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.