02/03/2000 08:13 AM House CRA

HB 233-MUNICIPAL BANKRUPTCY                                                                                                     
                                                                                                                                
                                                                                                                                
CO-CHAIRMAN HARRIS announced the next order of business before the                                                              
committee would be HOUSE BILL NO. 233, "An Act granting authority                                                               
to each municipality to be a debtor under 11 U.S.C. (Federal                                                                    
Bankruptcy Act) and to take any appropriate action authorized by                                                                
federal law relating to bankruptcy of a municipality."                                                                          
                                                                                                                                
JONATHON LACK, Legislative Assistant to Representative Halcro,                                                                  
Alaska State Legislature, informed the committee that the federal                                                               
law changed in 1994 to require a state's specific authority to                                                                  
local governments to file Chapter 9 bankruptcy reorganization.  The                                                             
State of Alaska has been slow to respond to that change, and                                                                    
therefore HB 233 would fix that.                                                                                                
                                                                                                                                
REPRESENTATIVE MURKOWSKI asked if any communities have suffered due                                                             
to the change in the federal law [and the state not being in                                                                    
compliance].                                                                                                                    
                                                                                                                                
TAPE 00-6, SIDE B                                                                                                               
                                                                                                                                
MR. LACK said that he did not know of any cities or local                                                                       
governments that had experienced problems.  He noted that the City                                                              
of Whittier had some problems that may or may not of necessitated                                                               
this type of use [bankruptcy].  Furthermore, one of the Rural                                                                   
Education Attendance Areas (REAA) may have had some difficulties in                                                             
the past few years and need some reorganization.                                                                                
                                                                                                                                
Number 2865                                                                                                                     
                                                                                                                                
CO-CHAIRMAN HARRIS asked if any city in Alaska had ever went                                                                    
bankrupt.                                                                                                                       
                                                                                                                                
MR. LACK indicated that the committee packet should include a case                                                              
note on the Copper River School District.  The Copper River School                                                              
District did go through Chapter 9 reorganization.  He explained                                                                 
that in 1986 the legislature did an across the board 10 percent cut                                                             
in assistance to REAAs.  Therefore, the REAAs could not restructure                                                             
their contracts with the teachers' union and thus went into                                                                     
collective bargaining.  The arbitrator decided against the Copper                                                               
River School District, which was told it had to pay on the                                                                      
contracts.  The legislature then made a one-time appropriation of                                                               
about $.5 million, which solved the problem for the 1986-1987                                                                   
school year but not for the 1988 school year.  He explained that                                                                
the Copper River School District sought protection from the                                                                     
Bankruptcy Court under Chapter 9 in order to reorganize the debt.                                                               
The Bankruptcy Court stepped in and renegotiated the contracts for                                                              
the REAA because the school district could not.                                                                                 
                                                                                                                                
CO-CHAIRMAN HARRIS posed a situation in which someone had a                                                                     
contract with a community for a very large sum.  Would the project                                                              
be bonded under normal circumstances?                                                                                           
                                                                                                                                
MR. LACK explained that for something like construction of a new                                                                
school, if an entity is bonded then the entity would be first in                                                                
line to recover in Bankruptcy Court because the entity has a                                                                    
secured interest.  When dealing with a nongovernmental entity, a                                                                
secured creditor will receive its security interest.  However, that                                                             
is not necessarily the case with a governmental entity because "you                                                             
don't want a creditor coming in and grabbing a school, grabbing an                                                              
ambulance, grabbing a fire truck."  Mr. Lack further explained that                                                             
Chapter 9 does not allow a local government to discharge debts but                                                              
rather Chapter 9 allows a local government to reorganize in order                                                               
to prevent a creditor from seizing assets.  Therefore, if there is                                                              
a bond for insurance, the insurance agent will probably have to                                                                 
pay.                                                                                                                            
                                                                                                                                
CO-CHAIRMAN HARRIS returned to the issue of schools and posed a                                                                 
situation in which the community is giving at its cap and                                                                       
enrollment is decreasing, but the teachers' contracts continue.                                                                 
Would this legislation allow the school to go bankrupt in order to                                                              
reorganize?                                                                                                                     
                                                                                                                                
MR. LACK replied yes.  With regard to REAAs, the first                                                                          
responsibility is that of the legislature to fund them.  In the                                                                 
case when the legislature does fund the REAA, the Bankruptcy Court                                                              
would have the authority to reorganize that school district and                                                                 
renegotiate those contracts.  All the parties would be at the table                                                             
at Bankruptcy Court.                                                                                                            
                                                                                                                                
MR. LACK, in response to Representative Joule, informed the                                                                     
committee that with no effective date the legislation would become                                                              
effective 90 days after passage [after the governor signs the                                                                   
legislation] or July 1.                                                                                                         
                                                                                                                                
Number 2624                                                                                                                     
                                                                                                                                
REPRESENTATIVE DYSON commented that it appears that the state is                                                                
moving towards state recognition of tribes.  From his limited                                                                   
understanding, he believes that tribal organizations cannot be                                                                  
sued.  If the state does recognize tribes, then will this                                                                       
legislation apply to them.                                                                                                      
                                                                                                                                
MR. LACK answered that tribes cannot be sued as a state or local                                                                
government cannot generally be sued unless that entity has given                                                                
authorization.  For instance, the City of Anchorage has given                                                                   
authorization to sue in tort, which most cities and states do.  Mr.                                                             
Lack explained that as a general concept, when tribes contract or                                                               
have agreements, the tribe generally waives its rights to be sued                                                               
under that contract or agreement.  Otherwise, the states or the                                                                 
federal governments would not contract with them.  Mr. Lack was not                                                             
sure how HB 233 would apply to tribes, but he offered to research                                                               
that and report back.                                                                                                           
                                                                                                                                
REPRESENTATIVE DYSON said that he sensed that this legislation does                                                             
not apply to tribes.                                                                                                            
                                                                                                                                
KEVIN RITCHIE, Executive Director, Alaska Municipal League,                                                                     
testified in support of HB 233 as it provides an additional option                                                              
to municipalities.                                                                                                              
                                                                                                                                
CO-CHAIRMAN HARRIS pointed out that the sponsor statement says that                                                             
the Congress changed the Bankruptcy Code to require states to give                                                              
local governments specific authority to protection.  If the                                                                     
Congress passes a bill requiring such, do the states have to do so                                                              
or can they decide not to do it.                                                                                                
                                                                                                                                
MR. RITCHIE said that he believes that it is an option of state                                                                 
governments.                                                                                                                    
                                                                                                                                
REPRESENTATIVE MURKOWSKI interjected that such would be necessary                                                               
if they want to avail themselves of protection under Chapter 9.                                                                 
                                                                                                                                
CO-CHAIRMAN HARRIS closed public testimony.                                                                                     
                                                                                                                                
Number 2427                                                                                                                     
                                                                                                                                
REPRESENTATIVE HALCRO moved to report CSHB 233, Version LS0948\G,                                                               
Cook, 1/26/00, out of committee with individual recommendations.                                                                
There being no objection, it was so ordered and CSHB 233(CRA) was                                                               
reported out of committee.