BILL ANALYSIS
SENATE LOCAL GOVERNMENT COMMITTEE
Senator Dave Cox, Chair
BILL NO: AB 2080 HEARING: 6/30/10
AUTHOR: Hernandez FISCAL: Yes
VERSION: 3/18/10 CONSULTANT:
Weinberger
JOINT POWERS AUTHORITIES' FINANCING PROGRAMS
Background and Existing Law
The Joint Exercise of Powers Act allows two or more public
agencies to use their powers in common if they sign a joint
powers agreement. Sometimes an agreement creates a new,
separate government called a joint powers authority (JPA).
Public officials have created about 700 JPAs which are
confederations of governments working together for common
purposes.
JPAs can buy certain "receivables," which are the rights to
future payments, and issue bonds secured by those payments.
The Legislature authorized local agencies to sell their
rights to nearly $1.3 billion in Vehicle License Fee (VLF)
backfill payments that the State withheld from cities and
counties in 2003 (SB 1096, Senate Budget Committee, 2004).
For an upfront payment of about 93% of the amount due,
participating local agencies sold the rights to their "VLF
Gap Loan" repayments to a JPA, which issued bonds backed by
the State's pledged repayments. Last year, when the State
borrowed local property tax revenues under the provisions
of Proposition 1A, the Legislature created a similar
securitization program, allowing local agencies to receive
upfront payments from a JPA in exchange for the right to
receive the state's constitutionally-required repayments
(ABx4 15, Assembly Budget Committee, 2009).
The federal Build America Bond (BAB) program authorizes
state and local government agencies to finance capital
projects by issuing taxable bonds with federal subsidies
that reimburse 35% of the interest payable to investors.
BABs are attractive to a broader range of investors,
including tax-exempt investors, investors in low tax
brackets, foreign investors, and others who might not
invest in tax-exempt bonds. The 35% subsidy, which is
meant to offset the difference between tax-exempt and
taxable bond interest rates, lowers an agency's net
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borrowing costs. For example, a city's net borrowing costs
for a BAB issued at a 10% taxable interest rate would be
6.5%. By expanding access to capital and lowering
borrowing costs, the BAB program seeks to promote state and
local investments in public works.
Financial industry professionals want a local government
that issues a BAB to be able to securitize its rights to
future federal BAB subsidy payments by selling them to a
JPA in exchange for an upfront payment of a portion of the
subsidies that are due over the life of the bond.
Proposed Law
Assembly Bill 2080 allows a joint powers authority (JPA) to
purchase, with the proceeds of its bonds or its revenue,
government receivables from one or more local agencies, and
allows the JPA 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.
AB 2080 defines a "government receivable" as 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 federal law, with respect to
Build American Bonds (BABs), including any residual
interests retained or received by the local agency in
connection with the sale of governmental receivables.
Government receivables may be pledged to the payment of
bonds issued by the JPA 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 purchased by the JPA.
The bill allows local agencies to sell government
receivables to a JPA, at one time or from time to time, and
enter into one or more sales agreements with a JPA as, and
on, the terms the local agency deems appropriate. 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 JPA 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.
AB 2080 -- 3/18/10 -- Page 3
AB 2080 requires that the governing documents for
transferring a government receivable by a local agency to a
JPA state that the sale must be treated as an absolute sale
and transfer of the property to the JPA and not as a pledge
or grant of a security interest by the local agency to
secure a borrowing. The characterization of the transfer
of any government receivable as an absolute sale or
transfer by the local agency cannot be negated or adversely
affected by any of the following:
The fact that only a portion of the government
receivable is transferred.
By the local agency's acquisition of an ownership
interest in any residual interest or subordinate
interest in the government receivable.
By any characterization of the authority or its
bonds for purposes of accounting, taxation, or
securities regulation.
By any other factor.
The bill 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 has no right,
title, or interest in or to the government receivable
transferred, and the government receivable is the property
of the JPA and not of the local agency, and must be owned,
received, held and disbursed only by the JPA or a trustee
or agency appointed by the JPA.
AB 2080 states that any sale of a government receivable is
automatically perfected without the need for physical
delivery, recordation, filing, or further act, and that
specified state statutes do not apply to the sale.
