BILL ANALYSIS                                                                                                                                                                                                    






                                                       Bill No:  AB  
          1009
          
                 SENATE COMMITTEE ON GOVERNMENTAL ORGANIZATION
                       Senator Roderick D. Wright, Chair
                           2009-2010 Regular Session
                                 Staff Analysis



          AB 1009  Author:  V. Manuel Perez
          As Amended:  September 4, 2009
          Hearing Date:  October 14, 2009
          Consultant:  Art Terzakis


                                     SUBJECT  
                                     Bonds

                                   DESCRIPTION
           
          AB 1009 is  an urgency measure  that makes substantive  
          changes to the California Industrial Development Financing  
          Act of 1980 so that California can take advantage of  
          certain provisions of the federal stimulus bill.   
          Specifically, this measure:  

             (1)  Expands the permissible projects to include those  
               that create or produce  "intangible" products as well  
               as traditional tangible products; 

             (2)  Provides a uniform mechanism for the issuance of  
               Recovery Zone Facility Bonds (RZFBs) by all cities and  
               by counties (and by 'on-behalf-of' entities if  
               permitted) and for a means by which the state can  
               confirm compliance with the American Recovery and  
               Reinvestment Act of 2009 (ARRA) and collect data on  
               the projects funded by these types of Private Activity  
               Bonds (PABs); and,

             (3)  Provides a means whereby the California Industrial  
               Development & Financing Advisory Committee (CIDFAC)  
               can receive grant funds or other moneys, from  
               ARRA-initiated program or other sources,  for the  
               purpose of offsetting the costs of issuing Industrial  
               Development Bonds (IDBs), thereby making this  




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               financing mechanism more economically accessible to  
               California businesses.

                                   EXISTING LAW

           Existing law establishes in state government the California  
          Debt Limit Allocation Committee (CDLAC), with duties that  
          include annually determining a state ceiling on the  
          aggregate amount of private activity bonds that may be  
          issued, and allocating that amount among state and local  
          agencies. Existing law defines the term "state ceiling" for  
          those purposes with regard to an amount specified in  
          federal law.

          Existing law, the California Industrial Development  
          Financing Act, authorizes cities, counties, cities and  
          counties, and redevelopment agencies to establish  
          industrial development authorities that are authorized to  
          issue IDBs, the proceeds of which may be used to fund  
          capital projects of private enterprise under terms and  
          conditions specified in the act.

                                    BACKGROUND
           
           Federal Law:   Federal law limits how much tax-exempt debt a  
          state can issue in a calendar year, with the cap determined  
          by a population-based formula. CDLAC was created to set and  
          allocate California's annual debt ceiling, and administers  
          the tax-exempt bond program to issue the debt.

          The primary objective of the California Industrial &  
          Financing Advisory Committee  (CIDFAC) is to provide  
          manufacturers in California with an alternative, low-cost  
          source of funds to finance capital expenditures. To this  
          end, CIDFAC reviews the public benefits generated by a  
          project, particularly job creation, and determines whether  
          these benefits will significantly outweigh any detrimental  
          public effects from the project. In addition, CIDFAC  
          maintains a statewide perspective to ensure that one entity  
          of the state is not adversely affected by the issuance of  
          IDBs by another jurisdiction. 

          The American Recovery and Reinvestment Act (ARRA) of 2009  
          included two new federal tax credits available to states  
          and local governments: (1) Recovery Zone Bonds and (2)  
          Qualified Energy Conservation Bonds. There are two types of  




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          Recovery Zone Bonds: (1) Recovery Zone Economic Development  
          Bonds (RZEDBs) and (2) Recovery Zone Facility Bonds  
          (RZFBs). Both are for public infrastructure to promote  
          economic activity, job training and educational programs in  
          a designated "recovery zone" area. The nationwide volume  
          cap for the RZEDBs is $10 billion and RZFBs is $15 billion,  
          with approximately $806 million of RZEDBs and $1.21 billion  
          of RZFBs going to California's cities and counties. 

          The Qualified Energy Conservation Bonds are for projects  
          that reduce energy consumption including automotive battery  
          technologies that reduce reliance on fossil fuel, renewable  
          energy resources and green community programs. California's  
          allocation of the QECBs is $381 million of the $3.2 billion  
          nationwide volume cap. 
           
