BILL ANALYSIS
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|SENATE RULES COMMITTEE | AB 1341|
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THIRD READING
Bill No: AB 1341
Author: Bonnie Lowenthal (D)
Amended: 8/2/10 in Senate
Vote: 21
SENATE REVENUE & TAXATION COMMITTEE : 5-0, 7/1/10
AYES: Wolk, Walters, Alquist, Ashburn, Padilla
SENATE APPROPRIATIONS COMMITTEE : 11-0, 8/12/10
AYES: Kehoe, Ashburn, Alquist, Corbett, Emmerson, Leno,
Price, Walters, Wolk, Wyland, Yee
ASSEMBLY FLOOR : Not relevant
SUBJECT : Property taxation: possessory interests: Long
Beach
Courthouse
SOURCE : Judicial Council of California
DIGEST : This bill provides legislative direction that
the Long Beach Courthouse Project Agreement is not
independent for possessory interest tax purposes.
ANALYSIS : Long Beach is ready for its new courthouse.
In fact, it is long overdue. Experts say its existing
50-year-old facility is perhaps the worst in the state when
it comes to security, safety and overcrowding. Its failure
as a public building was best illustrated when paramedics
carried a juror in cardiac arrest down a crowded flight of
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stairs, rather than whisk him down an elevator, delaying
his transport to the emergency room, because he happened to
be on a floor not serviced by elevators when his heart
attack occurred.
The Administrative Office of the Courts (AOC) has found a
way to deliver the project three years earlier than might
otherwise occur, by use of a public-private partnership.
Unfortunately, a dispute over property tax has arisen,
which, if left unresolved, could increase the cost of the
project to the point it would no longer be fiscally viable.
To resolve this problem without creating precedent or
altering existing code, this bill declares that the unique
needs and nature of the Long Beach Courthouse project
exempts its state functions from possessory interest
taxation.
This bill provides 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. 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:
1. The Judicial Council establishes performance
expectations and benchmarks for the court facility that
serve as the basis for the selection of the
nongovernmental entity.
2. The nongovernmental entity is required to design, build,
finance, operate, and maintain the Long Beach
Courthouse.
3. 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.
4. The nongovernmental entity is not treated as the owner
of the improvements of the Long Beach Courthouse for any
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purposes, including federal income tax purposes, and
does not deduct any depreciation on the improvements.
5. 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.
This bill also specifies 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.
Background
Completed in 1957, the Long Beach Courthouse is undersized
and dilapidated according to the AOC. AOC states that the
Long Beach Courthouse project is direly needed because the
existing structure is in unsatisfactory condition and poses
a risk to staff and the public. When seeking to replace
the aging Long Beach Courthouse, AOC decided to use a
"performance-based infrastructure delivery model," where a
private party builds, operates, and maintains a facility on
land owned by AOC instead of building it themselves, where
AOC would not pay property taxes because it is a public
agency. According to AOC, it elected to use the
performance-based infrastructure delivery model because of
its anticipated value for money and timely completion of
the project. AOC acknowledged in its request for proposals
that if a possessory interest existed, AOC will reimburse
the nongovernmental entity for its share. AOC selected a
consortium headed by Meridiam Infrastructure as the
preferred proposer on the project.
The Long Beach Courthouse project financing mechanism is
substantively different than the lease-leaseback process.
For this project, the nongovernmental entity never takes
ownership of the building; instead, the services agreement
that sets forth the nongovernmental entity's
responsibilities, the obligation of the AOC to pay the
nongovernmental entity, and the nongovernmental entity's
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right to evict the AOC and use the building for private
commercial space if AOC defaults constitute the
nongovernmental entity's interest. Because no private
ownership exists, the nongovernmental entity cannot deduct
depreciation. According to AOC, the Courthouse project is
the first or second transaction of this kind in California.
The Los Angeles County Assessor asserts that the project
contains a possessory interest, and plans to tax the
project accordingly; AOC disagrees, and is advancing this
bill to provide legislative direction to the Los Angeles
County Assessor not to assert a possessory interest. The
section of law the Legislature added in 1996 does not apply
because the public agency pays rent to the nongovernmental
entity, or lessee. AOC argues that this financing model
results in better value and a quicker project completion,
and does not require a large General Fund appropriation to
finance construction that would be necessary if AOC built
the project themselves. AOC states that the bidders on the
project did not factor in as part of their costs any
possessory tax implications, and adds that legislative
direction regarding the existence of a possessory interest
is necessary because the Department of Finance may not
approve the added costs of $4 to $5 million in possessory
interest tax liability. Without approval, AOC will have to
begin the entire courthouse procurement process again from
the beginning, which would delay the project by an
estimated three years.
Prior legislation . AB 1467 (Nunez and Perata), Chapter 32,
Statutes of 2006, amended the Streets and Highways Code to
provide that any lease entered into by the Department of
Transportation or regional transportation agencies with a
private entity for the construction and lease of toll road
projects does not constitute a possessory interest. While
similar, AB 1341 provides an exemption for only the Long
Beach Courthouse in an uncodified section of law.
Additionally, AOC has stated that it will account for the
possessory interest tax for all future projects; however,
this may not stop other proponents of so-called
"public-private partnerships" from seeking future
legislative exemptions despite this narrowly tailored bill.
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FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: Yes
According to the Senate Appropriations Committee:
Fiscal Impact (in thousands)
Major Provisions 2010-11 2011-12 2012-13 Fund
Courthouse exemption Foregone school revenues of
up to $2,000 General*
* 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.
SUPPORT : (Verified 8/17/10)
Judicial Council of California (source)
Long Beach City Council
Los Angeles Superior Court
OPPOSITION : (Verified 8/17/10)
California Assessors Association
DLW:mw 8/17/10 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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