’t expect to see any real reform or options for cities.