SACRAMENTO – A bill by Assemblymember Bob Wieckowski (D-Fremont) to require local government agencies to engage in mediation overseen by a neutral third-party evaluator before filing for municipal bankruptcy passed the state Assembly this morning on a 43-0 vote. The bill now heads to the Senate.

AB 506 will help public entities avoid a protracted, expensive bankruptcy process. It establishes a “good faith” negotiation process that has the potential to provide a less costly and more efficient means of restructuring for struggling municipalities.

“As a former councilmember and vice mayor, I believe that state intervention into local government affairs should only occur for good reason and in exceptional circumstances,” Wieckowski said.  “A local government facing severe financial distress is one of those circumstances.  Bankruptcies could affect borrowing rates for other municipalities, costing taxpayers more in the long run.  Even with these facts, my bill does not prohibit bankruptcies as an absolute last resort nor does it require state approval.  It is a common-sense step that is far less strict than laws in a majority of other states.”

California is one of only 11 states that permit bankruptcies by public entities without any limitations or oversight.  A majority of states do not authorize local government entities to go bankrupt and 13 states place significant restrictions on the process.

Even if a resolution cannot be reached through mediation, the process would not be wasteful because the parties involved would have developed at least a partial proposal of a restructuring plan that should serve to expedite the process in Chapter 9.  Chapter 9 has significant limitations compared to other types of bankruptcies.  AB 506 would provide substantially greater flexibility to the public entity.

The municipalities would appoint the neutral evaluator in a mutually agreed upon process that is common in alternative dispute resolution processes.

Contact: Jeff Barbosa 916-319-2020