BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |AB 974 |Hearing | 7/15/15 |
| | |Date: | |
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|Author: |Bloom |Tax Levy: |No |
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|Version: |3/26/15 |Fiscal: |Yes |
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|Consultant|Weinberger |
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REDEVELOPMENT SUCCESSOR AGENCIES
Allows redevelopment successor agencies to spend proceeds from
bonds issued by former redevelopment agencies in 2011.
Background and Existing Law
Until 2011, the Community Redevelopment Law allowed local
officials to set up redevelopment agencies (RDAs), prepare and
adopt redevelopment plans, and finance redevelopment activities.
As a redevelopment project area's assessed valuation grew above
its base-year value, the resulting property tax revenues - the
property tax increment - went to the RDA instead of going to the
underlying local governments. The RDA kept the property tax
increment revenues generated from increases in property values
within a redevelopment project area.
Citing a significant State General Fund deficit, Governor
Brown's 2011-12 budget proposed eliminating RDAs and returning
billions of dollars of property tax revenues to schools, cities,
and counties to fund core services. Among the statutory changes
that the Legislature adopted to implement the 2011-12 budget, AB
X1 26 (Blumenfield, 2011) dissolved all RDAs. The California
Supreme Court's 2011 ruling in California Redevelopment
Association v. Matosantos upheld AB X1 26, but invalidated AB X1
27 (Blumenfield, 2011), which would have allowed most RDAs to
avoid dissolution.
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AB X1 26 established successor agencies to manage the process of
unwinding former RDAs' affairs. With the exception of seven
cities that chose not to serve as successor agencies, the city
or county that created each former RDA now serves as that RDA's
successor agency. A successor agency that is specifically
designated to retain the housing assets and functions previously
performed by the former RDA is known as a "housing successor
agency." Each successor agency has an oversight board that is
responsible for supervising it and approving its actions. The
Department of Finance (DOF) can review and request
reconsideration of an over-sight board's decisions.
One of the successor agencies' primary responsibilities is to
make payments for enforceable obligations entered into by former
RDAs. The statutory definition of an "enforceable obligation"
includes bonds, specified bond-related payments, some loans;
payments required by the federal government, obligations to the
state, obligations imposed by state law, legally required
payments related to RDA employees, judgments or settlements, and
other legally binding and enforceable agreements or contracts.
Each successor agency must, every six months, draft a list of
enforceable obligations that are payable during a subsequent six
month period. This "Recognized Obligation Payment Schedule"
(ROPS) must be adopted by the oversight board and is subject to
review by DOF. Obligations listed on a ROPS are payable from a
Redevelopment Property Tax Trust Fund, which contains the
revenues that would have been allocated as tax increment to a
former RDA.
A successor agency receives a "finding of completion" from DOF
if the agency complies with state laws that require it to remit
specified RDA property tax allocations and cash assets
identified through a "due diligence review" (AB 1484, Assembly
Budget Committee, 2012). Nearly 340 successor agencies have
received a finding of completion.
State law allows a successor agency that receives a finding of
completion to use bond proceeds derived from bonds issued on or
before December 31, 2010, for the purposes for which the bonds
were sold. Bond proceeds in excess of the amounts needed to
satisfy approved enforceable obligations must be expended in a
manner consistent with the original bond covenants. If
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remaining bond proceeds cannot be spent in a manner consistent
with the bond covenants, the proceeds must be used to defease
the bonds or to purchase those same outstanding bonds on the
open market for cancellation. Defeasing bonds is a method of
retiring bond debt by buying and holding risk-free U.S. Treasury
securities in an amount that is sufficient to cover all
principal and interest payments on the outstanding bonds.
Citing the costs associated with retiring proceeds from bonds
issued by RDAs in 2011 and the potential benefits of investing
those proceeds in development projects, some local officials
want the Legislature to allow successor agencies to spend 2011
bond proceeds under specified conditions.
Proposed Law
Assembly Bill 974 allows a successor agency, including a housing
successor agency, to use bond proceeds derived from bonds issued
between January 1, 2011, and June 28, 2011, only for projects
which meet the following criteria, as determined by a resolution
issued by the oversight board:
The project must be consistent with the applicable
regional sustainable communities strategy or alternative
planning strategy adopted pursuant to state law that the
State Air Resources Board has determined would, if
implemented, achieve the greenhouse gas emission reduction
targets established by the board or, if a sustainable
communities strategy is not required for a region by law, a
regional transportation plan that includes programs and
policies to reduce greenhouse gas emissions.
Two or more of the following significant planning or
implementation actions must have occurred on or before
December 31, 2010:
o An action approved by the governing body of
the city, county, city and county, the board of the
former redevelopment agency, or the planning
commission directly related to the planning or
implementation of the project.
o The project is included within an approved
city, county, city and county, or redevelopment agency
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planning document, including a redevelopment agency
five-year implementation plan, capital improvement
plan, master plan, or other planning document.
o The expenditure by the city, county, city and
county, or project sponsor, of more than $25,000 on
planning related activities for the project within one
fiscal year, or $50,000 in total, over multiple fiscal
years.
The successor agency must provide documentation, dated
on or before December 31, 2010, indicating the intention to
finance all or a portion of the project with the future
issuance of long-term debt, or documentation showing that
the issuance of long-term redevelopment agency debt was
being planned on or before December 31, 2010.
Each construction contract over $100,000 must include a
provision that prevailing wage will be paid by the
contractor and all of that contractor's subcontractors.
For each construction contract over $250,000, the
successor agency must require prospective contractors to
submit a standardized questionnaire and financial
statements as part of their bid package, to establish the
contractor's financial ability and experience in performing
large construction projects.