          Purpose of AB 1009:   According to the State Treasurer's  
          Office the tax credit bonds will be allocated to states  
          based on a formula laid out in the ARRA. The state is then  
          to reallocate the funds to local cities and counties. There  
          is currently not an authority to administer the new tax  
          credit bonds, and CDLAC needs statutory language to be able  
          to administer the funds. AB 1009 would expand the  
          definition of "state ceiling" to include the Recovery Zone  
          Bonds and the Qualified Energy Conservation Bonds that were  
          made available to states and local governments through  
          ARRA. 

          CIDFAC provides manufacturers in California with an  
          alternative, low-cost source of funds to finance capital  
          expenditures. ARRA broadened the definition of  
          'manufacturing facility' to include facilities that are  
          used in the creation or production of intangible property  
          (i.e., patents, copyrights, formulas, processes, designs,  
          know-how, and other similar items) and created a new type  
          of bond called the Recovery Zone Facility Bonds (RZFBs) to  
          promote economic activity in designated "recovery zone"  
          area . This bill would amend CIDFAC's statute to reflect  
          these aspects of ARRA which would include "intangible"  
          property in the "manufacturing facility" definition and  
          allow the Authority to issue RZFBs. These changes permit  
          CIDFAC to provide low-cost financing to many more companies  
          in California, which will increase employment or otherwise  
          contribute to economic development.
           
          Detailed analysis of proposed changes by Section  




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          (Government Code):  
           
          Section 91501  :  The changes in this preamble language  
          amends the original intent to reflect the fact the federal  
          stimulus bill broadens the definition of 'manufacturing  
          facility' for the purposes of IDB financing to include  
          facilities that are used in the creation or production of  
          intangible property (i.e., patents, copyrights, formulas,  
          processes, designs, know-how, and other similar items).  By  
          broadening the definition in this way, the IDB financing  
          tool is now available to a variety of businesses (e.g.,  
          software manufacturer, R&D facilities for biotech or  
          pharmaceutical companies, etc.) as well as traditional  
          manufacturers of tangible products.  The changes also  
          clarify the types of public benefits derived from the  
          issuance of IDBs (e.g., including both the creation and  
          retention of jobs) and those expected from the issuance of  
          RZFBs (e.g., general economic development).

           Section 91502  :  By adding the phrase "including equipment  
          and furnishings" to this and other sections in the  
          Industrial Development Act (IDA), CIDFAC staff clarifies  
          that 'facilities' as used in relevant federal tax law  
          refers to buildings, land, equipment, furnishings, etc.   
          Also, the ARRA eliminates the 'ancillary facilities'  
          restrictions in federal tax law and thereby authorizes the  
          use of IDB proceeds to finance any assets that are  
          "functionally related and subordinate" to a manufacturing,  
          research & development, or production facility, provided  
          that such assets must be located on the site of the core  
          facility.  This proposed change in the IDA accommodates the  
          elimination of these restrictions.

           Section 91502.1(b)(4)  :  This change reflects the broader  
          public benefits expected of RZFBs.

           Sections 91503(a)(4) & (6) and (b)(2), (3), and (4)  :  The  
          change in Section (a)(4) adds commercial uses within a  
          recovery zone as one of the "activities or uses" for bonds  
          issued under the IDA.  By making this change, RZFBs can be  
          issued by local industrial development authorities,  
          redevelopment agencies, cities, and counties.  This change  
          essentially adds RZFBs to the list of the PABs (including  
          IDBs, empowerment zone bonds, etc.) that are authorized  
          under the IDA.





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          The changes in Section (a) (6) allows bonds authorized  
          under the IDA to be used to finance facilities that create  
          or produce intangible property, which accommodates the  
          expanded definition of 'manufacturing facility' in ARRA.

          The changes in Sections (b) (2), (3), and (4) address the  
          fact that RZFBs can be issued to finance a broader group of  
          private activity facilities than IDBs.  In other words,  
          RZFBs can be used for an array of private activity projects  
          recognized under federal tax law.  The exceptions are that  
          RZFBs cannot be used to finance housing projects or any of  
          the 'sin' projects enumerated in federal tax law (e.g.,  
          golf courses, country clubs, massage parlors, hot tub  
          facilities, suntan facilities, racetracks, liquor stores,  
          etc.).

