BILL ANALYSIS
AB 2080
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Date of Hearing: April 14, 2010
ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT
Cameron Smyth, Chair
AB 2080 (Hernandez) - As Amended: March 18, 2010
SUBJECT : Joint powers authorities: government receivables.
SUMMARY : Authorizes a joint powers authority to purchase a
local agency's right to payment of moneys due to a local agency
from direct subsidy payments, called government receivables,
related to the federal Build America Bonds Program, and allows
the authority to pledge government receivables to the payment of
bonds issued by the authority, or to resell them under specified
conditions. Specifically, this bill :
1)Defines "government receivable" to mean any payment or right
to payment for moneys due, or to become due, to a local agency
from the federal government in the form of direct subsidy
payments under Section 6431 of Title 26 of the United States
Code, with respect to Build American Bonds (BABs).
2)Additionally defines "government receivable" to mean any
residual interests retained or received by the local agency in
connection with the sale of governmental receivables.
3)Allows a joint powers authority (authority) to purchase, with
the proceeds of its bonds or its revenue, government
receivables from one or more local agencies, and allows the
authority to pledge, assign, resell or otherwise transfer or
hypothecate any government receivables for the purpose of
securing bonds issued to finance the purchase price of the
government receivables.
4)Provides that local agencies may sell government receivables
to an authority, at one time or from time to time, and enter
into one or more sales agreements with an authority as, and
on, the terms the local agency deems appropriate.
5)Provides that the sales agreement may include covenants of,
and binding on, the local agency necessary to establish and
maintain the security of bonds issued by the authority for the
purpose of purchasing the government receivables, and, if
applicable, the exclusion from gross income of interest on the
bonds for federal income tax purposes.
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6)Provides that any transfer of some or all of a government
receivable by a local agency to an authority that the
governing documents state is a sale shall be treated as an
absolute sale and transfer of the property so transferred to
the authority and not as a pledge or grant of a security
interest by the local agency to secure a borrowing.
7)Provides that the characterization of the transfer of any
government receivable as an absolute sale or transfer by the
local agency shall not be negated or adversely affected by any
of the following:
a) The fact that only a portion of the government
receivable is transferred;
b) By the local agency's acquisition of an ownership
interest in any residual interest or subordinate interest
in the government receivable;
c) By any characterization of the authority or its bonds
for purposes of accounting, taxation, or securities
regulation; or,
d) By any other factor.
8)Provides that on and after the effective date of each transfer
of a government receivable that the governing documents state
is a sale, the local agency shall have no right, title, or
interest in or to the government receivable transferred, and
the government receivable so transferred shall be the property
of the authority and not of the local agency, and shall be
owned, received, held and disbursed only by the authority or a
trustee or agency of the authority appointed by the authority.
9)Provides that any sale of some or all of any government
receivable shall automatically be perfected without the need
for physical delivery, recordation, filing, or further act,
and the provisions of the Uniform Commercial Code - Secured
Transactions and the related Civil Codes (954.5 - 955.1) shall
not apply to the sale.
10)Provides that none of the government receivables sold by the
local agency shall be subject to garnishment, levy, execution,
attachment, or other process, writ, including, but not limited
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to, a writ of mandate, or remedy in connection with the
assertion or enforcement of any debt, claim, settlement, or
judgment against the local agency.
11)Provides that on or before the effective date of any sale of
a government receivable, the local agency shall notify the
payor of the government receivable that the government
receivable has been sold to the authority and irrevocably
instruct the payor that payments on the government receivable
so sold are to be made directly to the authority or any
trustee or agent appointed by the authority.
12)Provides that any government receivable sold by a local
agency but received by that local agency shall be held by it
in trust solely for the benefit of the authority to which the
government receivable was sold and transferred to the
authority or any trustee or agency appointed by the authority
as soon as possible.
13) Provides that the authority may issue bonds for the purpose
of making loans to local agencies, to the extent those local
agencies are authorized by law to borrow moneys, or to
purchase government receivables from local agencies as
provided under this bill, and provides that the loan or sale
proceeds shall be used by the local agencies to pay for public
capital improvements, working capital, or insurance programs.
14)Allows an authority to issue bonds to finance the purchase of
government receivables in specified conditions.
15)Provides for the inclusion of updated provisions in any
resolution authorizing any bonds or any issue of bonds that
includes government receivables purchased under the provisions
of this bill.
16)Provides, for government receivables, that an action may be
brought under the validating proceedings established in the
Code of Civil Procedure, to determine the validity of any
bonds issued.
17)Expands the definition of "revenue" to include income and
receipts of the joint powers authority from purchased
government receivables.
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18)Expands the definition of "working capital" to mean money to
be used by, or on behalf of a local agency for any purpose for
which a local agency may borrow money, or for any purpose for
which a government receivable sold to an authority could have
been used by the local agency.
19)Expands the powers of an authority to include purchasing,
with the proceeds of its bonds or its revenue, any government
receivable sold to the authority, and provides that government
receivables that are purchased may be pledged to the payment
of bonds issued by the authority or may be resold to public or
private purchasers at public or negotiated sale, in whole or
in part, separately or together with other government
receivables purchase by the authority.
EXISTING LAW :
1)Defines "VLF receivable" to mean the right to payment of
moneys due or to become due to a local agency out of funds
payable in connection with vehicle license fees (VLF) to a
local agency.
2)Defines "Proposition 1A receivable" to mean the right to
payment of moneys due or to become due to a local agency
pursuant to the borrowing of property taxes that occurred in
the Fiscal Year 2009-10 budget.
3)Allows authorities to issue bonds and loan the proceeds to
local agencies to finance specified projects and programs.
