BILL ANALYSIS Ó Senate Appropriations Committee Fiscal Summary Senator Christine Kehoe, Chair AB 2207 (Gordon) - Property taxation welfare exemption: natural resources and open-space lands. Amended: July 5, 2012 Policy Vote: G&F 8-0 Urgency: No Mandate: Yes Hearing Date: August 6, 2012 Consultant: Mark McKenzie This bill meets the criteria for referral to the Suspense File. Bill Summary: AB 2207 would prohibit county assessors from considering specified revenues and uses of property for purposes of determining whether a property dedicated to open-space and natural resource preservation qualifies for the welfare property tax exemption. Fiscal Impact: Estimated statewide property tax revenue reduction of approximately $225,000 annually (foregone revenues). Assuming 50 percent of the statewide property tax revenues offset General Fund obligations to schools pursuant to Proposition 98 minimum funding guarantees, the General Fund impact would be approximately $113,000 due to increased state backfill provided to schools. Staff notes that actual state impacts may vary as the school share of property tax is typically in the range of 45 percent to 60 percent in most parts of the state. Likely minor reimbursable mandate costs related to the imposition of new duties on local tax officials since the bill revises the criteria that assessors would use to determine eligibility for the welfare exemption that applies to property dedicated to open-space and natural resource preservation (General Fund). Background: Existing law, Article XIII Section 4(b) of the California Constitution, allows the Legislature to grant exemptions from the property tax for property owned and operated by nonprofit organizations for religious, hospital, or charitable purposes. When the Legislature enacted the "welfare exemption" in 1945 to implement the Constitutional provision, AB 2207 (Gordon) Page 1 property used for scientific purposes was included in the property tax exemption. In order to qualify for the exemption, the property must be used for the actual operation of the exempt activity and no part of the net earnings of the owner may inure to the benefit of a private shareholder or individual. In 1971, special session legislation was enacted to expand the welfare exemption to include land owned and operated by specified nonprofit organizations that is open to the general public and used exclusively for the preservation of native plants or animals, biotic communities, geological or geographical formations of scientific or educational interest, and open space lands used solely for recreation and for the enjoyment of scenic beauty. Existing law provides county assessors with sole authority to determine eligibility for the welfare exemption. In order to qualify for the property tax exemption, a property must be used exclusively for the specified exempt purposes and activities, but the courts have determined that exclusive use includes any use of the property that is incidental to and reasonably necessary for the accomplishment of the exempt purpose. Assessors in five counties have disallowed the welfare exemption for open space lands held by nonprofits organizations because of certain revenue generating activities on the properties, such as lease payments for cattle grazing and collection of hunting fees. The Board of Equalization (BOE) has provided legal opinions in two counties concluding that the properties in question were not eligible for the welfare exemption on multiple grounds, including the existence of cattle grazing leases that were not deemed to be an incidental use of the property. The BOE opinions are advisory and not binding on the decisions of county assessors. Proposed Law: For purposes of determining whether a property is used for the actual operation of exempt activities required to qualify for the welfare property tax exemption, AB 2207 would prohibit the consideration of the use of the property for either of the following: Activities resulting in direct or in-kind revenues, provided the activities further the conservation objectives of the property as provided in a qualified conservation management plan, including revenue from grazing leases, hunting and camping permits, rents from persons residing on the property who perform caretaking activities, and AB 2207 (Gordon) Page 2 admission fees collected for purposes of public enjoyment. Any lease that furthers the conservation objectives of the property as provided in a qualified conservation management plan. The bill would also specify the contents of a qualified conservation management plan and prohibit the activities and leases noted above from generating unrelated business income. Related Legislation: AB 703 (Gordon), Chap 575/2011, extended the welfare exemption for property dedicated to natural resource protection and open-space purposes until January 1, 2022. Staff Comments: This bill is intended to provide clarity to assessors who may have differing interpretations related to the allowable uses of properties held by nonprofits for natural resource preservation and open-space purposes. By prohibiting the consideration of leases and specified revenue-generating activities that are consistent with conservation objectives identified in a nonprofit's conservation management plan for a property when determining eligibility for the welfare exemption, AB 2207 would ensure more uniform application of the exemption by county assessors. Based upon the previous known instances in which county assessors have denied the welfare exemption, this bill would result in decreased statewide property tax collections of approximately $225,000 annually, beginning in 2013-14. Assuming half of this revenue would otherwise be allocated to schools, the General Fund impact related to state backfills of schools' losses would be about $113,000. This revenue impact could increase to the extent more property owners claim the welfare exemption as a result of the bill's broader interpretation of the allowable uses of property that qualify as exempt activities.