           Sections 91504 (h) and (i)(1) & (6)et al  :  The change in  
          (h) simply clarifies that limited liability companies  
          (LLCs) can act as borrowers for IDBs, empowerment zone  
          bonds, and RZFBs.  The reference to 'rehabilitation' in  
          (i)(1) & (6) and elsewhere in the CIDFAC statute clarifies  
          that IDB, empowerment zone bond, and RZFB proceeds can be  
          used to rehabilitate and renovate existing facilities.

           Section 91504(n) :  The change in the definition of  
          'project' clarifies the range of possible capitol  
          expenditures to which IDB, empowerment zone bond, and RZFB  
          proceeds may be applied.

           Section 91527 (n)  :  By adding the reference to costs of  
          issuance here and elsewhere in the IDA, CIDFAC will be able  
          to award to issuers any possible grant funds or other  
          moneys, available as the result of passage of the ARRA or  
          from other sources, it may receive to offset borrowers'  
          costs associated with the issuance of IDBs.  Such  
          assistance with the cost of issuance will make IDBs a more  
          economically feasible finance vehicle for California  
          businesses.   [See Section 91571(f) et al.]

           Sections 91530(c) and 91531(b)(1)  :  Adding references to  
          equipment in these sections clarifies the fact that, under  
          pertinent federal tax law, 'facilities' refers to  
          buildings, land, machinery, equipment, etc.  Under the IDB,  
          empowerment zone bond, and RZFB programs, bond proceeds may  
          be used for equipment purchases (and often times a project  
          consists of the purchase of equipment only).




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           Section 91531(c)  :   This provision allows the Commission to  
          review RZFB transactions based upon the general economic  
          development criteria referenced in the ARRA and to  
          authorize the issuance of RZFBs based upon confirmation  
          that the project is in compliance with the ARRA.  By doing  
          so, the Commission will be able to provide issuers with  
          state-level review aimed at ensuring the projects meet the  
          intent of the ARRA provisions for RZFBs and the Governor's  
          Office with RZFB project information.

           Section 91538(b)  :  There is no need for CIDFAC's statute to  
          set issuance parameters such as the maximum tax-exempt bond  
          amounts as that is covered in federal tax law.  Note that  
          there are efforts at the federal level to increase the  
          maximum IDB amount from $10 million to $20 million and, if  
          and when this change in federal tax law is implemented,  
          CIDFAC staff wants to ensure the IDA will not prevent  
          California's businesses from taking advantage of the  
          change.  Also, there is no cap on the par amount of  
          tax-exempt RZFBs, and therefore this change accommodates  
          this feature of the ARRA.

          With respect to the par value of taxable bonds, CIDFAC's  
          experience is that IDBs may be issued with a "taxable tail"  
          that is significantly less than the tax-exempt portion.  In  
          these cases, the economics of the transactions are such  
          that it makes sense from a practical standpoint for the  
          borrowers to combine their taxable borrowings with their  
          tax-exempt borrowings.  In other words, it makes more sense  
          for the borrower to seek one, combined loan in a single  
          transaction on the municipal market than it does for it to  
          initiate another loan transaction in the private market.

           Section 91555(a)  :  The addition of "state agencies" and the  
          elimination of the reference to "industrial development  
          bonds" are for the purposes of (1) accommodating the  
          possibility that state agencies (e.g., the I-Bank) may be  
          able to act as pooling agent or as 'on-behalf-of' entities  
          for cities and counties wishing to issue RZFBs and (2)  
          removing the reference to  CIDAFC's activities related only  
          to IDBs, thereby recognizing CIDFAC's role with respect to  
          empowerment zone bonds and RZFBs, two other types of PABs  
          that have economic development impacts.

           Section 91571(f)  :  The addition of this provision permits  




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          CIDFAC to receive grant funds and other moneys, from  
          programs established by the ARRA or from other sources, for  
          the purpose of awarding these funds to issuers of IDBs to  
          offset the costs of issuing the bonds incurred by the  
          borrowers.  By providing this type of financial assistance,  
          IDB financing will be a more economically accessible form  
          of financing for California's businesses.  This provision  
          is consistent with the goals highlighted in CIDFAC's  
          strategic plan, which was adopted by the Commission on  
          September 24, 2008.

           Section 91573(a)(2)  :  This provision clarifies that the  
          $350,000,000 volume cap for IDBs does not apply if the  
          funds are part of ARRA.  This ARRA related financing  
          sunsets on December 31, 2010.  

           SUPPORT:   State Treasurer's Office

           OPPOSE:   None on file.

           FISCAL COMMITTEE:  Senate Appropriations Committee

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