BILL ANALYSIS Ó
SENATE COMMITTEE ON APPROPRIATIONS
Senator Ricardo Lara, Chair
2015 - 2016 Regular Session
AB 974 (Bloom) - Redevelopment dissolution: housing projects:
bond proceeds
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|Version: March 26, 2015 |Policy Vote: T. & H. 8 - 2, |
| | GOV. & F. 4 - 1 |
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|Urgency: No |Mandate: No |
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|Hearing Date: August 17, 2015 |Consultant: Mark McKenzie |
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This bill meets the criteria for referral to the Suspense File.
Bill
Summary: AB 974 would allow redevelopment successor agencies,
and entities performing the housing functions of former
redevelopment agencies (RDAs), to spend bond proceeds from bonds
issued by former RDAs between January 1, 2011 and June 28, 2011
for specified projects that were planned for development prior
to 2011.
Fiscal
Impact: Significant General Fund impacts, potentially tens of
millions in some years, most of which would occur beginning in
2021 and through 2041, as a result of the bill allowing for
AB 974 (Bloom) Page 1 of
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continued debt repayment on bonds issued in 2011 from tax
increment that would otherwise be redistributed to taxing
entities if the bonds were defeased.
The amount of continued debt service payments from tax increment
revenues would escalate to a peak of $99 million in 2026 and
decline to approximately $42 million in 2041 (the typical 30
year term of most affected bonds), preventing a like amount from
being distributed to local agencies that receive a portion of
the property tax, including schools. Since the General Fund
must backfill any amounts that would otherwise go to schools
under Proposition 98's minimum funding guarantees, this bill
would result in future General Fund impacts that could reach the
tens of millions, reaching a peak in 2026 and declining
thereafter. (This does not account for any potential economic
benefits resulting from allowing the completion of projects
funded by the 2011 bonds)
Background: Historically, the Community Redevelopment Law has allowed a
local government to establish redevelopment agencies (RDAs) and
capture all of the increase in property taxes that is generated
within the project area beyond the base year value (referred to
as "tax increment") over a period of decades. Prior to their
dissolution pursuant to ABx1 26 (Blumenfield) Ch. 5/2011, RDAs
used tax increment financing, oftentimes issuing long-term debt
in the form of tax allocation bonds, to address issues of
blight, construct affordable housing, rehabilitate existing
buildings, and finance development and infrastructure projects.
When RDAs were abruptly dissolved pursuant to ABx1 26, many held
balances of unencumbered bond proceeds that were intended to
fund future redevelopment activities, but were not needed to
meet those RDAs' existing obligations.
Existing law establishes procedures for winding down RDA
activity, including a requirement that successor agencies
dispose of former RDAs' assets under direction of an oversight
board. Successor agencies are required to make any payments
related to enforceable obligations, as specified in an adopted
biannual recognized obligation payment schedule (ROPS), and
remit unencumbered balances of RDA funds to the county
auditor-controller for distribution to local taxing entities in
the county. The DOF reviews each ROPS to determine if the
listed payments meet the statutory criteria for repayment, and
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has the authority to disallow any payments that do not meet
those criteria. Successor agencies must use bond proceeds
derived from bonds issued prior to January 1, 2011 for the
purposes for which the bonds were sold. If those purposes
cannot be achieved, the proceeds can be used to defease the
bonds. Successor agencies cannot enter into new enforceable
obligations.
Existing law, AB 1484 (Budget Committee), Chap 26/2012, requires
DOF to provide a successor agency with a "finding of completion"
after the agency remits specified RDA property tax allocations
and unencumbered cash assets to the county auditor-controller
through a due diligence process. Once the successor agency
receives a finding of completion, the agency is authorized to,
among other things, expend bond proceeds in excess of the
amounts needed to satisfy approved enforceable obligations in a
manner consistent with the original bond covenants. If
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.
