BILL ANALYSIS
AB 2080
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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
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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