BILL ANALYSIS
AB 2080
Page 1
ASSEMBLY THIRD READING
AB 2080 (Hernandez)
As Amended March 18, 2010
Majority vote
LOCAL GOVERNMENT 6-2 APPROPRIATIONS 10-5
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|Ayes:|Caballero, Arambula, |Ayes:|Fuentes, Ammiano, Coto, |
| |Bradford, Davis, Solorio, | |Davis, Bonnie Lowenthal, |
| |De La Torre | |Hall, Skinner, Solorio, |
| | | |Torlakson, Hill |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|Smyth, Knight |Nays:|Conway, Harkey, Miller, |
| | | |Nielsen, Norby |
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SUMMARY : Authorizes a joint powers authority (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 an 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
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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.
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.
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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
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
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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.
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,
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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.
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 : According to the Assembly Appropriations
Committee:
1)No direct state cost.
2)For local agencies selling receivables, reduced revenues in
future years.
COMMENTS : 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.
According to the author, the purpose of the bill is to give
local and state entities that receive BABs the ability to
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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.
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), Chapter 14, Statutes of
2009, which provided for a state-financed 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),
Chapter 634, Statutes of 2009, 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.
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
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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.
This bill 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 facility and
other types of improvements.
The Legislature 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.
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 Legislature 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.
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.
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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.
Analysis Prepared by : Debbie Michel / L. GOV. / (916)
319-3958
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