SB 375 (Steinberg) Ch. 728/2008, requires the Air Resources
Board (ARB) to provide each region that has a metropolitan
planning organization (MPO) with a greenhouse gas emission
reduction target for the automobile and light truck sector for
2020 and 2035, respectively. Each MPO, in turn, is required to
include within its regional transportation plan a sustainable
communities strategy (SCS) designed to achieve the ARB targets
for greenhouse gas emission reduction. Each MPO must submit its
SCS to ARB for review. ARB must accept or reject the MPO's
determination that the implementation of a submitted SCS
submitted would achieve the greenhouse gas emission reduction
targets.
Proposed Law:
AB 974 would authorize RDA successor agencies and housing
successors to use bond proceeds derived from bonds issued
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between January 1, 2011 and June 28, 2011 for the projects that
meet the following criteria, as determined by a resolution of
the oversight board:
The project must be consistent with the applicable
regional SCS or alternative planning strategy, as
specified.
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 RDA, 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 RDA planning
document, including, an RDA 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 RDA debt was being planned on or
before that date.
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
establish the contractor's financial ability and experience
in performing large construction projects, as specified.
AB 974 would also do the following:
Authorizes a successor agency to reimburse city and/or
county expenditures that funded a project that meets these
criteria from the proceeds of 2011 bonds, if those
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expenditures occurred between June 28, 2011 and the bill's
effective date.
Require a successor agency requesting to use bond
proceeds from bonds issued between January 1, 2011 and June
28, 2011 to place that request on its ROPS, with each
project listed as a separate line item.
Require a successor agency to show how each project
meets specified requirements in the resolution adopting the
ROPS, as specified, and to forward the resolution to DOF
for review and approval or denial.
Require a successor agency to use bond proceeds that
cannot be spent on projects, pursuant to requirements in
the bill, to either defese the bonds or to purchase bonds
for cancellation.
Requires bonds issued in 2011 that can be used for
projects, pursuant to requirements in the bill, to be
refinanced, when it is permitted, to reduce debt service
costs by lowering interest rates.
Related
Legislation: AB 2493 (Bloom), which was vetoed by Governor
Brown in 2014, was substantially similar to this bill. The
Governor's veto message stated the following:
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 (Budget Committee), which is a 2015-16 Budget Trailer
Bill, 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 are granted a "last
and final" ROPS by DOF would be authorized to spend 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 pending in the Senate
Budget and Fiscal Review Committee.
Staff
Comments: 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. While some of
these bond sales were deliberate attempts by RDAs to preempt the
Governor's proposal to eliminate redevelopment, by establishing
debt obligations that would tie up property tax increment
revenues well into the future, many of those bond sales were
intended for projects that had been in the planning stages long
before the Governor announced his intentions.
Since RDA dissolutions statutes prohibit successor agencies from
spending bond proceeds issued after December 31, 2010, they are
often forced to retain those proceeds for extended periods of
time while paying debt service (including interest charges) out
of tax increment revenues. Much of the debt that was issued in
2011 cannot be defeased or refinanced until 2021. Proponents
indicate that up to $1 billion in debt service payments will
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have been paid from tax increment by that time. AB 974 would
allow successor agencies and housing successors to spend 2011
bond proceeds on projects that are consistent with the SCS and
meet other specified criteria. This would essentially allow for
an extension of redevelopment activity for at least 20 years to
continue the debt service on these projects. As a result,
successor agencies and housing successors would continue to
incur administrative costs associated with the continued
repayment.
Staff notes that the author has provided information indicating
that bill would allow for the expenditure of approximately $435
million of the estimated $715 million in unspent 2011 RDA bond
proceeds by 35 cities that have projects meeting the criteria
established by the bill. Since the majority of bonds issued in
2011 cannot be defeased until 2021, the state fiscal impacts of
this bill would not occur until that date, and would extend for
an additional 20 years in most cases. Since this bill would
ensure continued debt service for 20 years from tax increment
that would otherwise be distributed to local taxing agencies, AB
974 would result in increased General Fund expenditures to
offset tax increment payments that would otherwise go to
schools, absent the bill.
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