AB 1692 could halt city bankruptcies

April 26, 2012

By Katy Grimes

SACRAMENTO — Bankruptcy still haunts California cities six months after Gov. Jerry Brown signed into law AB 506. Written by Assemblyman Bob Wieckowski, D-Fremont, the bill made it more difficult for municipalities to file bankruptcy, such as requiring negotiations with creditors before a bankruptcy can be filed.

When AB 506 was only four months into law, Wieckowski started pushing a new bankruptcy bill, AB 1692. On Wednesday, Wieckowski told colleagues in the Assembly Local Government Committee that AB 1692 was a “cleanup bill” for AB 506. The new bill would prevent cities from filing for bankruptcy protection without first participating in a lengthy mediation process. The fur flew when he said he made so many concessions on the original bill just to get it passed and signed into law, that he created a new bill to rectify and retract those concessions.

But after Wieckowski’s testimony, some are questioning the real motives behind the new bill. Is this just a legal vanity bill, or a gift to the state’s labor unions?

New Bankruptcy Law

Under AB 506, local governments are now required to use a “neutral evaluator” for a minimum of 60 days before seeking full bankruptcy protection. This new mediation process can only be avoided if a municipality declares a financial emergency and heads straight for federal bankruptcy court.

Sitting with Wieckowski at the hearing was Christy Bouma with the California Professional Fire Fighters. She said, “We want to make sure it works.” But firefighters’ contracts could be nullified if cities enter into bankruptcy.

The California Labor Federation, the Teamsters, the United Association of Plumbers and Pipefitters, the Sheet Metal Workers’ International Association and many other labor unions were also represented at the hearing, all in support of AB 1692, and also obviously concerned about losing their rich union contracts.

But cities feel duped.

Cities Are Angry About Changes  

The League of California Cities reported in its fall 2011 newsletter, “In September 2011, after careful negotiations, which included Sen. Lois Wolk, D-Davis, and Gov. Jerry Brown, the League agreed to a compromise based on provisions that allowed for pre-bankruptcy facilitation by a mediator without state or other political intrusion, and unfettered local access to federal bankruptcy protection if an emergency fiscal situation exists.”

Wieckowski agreed to the League’s amendments in September 2011.

The cities of Stockton and Mammoth Lakes are precariously perched on the edge of bankruptcy, and are proceeding with mediation according to the provisions in AB 506. But Wieckowski’s new bill threatens to unravel any headway Stockton has made.

Wieckowski’s proposed changes to the six-month-old bankruptcy law took local government groups by surprise, the league newsletter said, “because AB 506’s passage was preceded by years of legislative battling and extensive negotiations, which led to the legislation being heavily amended to address the concerns of local governments and organizations like the League of CA Cities.”

AB 506 was amended 11 times before finally being passed by the Legislature.

Reversion

AB 1692 appears to revert back to earlier versions of AB 506, before the many amendments were agreed to. But early versions of Wieckowski’s bill had vehement opposition last year.

AB 1692 would remove provisions of AB 506 related to the mediation process, including giving the “neutral evaluator” independent decision-making authority. AB 1692 would allow other interested parties to create delays by allowing the process to continue without agreement by the public entity.

And a disturbing addition to AB 1692 adds “successor agencies” to the list of local public
entities that may file for federal bankruptcy protection. The bill’s analysis explains, AB 1692 “Expands the definition of ‘local public entity,’ to include a successor agency, as defined in the Health and Safety Code related to the dissolution of redevelopment agencies and designation of successor agencies, for the purpose of an entity eligible to file for federal bankruptcy.”

But there was no discussion at the hearing about including former redevelopment agencies in the definition of state public entities entitled to file for bankruptcy, dissolved after Brown and the Legislature this year ended redevelopment, .

Cities’ Opposition

The League of California Cities formally opposed early versions of AB 506 “because it created obstacles to municipal bankruptcy, and resulted in a process stacked against local agencies.” The League said it now is opposed to AB 1692 for the same reasons.

AB 1692 is designed to again insert the phrase “neutral evaluation” into the statute as “a form of alternative dispute resolution that has elements of mediation though, unlike mediation, it may be mandatory mediation.”

Many are concerned that the attempt to undo the agreed-upon provisions in AB 506 only four months after the law took effect, and say it is a bait and switch aimed at the cities of Stockton and Mammoth Lakes, which are currently engaged in mediation with their creditors under the provisions of AB 506.

This measure appears to tamper with that process when the parties have not even had a chance to determine if they can reach agreements.

Kathy Miller, representing Stockton, said the city is engaged in the mandatory mediation process, and is having success. However, because the negotiations are confidential, she could not report specifics, but insisted that the process is working.

Premature Legislation

Other opponents said that the bill is premature, since there are no completed mediated negotiations yet.

“Why wouldn’t we wait until after we see the effects?” asked Assemblyman Cameron Smyth, R-Santa Clarita, chairman of the committee.

“I feel there are obvious things that need to be done,” Wieckowski said. “Things I agreed to, to get the bill signed by the Governor.”

Wieckowski said that, because the rest of the nation is watching to see what California does, he is taking a closer look at the concessions he made last year. And he added that members of the Bankruptcy Bar Association view the process as groundbreaking. “Hopefully I am only improving the situation,” Wieckowski added. “It’s unique to anything ever done.”