AB 974 allows a successor agency to use 2011 bond proceeds to
reimburse a city, county, or city and county that funded an
eligible project that meets specified criteria with funds other
than redevelopment funds between June 28, 2011 and the bill's
effective date.
AB 974 requires that any successor agency requesting the use of
bond proceeds pursuant to the bill's provisions must place that
request on its Recognized Obligation Payment Schedule in a
specified manner.
AB 974 requires a successor agency to detail in the resolution
adopting the Recognized Obligation Payment Schedule how each
project will meet specified requirements and all documentation
showing how the project meets those must be attached to the
resolution. The resolution adopting the Recognized Obligation
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Payment Schedule, including the supporting documentation, must
be forwarded to the Department of Finance for review and
approval or denial.
AB 974 specifies that a successor agency must use bond proceeds
that cannot be spent on projects, pursuant to the bill's
requirements, either to defease bonds or purchase bonds for
cancellation.
If bond proceeds derived from bonds issued between January 1,
2011, and June 28, 2011 can be used for projects that meet
requirements specified in AB 974, the bill requires that the
corresponding bonds must be refinanced, when refinancing is
allowed according to the bond's indenture, to reduce debt
service costs by lowering interest rates.
State Revenue Impact
No estimate.
Comments
1. Purpose of the bill . State law offers successor agencies no
good options for disposing of billions of dollars of unspent RDA
bond proceeds. If the interest rates that a successor agency
earns on securities it buys to defease bonds are significantly
lower than the interest payments on the bonds, the agency will
lose money on the transaction. As a result, successor agencies
may choose to retain hundreds of millions of dollars of bond
proceeds for extended periods of time, while paying debt
service, without producing any new infrastructure or economic
development. Even if an agency wants to defease the 2011 bonds,
much of the debt that was issued in 2011 can't be retired for at
least 10 years after it was issued. In the meantime, that debt
continues to generate interest costs while producing no
offsetting economic benefits. By contrast, AB 974 will support
the completion of infrastructure projects that have already
received millions of dollars of public investments, support
state policy goals, and generate billions of dollars of economic
activity that will benefit residents throughout California.
2. Forgiving Mardi Gras sins . In what has been called a "Mardi
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Gras" reaction, some redevelopment officials responded to
Governor Brown's January 2011 proposal to eliminate
redevelopment agencies by accelerating their RDAs' tax
allocation bond sales. According to the Legislative Analyst's
Office, in the first six months of 2011, RDAs issued about $1.5
billion in tax allocation bonds, a level of debt issuance
greater than during all 12 months of 2010 ($1.3 billion). About
two-thirds of the bond issuances in 2011 had interest rates
greater than 7 percent-compared with less than one-quarter of
bond issuances in 2010. In fact, RDAs issued more tax
allocation bonds with interest rates exceeding 8 percent during
the first six months of 2011 than they had in the previous ten
years. Because some of these atypical bond sales were efforts
to preempt the Governor's proposal by establishing debt
obligations that would tie up property tax increment revenues
well into the future, state law does not allow successor
agencies to use unencumbered proceeds from bonds sold in 2011.
The Committee may wish to consider whether local officials
should now be allowed to use bond proceeds that were generated
in an ill-conceived rush to confound the Governor's RDA
proposal.
3. Related legislation . AB 794 is substantially similar to AB
2493 (Bloom, 2014), which Governor Brown vetoed. The Governor's
veto message states:
This bill permits successor agencies and housing successors
of former redevelopment agencies to use proceeds derived
from bonds issued between January 1, 2011, and June 28,
2011, if the project is consistent with a sustainable
communities strategy or reduces greenhouse gas emissions.
Expenditure of the bond proceeds would be subject to
approval by the Department of Finance (DOF).
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 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.
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I recognize that the cost to local governments to defease
these high interest rate bonds is significant. Therefore, I
am directing the Department of Finance to develop a plan to
address the outstanding bond debt of these agencies.
AB 113 (Assembly Budget Committee, 2015), which is one of this
year's proposed budget trailer bills, contains provisions that
enact some of the Governor's proposed changes to the
redevelopment dissolution process, including an alternative
approach to allowing the expenditure of 2011 redevelopment bond
proceeds. Under the alternative approach in AB 113, successor
agencies that get the Department of Finance to approve a last
and final recognized obligation payment schedule can expend up
to 30% of any unencumbered 2011 bond proceeds and can spend an
additional share - ranging from 25% to 5% - that corresponds to
the date on which the bonds were issued. AB 113 is awaiting a
vote on the Senate Floor.
4. Let's get technical . To make AB 974's provisions more clear
and consistent, the Committee may wish to consider making the
following technical amendment to the bill:
On page 10, line 33, strike out "met" and insert "meet"
5. Double-referred . Because AB 974 relates to the use of
former RDA bond proceeds for projects that include affordable
housing development, Senate Rules Committee double-referred the
bill, first to the Senate Transportation & Housing Committee,
which hears bills related to housing policy, and then to the
Senate Governance & Finance Committee, which hears bills related
to RDAs' dissolution. At its July 7 hearing, the Senate
Transportation & Housing Committee passed AB 974 on an 8-2 vote.
Assembly Actions
Assembly Local Government Committee: 5-3
Assembly Housing & Community Development Committee: 4-3
Assembly Appropriations Committee: 12-5
Assembly Floor: 46-29
Support and
Opposition (7/9/15)
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Support : Cities of Lynwood, Santa Monica, Union City and West
Hollywood.
Opposition : California Professional Firefighters; California
Special Districts Association; California State Association of
Counties, Counties of Los Angeles and Santa Clara; Urban
Counties Caucus.
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