BILL ANALYSIS Ó SENATE COMMITTEE ON TRANSPORTATION AND HOUSING Senator Jim Beall, Chair 2015 - 2016 Regular Bill No: AB 974 Hearing Date: 7/7/2015 ----------------------------------------------------------------- |Author: |Bloom | |----------+------------------------------------------------------| |Version: |3/26/2015 | ----------------------------------------------------------------- ----------------------------------------------------------------- |Urgency: |No |Fiscal: |Yes | ----------------------------------------------------------------- ----------------------------------------------------------------- |Consultant|Eric Thronson | |: | | ----------------------------------------------------------------- SUBJECT: Redevelopment dissolution: housing projects: bond proceeds DIGEST: This bill allows both successor agencies and housing successors to commit remaining proceeds from non-housing and housing redevelopment bonds, respectively, issued between January 1, 2011, and June 28, 2011, provided that the remaining proceeds are approved by the oversight board and used for projects that meet specific criteria. ANALYSIS: Historically, the Community Redevelopment Law allowed a local government to establish a redevelopment area and capture all of the increase in property taxes generated within the area (referred to as "tax increment") over a period of decades. The law requires redevelopment agencies to deposit 20% of tax increment into a Low and Moderate Income Housing Fund (L&M Fund) to be used to increase, improve, and preserve the community's supply of low- and moderate-income housing available at an affordable housing cost. In 2011, the Legislature enacted two bills, AB 26X (Blumenfield) and AB 27X (Blumenfield), Chapters 5 and 6, respectively, of the First Extraordinary Session. AB 26X eliminated redevelopment agencies (RDAs) and established procedures for winding down the agencies, paying off enforceable obligations, and disposing of agency assets. AB 26X established successor agencies, typically the city that established the agency, to take control of all AB 974 (Bloom) Page 2 of ? redevelopment agency assets, properties, and other items of value. Successor agencies are to dispose of an agency's assets as directed by an oversight board, made up of representatives of local taxing entities, with the proceeds transferred to the county auditor-controller for distribution to taxing agencies within each county. AB 26X also included provisions allowing the host city or county of a dissolving RDA to retain the housing assets and functions previously performed by the agency, except for funds on deposit in the agency's L&M Fund, and thus become a housing successor. If the host city or county chooses not to become the housing successor, a local housing authority or the California Department of Housing and Community Development (HCD) takes on that responsibility. AB 27X allowed RDAs to avoid elimination if they made payments to schools in the current budget year and in future years. In December 2011, the California Supreme Court in California Redevelopment Association v. Matosantos upheld AB 26X and overturned AB 27X. As a result, all of the state's roughly 400 RDAs dissolved on February 1, 2012, and successor agencies began implementing AB 26X's provisions to distribute former redevelopment assets and pay the remaining obligations. Subsequent legislation, AB 1484 (Budget Committee, Chapter 26, Statues of 2012), allowed a successor agency to expend remaining proceeds from non-housing redevelopment bonds issued before January 1, 2011, for the purposes for which the bonds were sold or to defease the bonds. AB 1484 also allowed a housing successor to commit remaining proceeds of bonds backed by the L&M Fund and issued for the purposes of affordable housing prior to January 1, 2011. This bill: 1)Allows both successor agencies and housing successors to commit remaining proceeds from non-housing and housing redevelopment bonds, respectively, issued between January 1, 2011, and June 28, 2011, provided that the remaining proceeds are approved by the oversight board and used for projects that meet all of the following criteria: a) The project must be consistent with a region's sustainable communities strategy or equivalent planning AB 974 (Bloom) Page 3 of ? strategy designed to reduce greenhouse gas emissions. b) Two or more significant planning actions, as defined, occurred on or before December 31, 2010, related to the project. c) Documentation dated on or before December 31, 2010, is provided indicating the intention to finance all or a portion of the project with the future issuance of long-term debt. d) Any construction contract over $100,000 must include a provision ensuring prevailing wage is paid by the contractor and all subcontractors. e) Any construction contract over $250,000 must require prospective contractors to establish their financial ability and experience in performing large construction contracts. 1)Authorizes a housing successor to reimburse with the bond proceeds issued in 2011 a city or county that funded an eligible project with other funds as long as the project meets the purpose for which the bonds were issued. 2)Requires bonds to be refinanced as soon as possible to reduce the debt service costs by lowering interest rates. COMMENTS: 1)Purpose. According to the author, it is estimated that approximately $750 million in 2011 RDA bond proceeds are currently sitting idle and cannot be used. If these proceeds were spent on their intended projects, it is estimated that 19,000 high-wage construction and related jobs would be generated. The state has asserted that the vast majority of the 2011 RDA bonds must be defeased and their proceeds not spent on projects; however, over 90% of these bonds cannot be defeased for 10 years. During this 10-year period, nearly $1 billion will be spent on the debt service payments for these bonds, and the bond proceeds will continue to go unused. The vast majority of these bonds were issued for public works projects such as infrastructure construction and repair, new public facilities, and affordable housing. Further, the author argues that bondholders who purchased tax-exempt bonds for specific public works projects (approximately 70% of the bonds in question) were promised tax-free returns. Per federal tax law, tax-exempt bond proceeds must be used for their intended purpose, or the bonds could be subject to losing their AB 974 (Bloom) Page 4 of ? tax-exempt status. 