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 AB 1009 (V. Manuel Perez) continued Page 2 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 AB 1009 (V. Manuel Perez) continued Page 3 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 AB 1009 (V. Manuel Perez) continued Page 4 (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. AB 1009 (V. Manuel Perez) continued Page 5 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). AB 1009 (V. Manuel Perez) continued Page 6 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 AB 1009 (V. Manuel Perez) continued Page 7 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 **********