AB 2080 prohibits the government receivables sold by the
local agency from being subject to garnishment, levy,
execution, attachment, or other process, writ, including a
writ of mandate, or remedy in connection with the assertion
or enforcement of any debt, claim, settlement, or judgment
against the local agency.
The bill requires the local agency selling a government
receivable to notify the payor, on or before the effective
date of any sale, that the government receivable has been
sold to the JPA and irrevocably instruct the payor that
payments are to be made directly to the JPA or any trustee
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or agent appointed by the JPA.
AB 2080 requires any government receivable sold by a local
agency but received by that local agency to be held in
trust solely for the benefit of the JPA to which the
government receivable was sold and transferred to the JPA,
or any trustee or agency appointed by the JPA, as soon as
possible.
The bill authorizes the JPA to 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.
AB 2080 allows a JPA to issue bonds to finance the purchase
of government receivables in specified conditions.
AB 2080 specifies that a resolution authorizing bonds or
any issue of bonds may contain provisions pledging the
revenues from any government receivables to secure the
payment of the bonds.
The bill authorizes a JPA to bring a validating action,
pursuant to specified statutes, to determine the validity
of any bonds issued to finance the purchase of government
receivables.
AB 2080 defines key terms and makes additional technical
and clarifying amendments.
Comments
1. Useful option . California state and local government
entities have issued 90 Build America Bonds (BABs),
totaling nearly $22 billion. AB 2080 augments this popular
financing tool by giving local governments the option of
obtaining additional capital to invest in public works
projects by securitizing their federal subsidy payments.
When Congress established the BAB program, as part of the
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American Recovery and Reinvestment Act (ARRA), it wanted to
stimulate economic activity by providing state and local
governments with a more attractive way to finance capital
projects. By potentially making hundreds of millions of
dollars in additional capital immediately available to
local governments, AB 2080 advances the fundamental purpose
of the BAB program and gives California local governments
another tool to use in confronting severe capital
shortages.
2. What's the rush ? AB 2080 authorizes local governments
to use an untested financing mechanism that is subject to
significant uncertainty. No other states authorize BAB
issuers to securitize their federal subsidy payments. The
BAB program expires on December 31, 2010, the day before AB
2080 takes effect. Although Congress may extend the BAB
program for another year, an extension is not certain. If
the BAB program is extended, Congress will probably change
the program's terms, including lower subsidy payments.
Regardless, public finance professionals disagree on
whether federal law allows BAB issuers to transfer the
rights to federal BAB subsidies. Lenders may need the
federal Treasury Department to confirm the validity of such
transfers, or seek legislation clarifying federal law,
before entering into any BAB securitization transactions.
In light of numerous unanswered questions about BABs, and
BAB subsidies, the Committee may wish to consider whether
AB 2080 is premature.
3. Shifting risk . The VLF and Proposition 1A
securitization mechanisms helped to protect local
governments against the risk that the state wouldn't repay
what it owed. In the case of the 2004 VLF securitization,
local officials accepted a discounted amount of what the
state owed in exchange for the security of receiving an
immediate payment. Last year, local governments
securitized the full amount of the property taxes that the
state must repay under the constitutional provisions of
Proposition 1A. Recent news articles report that the
federal government is reducing subsidy payments to some BAB
issuers to "offset" amounts that the federal government
claims the issuer owes under other federal programs. The
risk of federal "offsets" to BAB subsidy payments raises
two questions that the Committee may wish to consider.
First , should a local government use the BAB securitization
mechanism to shift, to bondholders, the risk that the
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federal government will collect debts that the local
government owes? Second , will the risk posed by federal
"offsets" decrease the amount of up-front cash payments
that lenders would give to local governments, making AB
2080's BAB securitization mechanism less useful?
Assembly Actions
Assembly Local Government Committee: 6-2
Assembly Appropriations Committee:10-5
Assembly Floor: 47-27
Support and Opposition (6/24/10)
Support : California Public Securities Association,
California Association of County Treasurers and Tax
Collectors, League of California Cities.
Opposition : Unknown.