2)Defeasance vs spending. The core issue presented by this bill is whether remaining bond proceeds should be spent or repaid as soon as possible. While many bonds cannot be repaid for 10 years, spending the money means that the bonds will not be repaid for up to 30 years, which of course entails significant additional interest. All these costs are funded through local tax increment, meaning that expending tax revenues on these projects reduces the amount of revenues available for other local governmental entities. Spending bond proceeds instead of repaying the bondholders will result in the completion of additional projects, many of which are likely to be beneficial to the community, if not the state, but this comes with an opportunity cost. Cities, counties, special districts, and the state by way of the school funding backfill will have fewer resources to spend on other needs or priorities. 3)Opposition. Opponents argue that allowing successor agencies to use proceeds from bonds issued after the governor announced his proposal to dissolve RDAs improperly rewards agencies that deliberately acted to circumvent the dissolution process, often by rushing to sell bonds at above-market interest rates. $750 million in bond proceeds is at stake, but the ultimate cost to schools, counties, cities, and special districts is $2 billion when the additional interest payments are included. Opponents prefer to see the bond proceeds used to retire redevelopment debt so that tax increment is more quickly available to all taxing entities, including schools, which otherwise the state's General Fund must support. In other words, this bill requires the whole state to pay for these 39 "Mardi Gras" agencies. 4)Previous legislation. This bill is very similar to AB 2493 (Bloom) of 2014, which would have allowed successor agencies to use proceeds derived from bonds issued between January 1, 2011, and June 28, 2011, if the project was consistent with a sustainable communities strategy or reduced greenhouse gas emissions. AB 2493 was vetoed by Governor Brown, with the following veto message: "I applaud the author's efforts to craft legislation to target specific projects for funding from 2011 bond proceeds. Funding for this measure, however, would come at the expense of lost property tax dollars to cities and counties that chose AB 974 (Bloom) Page 5 of ? not to incur debt during this period, as well as special districts and schools. The cost to the general fund to backfill schools could be significant, to the tune of $500 million, at a time when the state is still recovering from deep recession. "I recognize that the cost to local governments to defease these high interest rate bonds is significant. Therefore, I am directing DOF [the California Department of Finance] to develop a plan to address the outstanding bond debt of these agencies." To address the governor's concern expressed in his veto message, the author has included in this bill a requirement that successor agencies refinance their 2011 bonds. The author argues that this requirement reduces some of the future fiscal impacts to the state and other taxing entities. It seems likely agencies would do this anyway; however, it is unclear how this change will adequately address the Governor's concerns. 5)Splitting the difference. The opponents of this bill raise valid concerns about rewarding bad behavior at the expense of others. Others have questioned the economic and social benefits that some of the projects may provide should they be funded through the mechanisms in this bill. For example, according to the bill's supporters, some of the projects to be funded with this money include libraries, highway landscaping, parking structures, and law-enforcement facilities. Notwithstanding the merits of these and other projects, opponents are concerned about funding them on the backs of others. On the other hand, the bill supporters report that roughly $135 million of the $750 million outstanding is for affordable housing projects. About 60% of those projects could be used under the conditions laid out in this bill, meaning roughly $80 million could be made available with this bill for affordable housing around the state. Given the dire need for affordable housing, the committee may wish to amend the bill to specify that only funds allocated for affordable housing projects could be available for expenditure under this bill, instead of all types of projects that otherwise meet the bill's criteria. AB 974 (Bloom) Page 6 of ? 6)Double referred. The Senate Rules Committee has referred this bill to both this committee and the Committee on Governance and Finance. If this bill passes out of this committee, then it will next be heard in the Governance and Finance Committee. Related Legislation: AB 113 (Assembly Budget Committee) - this budget trailer bill includes a number of provisions related to former RDAs and successor agencies, including language very similar to this bill. AB 113 is currently pending in the Senate Budget and Fiscal Review Committee. AB 806 (Dodd) - among other things, allows the successor agency to amend or modify existing contracts and agreements, or otherwise administer projects in connection with enforceable obligations approved pursuant to existing law if the successor agency has received a finding of completion. AB 806 is currently pending in the Senate Governance and Finance Committee. AB 2493 (Bloom, 2014) - similar to this bill, would have allowed successor agencies to use proceeds derived from bonds issued between January 1, 2011, and June 28, 2011, if the project was consistent with a sustainable communities strategy or reduced greenhouse gas emissions. AB 2493 was vetoed by Governor Brown. AB 981 (Bloom, 2013) - would have allowed successor agencies to use proceeds of bonds issued by an RDA between January 1, 2011, and June 28, 2011, for projects of the former RDA, upon the issuance of a finding of completion by the state. AB 981 bill was held in the Assembly Appropriations Committee. Assembly Votes: Floor: 46-29 Appr: 12-5 H&CD: 4-2 LGov: 5-3 FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No POSITIONS: (Communicated to the committee before noon on AB 974 (Bloom) Page 7 of ? Wednesday, July 1, 2015.) SUPPORT: City of West Hollywood OPPOSITION: California Professional Firefighters California Special Districts Association California State Association of Counties County of Los Angeles County of Santa Clara Urban Counties Caucus -- END --