BILL ANALYSIS AB 2080 Page 1 Date of Hearing: April 28, 2010 ASSEMBLY COMMITTEE ON APPROPRIATIONS Felipe Fuentes, Chair AB 2080 (Hernandez) - As Amended: March 18, 2010 Policy Committee: Local GovernmentVote:6-2 Urgency: No State Mandated Local Program: No Reimbursable: SUMMARY This bill permits local agencies to sell their rights to future subsidy payments from the U.S. treasury related to the Build America Bonds Program to a joint powers authority for cash. The joint powers authority would then be permitted to sell bonds secured by these future subsidy payments. FISCAL EFFECT 1)No direct state cost. 2)For local agencies selling receivables, reduced revenues in future years. COMMENTS 1)Purpose . According to the author, the bill is intended to allow local governments to take future federal subsidy payments up front through a securitization transaction, thereby resulting in additional capital available finance projects. 2)Background . A provision of the American Recovery and Reinvestment Act (ARRA) is the Build America Bonds (BABs) program, which is designed to help state and local finance infrastructure spending. The tax exempt bond market, the principal source of financing for state and local infrastructure projects, has faced major problems over the past two years, due to the credit crisis and lack of demand for securities that pay interest that is exempt from federal and state income taxation. AB 2080 Page 2 Under the BABs program, state and local government agencies issue taxable bonds and then receive a federal subsidy payment of 35% from the U.S. treasury, which is meant to offset the difference between tax exempt and taxable interest rates. Thus, if a local government sells a bond with a 7% taxable interest rate, the federal government subsidy lowers the effective interest rate to the issuer to about 4.5%. State and local governments benefit because they now have access to the vast worldwide market for taxable bonds, making it easier to sell their bonds, and with the subsidy, they can significantly lower the cost of financing their infrastructure projects. Currently, joint power authorities are authorized to purchase bonds from local governments, pool them and resell them to private investors. In addition, JPA's are authorized to buy certain local government "receivables" - that is, future rights of payments - and issue bonds secured by these payments. Receivables for which JPA's may currently sell bonds include certain vehicle license fee payments and the state's repayment of property tax borrowed from local governments in 2009-10, as authorized by Proposition 1A. This bill would add federal BAB payments to the list of receivables that JPA's could purchase and use as security for bonds it sells to the public. As a result, municipalities could convert their rights to future payments into "up front" cash at a discount. 1)Key Issues . Federal BABs subsidy payments are not "new" money available to local governments. Municipalities selling BAB bonds are obligated to pay higher taxable interest rates than would otherwise be the case if they were to sell tax exempt securities. The federal subsidy merely offsets these higher payments. If the right to these future subsidy payments is sold for up-front cash at a discounted value, the local agency is left with the higher annual interest payments but no offsetting subsidy payments. It would be important for local governments considering this when evaluating whether to pursue the this option. Analysis Prepared by : Brad Williams / APPR. / (916) 319-2081