BILL ANALYSIS
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
1341 (Lowenthal)
Hearing Date: 08/12/2010 Amended: 08/02/2010
Consultant: Mark McKenzie Policy Vote: Rev&Tax 5-0
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BILL SUMMARY: AB 1341 would provide that a project agreement
between the Judicial Council and a nongovernmental entity for
the replacement of the Long Beach Courthouse does not constitute
a taxable possessory interest. Specifically, this bill
specifies that there is no independent possession or use of land
or improvements under the project agreement if all of the
following criteria are met:
The Judicial Council establishes performance expectations and
benchmarks for the court facility that serve as the basis for
the selection of the nongovernmental entity.
The nongovernmental entity is required to design, build,
finance, operate, and maintain the Long Beach Courthouse.
The Judicial Council holds title to the land and improvements
of the Long Beach Courthouse and, with other governmental
entities, has exclusive use and control of the land and
improvements for court and related activities for 35 years.
The nongovernmental entity is not treated as the owner of the
improvements of the Long Beach Courthouse for any purposes,
including federal income tax purposes, and does not deduct any
depreciation on the improvements.
Any lease-leaseback of land and improvements of the Long Beach
Courthouse with the nongovernmental entity is solely for the
purpose of providing security for the payment by the Judicial
Council of the service fee for services provided by the
nongovernmental entity in connection with a court facility.
The bill would also specify that a taxable possessory interest
would apply to the extent that the courthouse facilities are
used by the nongovernmental entity as commercial office space,
retail space, or paid parking spaces not designated for
governmental or court purposes.
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Fiscal Impact (in thousands)
Major Provisions 2010-11 2011-12 2012-13 Fund
Courthouse exemption Foregone school revenues of up to
$2,000General*
--------see staff comments---------
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* Note: This figure represents the approximate school share of
total possessory interest tax revenue loss of up to $5 million.
Actual impact depends upon which test of Proposition 98 is in
effect.
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STAFF COMMENTS: SUSPENSE FILE.
The Judicial Council indicates that in the absence of this bill,
the state would be required to pay any possessory interest taxes
related to the Long Beach Courthouse on behalf of the
nongovernmental entity, which could result in annual General
Fund payments of $4 to $5 million (see below).
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AB 1341 (Lowenthal)
Current law generally prohibits the taxation of property owned
by governmental entities and other public land, but imposes a
"possessory interest" tax on government-owned property used by a
private interest, such as a private lease of public land, if the
private use meets three tests of independence, durability, and
exclusivity. For purposes of determining a possessory interest,
existing law defines "independence" as the ability to exercise
authority and exert control over the management or operation of
the property or improvements, as specified. A possession or use
is independent if the possession or operation of the property is
sufficiently autonomous to constitute more than mere agency.
Case law and Board of Equalization (BOE) Property Tax Rule 20
add that the possessor must derive some "private benefit" to be
considered independent, meaning the use must provide some
private economic benefit to the possessor not shared by the
general public, such as an opportunity to earn a profit or
pursue a private purpose. Existing law also provides that a
lease-leaseback of publicly owned real property does not
constitute an independent use for purposes of the possessory
interest tax under specified circumstances, including a
prohibition against the lessee exercising independent authority
over the property or receiving rents from the public owner that
exceeds the present value for the rent.
Existing law enacted as part of the 2007 Budget (SB 77, Chapter
171 of 2007, and SB 82, Chapter 176 of 2007) authorized the
Judicial Council to evaluate and, if determined to be in the
best interests of the State, enter into agreements for court
facility development that include a public-private partnership
delivery method for reconstructing the existing court facilities
in Long Beach. Judicial Council is authorized to enter into a
multiyear agreement for delivery of the courthouse, provided the
agreements meet established performance expectations, as
specified. This authority includes a process for oversight by
the Department of Finance (DOF) and the Joint Legislative Budget
Committee. Upon reaffirmed approval of the undertaking by DOF,
the Administrative Office of the Courts (AOC) issued a request
for proposals (RFP) that established performance expectations
and benchmark criteria that served as a basis for the selection
of the preferred proposer. The AOC decided upon a
"performance-based" infrastructure delivery model where a
private party builds, operates, and maintains a facility on land
owned by the state. AOC specified in the RFP that if a
possessory interest applies to the lease-leaseback arrangement,
the nongovernmental entity would be reimbursed for its share.
The AOC has recently selected a preferred bidder and is in the
process of negotiating final terms and conditions. Design and
construction are scheduled to begin late this year, and
completion and occupancy are expected in 2013.
AB 1341 is intended to provide direction to Los Angeles County
to ensure that a possessory interest tax does not apply to the
Long Beach Courthouse as a result of the proposed
lease-leaseback arrangement between a nongovernmental entity and
the Judicial Council. Using the parameters in existing law, the
Los Angeles County Assessor believes that a possessory interest
tax would apply, and the project would be subject to payments of
$4 to $5 million annually. Staff notes, therefore, that the
bill would result in foregone revenues to local entities,
including K-14 schools. Approximately $2 million of this
revenue would have otherwise gone to K-14 schools, thereby
relieving the General Fund of payments pursuant to Proposition
98.
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AB 1341 (Lowenthal)
The AOC has determined, and DOF has concurred, that the
public-private partnership and lease-leaseback model are in the
best interests of the state for reconstruction of the Long Beach
Courthouse. AOC also believes that absent this bill, the state
would be required to pay any possessory interest taxes on behalf
of the nongovernmental entity because of the specifications of
the RFP. Staff notes, however, that the authority provided to
AOC to enter into a public-private partnership to reconstruct
the Long Beach Courthouse does not specify that the state is
responsible for payment of any possessory interest taxes that
apply. Rather, the AOC included the provision specifying state
liability for the possessory interest tax in the RFP at its
discretion. It is clear that if the bill is not enacted, the
current proposal for rebuilding the Long Beach Courthouse would
be in jeopardy because the possessory interest tax payments
could make the project no longer fiscally viable. The AOC
indicates that if they have to start the procurement process
from the beginning, the project would be delayed by two to three
years. The full fiscal implications of this circumstance are
unknown.