4)Allows an authority, with the proceeds of its bonds or its
revenue, to purchase VLF receivables sold to the authority,
and provides that those receivables may be pledged to the
payment of bonds issued by the authority or may be resold to
public or private purchasers at public or negotiated sale, in
whole or in part, separately or together with other VLF
receivables purchased by the authority.
5)Allows an authority, with the proceeds of its bonds or its
revenue, to purchase Proposition 1A receivables and provides
that those receivables purchased may be pledged to the payment
of bonds issued by the authority, or may be resold to public
or private purchases at public or negotiated sales, in whole
or in part, separately or together with other Proposition 1A
receivables purchased by the authority.
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6)Allows for an authority, for purposes of meeting costs
incurred in performing duties relative to the purchase and
sale of Proposition 1A receivables, to charge a fee to each
entity from which it purchases a Proposition 1A receivable,
and provides for how the fee shall be computed.
FISCAL EFFECT : Unknown
COMMENTS :
1)In April of 2009, the United States Treasury Department
announced the BABs Program as part of the American Recovery
and Reinvestment Act (ARRA). The program created a new
financing tool for state and local governments, and was
designed to provide a federal subsidy of 35% of the interest
payment of the borrowing costs of state and local government,
with the goal of stimulating the economy and encouraging
investments in capital projects in 2009 and 2010. The BAB
program works in the following manner: a local government
issues a BAB at a 10% taxable interest rate, for example, and
then the Treasury Department would make a payment directly to
the government of 3.5% of that interest. The local
government's net borrowing cost would be only 6.5% on a bond
that actually pays 10% interest.
2)According to the author, the purpose of the bill is to give
local and state entities that receive BABs the ability to
securitize the guaranteed subsidy on the interest paid on the
bond and garner more capital for financed projects. The
author notes that as a result of this federal subsidy payment,
state and local governments will have lower net borrowing
costs and be able to reach more sources of borrowing than with
more traditional tax-exempt or tax credit bonds. This bill
allows the federal subsidy to be monetized by selling the
subsidy in a securitization transaction; the author notes that
this would result in additional capital at the same cost or
less as the taxable rate on its BABs.
3)The 2009-10 budget included provisions suspending Proposition
1A, meaning that the state borrowed 8% of the total property
tax revenues that otherwise would have been received by
cities, counties and special districts. As part of the
suspension, the Legislature passed
AB 15 X4 (Gaines, 2009), which provided for a state-financed
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securitization of the Proposition 1A suspension reduction
amounts. Under the provisions in AB 15 X4, local agencies
that chose to participate were able to sell their Proposition
1A receivables (meaning the state's repayment obligation to
those agencies), to a joint powers authority that then sold
bonds to investors backed by the receivables. The bond
proceeds were then used to pay for the purchase of the
receivables from the local agencies and thus helped make the
agencies whole as soon as the securitization occurred. AB 15
X4 included other alternatives to participation in the joint
securitization for local agencies, and contained hardship
provisions for local agencies. AB 2080 builds upon the
existing securitization provisions for Proposition 1A
receivables, by allowing for a similar securitization to occur
for BABs.
The Legislature passed and the Governor signed SB 67 (Ducheny)
in October 2009 to enact revisions to AB 15 X4. SB 67 revised
hardship exemptions, increased the minimum size requirement of
the authority from 100 local agencies to 250 local agencies,
added an urgency clause, and made other specified changes.
4)On April 2, 2010, the United States Department of the Treasury
released a report on the BABs Program and usage by states and
local governments. As noted in the report, from the inception
of the program in April 2009 to March 31, 2010, there have
been 1,066 separate BAB issuances in 48 states for a total of
more than $90 billion. According to the report, for the $90
billion of BABs issued, state and local governments will save
$12.3 billion in the net present value of borrowing costs
compared with issuing traditional tax-exempt bonds.
In California there have been 86 issues of BABs as of March
31, 2010, totaling $21 billion. This includes issuances by
cities and counties, special districts, school districts, and
major issuances by the State of California.
5)AB 2080 defines "local agency" to mean "a party to the
agreement creating the authority, or any agency or subdivision
of that party, sponsoring a project of public capital
improvements, or any city, county, city and county, authority,
district, or public corporation of this state." Staff notes
that the California State Treasurer's Office has been one of
the biggest users of the BABs program in California in order
to help finance school, water utility, highway, correction
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facility and other types of improvements.
The Committee may wish to ask the author to explicitly include
authorization for the state to participate in the provisions
of the bill, since it is unclear that the definition of "local
agency" includes the state of California.
6)Under ARRA, the ability of municipalities to issue BABs is set
to expire on December 31, 2010. Staff notes that in March
2010, the United States House of Representatives passed H.R.
4849, the Small Business and Infrastructure Jobs Tax Act of
2010, which included an extension of the BAB program through
2013. The provisions of H.R. 4849 would incrementally lower
the percentage of a direct-payment BAB subsidy between 2010
and 2013, from 35% to 30%. Since the existing program is set
to expire at the end of the year, with no definite guarantees
as to an extension at the federal level, the Committee may
wish to discuss whether adding an urgency clause into this
bill might be helpful for those entities that are already
using the BABs program.
7)Support Arguments . This measure adds another tool that public
agencies can consider at their own option. Those agencies
that elect to participate will do so because they see value in
capturing the federal BABs subsidies up front, so that they
can be used for other public purposes.
8)Opposition Arguments . The BABs Program, and the subsequent
authorization of the securitization of the BABs that would be
allowed under this bill, could cause cities to take on more
unnecessary debt at a time when the financial markets are
volatile.
REGISTERED SUPPORT / OPPOSITION :
Support
CA Public Securities Association [SPONSOR]
CA Association of County Treasurers and Tax Collectors
Opposition
None on file
Analysis Prepared by : Debbie Michel / L. GOV. / (916)
AB 2080
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