This document discusses the financial challenges faced by many California cities following the demise of redevelopment agencies and how cities can seize the opportunity to restore their fiscal health. It recommends cities carefully evaluate ways to reduce costs and increase revenues through measures like workforce reductions, asset sales, and debt restructuring. The document also discusses the Chapter 9 municipal bankruptcy process and recent California legislation on the topic.

1. The Demise of RDAs: An Opportunity
to Restore Fiscal Health with a Vision
for Future Economic Development
California Contract Cities Association
Annual Municipal Seminar
Indian Wells, California
May 18, 2012

2. Municipalities Under Financial Stress:
The Need for a Proactive Approach
David S. Kupetz
SulmeyerKupetz
333 SOUTH HOPE STREET, THIRTY-FIFTH FLOOR
LOS ANGELES, CALIFORNIA 90071-1406
DIRECT DIAL 213-617-5274
FAX 213-629-4520
dkupetz@sulmeyerlaw.com
www.sulmeyerlaw.com

3. Seizing the Opportunity to Restore
Financial Health
• Before the demise of Redevelopment Agencies, many
California cities already faced serious financial issues,
including budget shortfalls and pension underfunding
• On top of unaddressed pre-existing financial realities,
RDA dissolution may push some cities to the brink of
insolvency
• In order to avoid going over the brink, it is important
that cities proactively address these realities and use
the demise of RDAs as an opportunity to maintain or
revive their fiscal health

4. Evaluation Needed
• Careful and prompt evaluation of the city’s
ability to reduce costs and increase revenues
is imperative
• Considering reductions in force, services,
infrastructure spending, employee benefits,
pension obligations, outsourcing, and other
means of cost cutting is necessary
• Analysis of monetizing assets, taxes,
assessments, bonds, fees, possible retention
of former RDA assets, and other alternatives
to enhance revenues is needed

5. Shadow of Chapter 9
• At the same time that opportunities to reduce
costs and increase revenues are being
examined, for cities in severe financial straits,
debt restructuring, moratoriums, and
adjustment are potential solutions that may
need to be explored
• Such exploration takes place in the shadow of
Chapter 9 of the Bankruptcy Code

6. AB 506
• AB 506 requires municipal debtors to engage in
“neutral evaluation” (mediation) before being eligible
to file for Chapter 9, except in the case of a declared
fiscal emergency
• AB 506 was largely promoted by government employee
unions and earlier versions of the legislation severely
restricted a municipality’s ability to enter Chapter 9 as
a last resort for financial reorganization

7. AB 1692
• Seeks to unravel key features of last year’s
agreement on AB 506
• Would revert to concepts that were advanced in
earlier versions of AB 506 which local
governments strongly opposed

8. AB 1692
• Proposed changes to AB 506
– Removes references to mandatory mediation and
“mediator” as terms that describe the neutral party
– Seeks to empower the neutral evaluator with
independent decision-making authority
– Changes the circumstances under which the
mediation may be continued/extended by removing
the required concurrence by the affected local
public entity

9. Initial Application of AB 506
• AB 506 has been invoked twice so far:
– City of Stockton
– Town of Mammoth Lakes

10. Maintaining Flexibility: Avoiding the Brink
• Preserve General Fund Liquidity
• Identify unrestricted fund balances held in other
funds
• Develop plan for lower service level scenarios
• Develop plan for alternative delivery approaches
to further reduce costs

11. Maintaining Flexibility: Avoiding the Breach
• Develop multi-year forecasts for all funds
• Analyze projected costs of services and
opportunities for generating fees
• Evaluate cost recovery opportunities that might
result in additional revenue to aid in the
restoration of needed services

12. Maintaining Flexibility: Avoiding the Brink
• Consider voter polling to gauge support for
augmenting existing revenue sources
• Debt restructuring – outside of Court, if
possible

13. Chapter 9 Eligibility
• Unlike Chapter 11, Chapter 9 has significant
eligibility requirements
• This is largely because Chapter 9 is designed for
limited use as a last resort
• Municipality must be insolvent (not paying
undisputed debts as they come due or unable to
pay its debts as they come due) and desire to
effect a plan to adjust its debts

14. Chapter 9 Eligibility
• Municipality must either obtain agreement of at
least a majority in an amount of each impaired
creditor class, negotiate in good faith with
creditors, be unable to negotiate with creditors or
reasonably believe that a creditor may attempt to
obtain a preference
• Municipality must be specifically authorized by
state law to commence a Chapter 9 case

15. California’s Authorization for Chapter 9 Filings
• Chapter 9 filings are authorized in the California
Government Code (Government Code § 53760-
53760.7)
• After three years of legislative wrangling and
significant compromise, AB 506 was enacted
(effective January 1, 2012)

16. Purpose of Chapter 9
• Chapter 9 provides a framework for eligible
governmental entities to restructure debt
• Chapter 9 was drafted solely for municipalities

17. Purpose of Chapter 9
• Not unlike Chapter 11 bankruptcy reorganization
for non-governmental entities, the two main
benefits of Chapter 9 are:
(1) the breathing spell provided by the automatic stay
and
(2) the ability to adjust debts through a plan (plan of debt
adjustment)
• The goal of a Chapter 9 case is confirmation of a
plan of debt adjustment

18. Chapter 9 Process
• Chapter 9 is designed to be used as a last resort
to allow insolvent local public entities enough
flexibility to remain viable
• The Bankruptcy Court cannot interfere with the
municipality's ability to continue its operations or
dictate what type of services or level of services
the governmental entity may provide

19. Chapter 9 Process
• Municipalities are permitted to adjust
burdensome contractual relationships under the
power to reject executory contacts and unexpired
leases, subject to court approval
• Municipalities may also reject collective
bargaining agreements and retiree benefit plans

20. Chapter 9 Process
• Creditors cannot expect that all excess cash go to
the payment of their claims under a Chapter 9
plan
• The municipality must retain sufficient funds
from which to operate, make necessary
improvements and maintain its facilities and
assets, and continue to fulfill its governmental
responsibilities