BILL ANALYSIS Ó SENATE GOVERNANCE & FINANCE COMMITTEE Senator Lois Wolk, Chair BILL NO: SB 214 HEARING: 4/27/11 AUTHOR: Wolk FISCAL: No VERSION: 4/25/11 TAX LEVY: No CONSULTANT: Lui INFRASTRUCTURE FINANCING DISTRICTS Makes it easier for local governments to use infrastructure Financing Districts. Background and Existing Law Cities and counties can create Infrastructure Financing Districts (IFDs) and issue bonds to pay for community scale public works: highways, transit, water systems, sewer projects, flood control, child care facilities, libraries, parks, and solid waste facilities. To repay the bonds, IFDs divert property tax increment revenues from other local governments for 30 years. However, IFDs can't divert property tax increment revenues from schools (SB 308, Seymour, 1990). Unlike redevelopment, the property in an IFD doesn't have to be blighted, but an IFD can't overlap a redevelopment project area. The Legislature has declared, but not required, that IFDs should include substantially undeveloped areas. Forming an IFD is cumbersome. The city or county must develop an infrastructure plan, send copies to every landowner, consult with other local governments, and hold a public hearing. Every local agency that will contribute its property tax increment revenue to the IFD must approve the plan. Once the other local officials approve, the city or county must still get the voters' approval. The deadline for filing lawsuits to challenge an IFD's creation, financing plan, allocation of property tax increment revenues, and tax allocation bonds is 30 days after the local officials get voter approval. Public officials continue to search for ways to raise the SB 214 -- 4/25/11 -- Page 2 capital they need to invest in public works projects, like public transit facilities, infill development, or clean water. One concept recognizes that expanded public structures can boost the value of nearby property. Higher property values produce higher property tax revenues. Property tax increment financing captures those property tax increment revenues. When redevelopment officials use property tax increment financing to eradicate blight, state law doesn't require voter approval. When local officials use IFDs to capture property tax increment revenues, state law requires 2/3-voter approval. Proposed Law I. Voter approval . After preparing an infrastructure financing plan, local officials must get voter approval to: Form the IFD, which requires 2/3-voter approval. Issue bonds, which requires 2/3-voter approval. Set the appropriations limit, which requires majority-voter approval. Senate Bill 214 repeals the voter approval requirements to form an IFD, issue IFD bonds, and set the IFD's appropriations limit. II. Fire district approval . Before an IFD can divert property tax increment from another taxing entity, every local agency that will contribute its property tax increment revenue to the IFD must approve the infrastructure financing plan. Some special districts are governed ex officio by county boards of supervisors or city councils. In the case of a special district that provides fire protection services where the county board of supervisors is the governing authority, Senate Bill 214 requires the special district to act on an IFD's plan by adopting a separate resolution. III. Bond terms . The terms of IFDs' bonds can't be more than 30 years. Senate Bill 214 extends the maximum term of IFDs' bonds from 30 years to 40 years. IV. Accountability . The current IFD law is silent on fiscal protections, project management, or reporting measures. Senate Bill 214 requires that local officials' SB 214 -- 4/25/11 -- Page 3 resolution of intention to form an IFD must state the goal and need of the district and that the resolution be posted on the legislative body's Internet web site. SB 214 clarifies that IFDs can't be used for maintenance, services, or to compensate the members of the legislative body. SB 214 requires the legislative body to mail an annual report to landowners in the district and each affected taxing entity. The report must also be posted on the legislative body's website. The report must include: A summary of the IFD's expenditures. A progress report of the IFD's adopted goals. An assessment of the status of the IFD's public works projects. If the IFD fails to submit the annual report to its landowners or taxing entities, or the report is not put on the legislative body's Internet, it can't spend any funds to construct public works projects until the report is submitted. If the IFD fails to show progress for five consecutive years, it can't spend any funds to construct any new public works projects. Any excess property tax increment revenues that may have been allocated to the new public works projects would be re-allocated according to the adopted formula. V. Redevelopment project areas . An IFD can't overlap a redevelopment project area. Senate Bill 214 repeals that statutory prohibition. VI. Big box retailers and vehicle dealers . State law prohibits a community from giving financial assistance-direct below-market property deals or cuts in fees-to a big box retailer or vehicle dealer that relocates in the same market area (SB 114, Torlakson, 2003). That law applies to counties, cities, and redevelopment agencies. Senate Bill 214 prohibits IFDs from providing financial assistance to big box retailers or vehicle dealers to relocate from one local agency to another in the same market area. VII. Disadvantaged communities . State law defines disadvantaged communities as those with median household incomes less than 80% of the statewide average. Severely disadvantaged communities have median household incomes less than 60% of the statewide average. Many disadvantaged communities lack adequate public services and facilities like clean water, sewers, paved streets, storm drains, and street lights. Advocates want legislators to require local SB 214 -- 4/25/11 -- Page 4 officials to include disadvantaged communities in their long-range planning for land use and public facilities. Senate Bill 214 declares that it is in the public interest for IFDs to finance public works for disadvantaged communities. VIII. Polanco Act . The Polanco Redevelopment Act encourages cleanup and development of brownfields-properties contaminated by hazardous waste. The Act authorizes redevelopment agencies to conduct a cleanup and to recover the costs of that cleanup from responsible parties. Redevelopment agencies that conduct these cleanups, and individuals that enter into redevelopment agreements with the agency, immune from future cleanup liability. Senate Bill 214 allows IFDs to finance necessary actions to clean-up brownfield sites under the Polanco Act. IX. Sustainable Communities Strategy . The Sustainable Communities and Climate Protect Act requires the Air Resources Board to set regional targets for automobiles' and light trucks' greenhouse gas emission reduction, requires a regional transportation plan to include a Sustainable Communities Strategy to meet targets for greenhouse gas emission reduction, requires the California Transportation Commission to maintain guidelines for travel demand models, requires cities and counties to revise their housing elements every eight years in conjunction with the regional transportation plan, and relaxes CEQA requirements for housing developments that are consistent with a Sustainable Communities Strategy (SB 375, Steinberg, 2008). Senate Bill 214 allows IFDs to finance any projects to implement a sustainable communities strategy. State Revenue Impact No estimate. Comments 1. Purpose of the bill . Senate Bill 214 creates a more flexible development tool to finance needed public works projects, while incorporating rigorous accountability measures to ensure local government diligence, positive project results, and healthier community development. SB 214 recognizes the potential for infrastructure financing SB 214 -- 4/25/11 -- Page 5 districts to implement SB 375's (Steinberg, 2008) sustainable communities strategy and the benefits of protecting and rehabilitating brownfields from hazardous waste. Local officials use tax increment financing to divert part of the property tax revenue stream to a separate IFD. If a local government decides not to participate in the IFD formation, its tax increment revenue shares aren't touched. Before taxes are raised, assessments are levied, or bonds are issued, the California Constitution requires local officials to get voters' approval: special taxes require 2/3-voter approval; general taxes require majority-voter approval; benefit assessments require a weighted ballot approval by property owners; local general obligation bonds that require new property tax revenues need 2/3-voter approval; local revenue bonds that rely on new fee revenues require majority-voter approval. However, in contrast to taxes, assessments, or bonds, IFDs neither raise taxes nor generate new revenue. SB 214 removes the requirement for voter approval of IFDs' plans, bonds, and appropriations limits. Legislators and voters who have elected their local representatives should let local officials do their job-setting local priorities for spending local revenues. 2. Voter review . The California Constitution requires 2/3-voter approval before cities or counties can issue long-term debt backed by local general purpose revenues; school districts need 55%-voter approval. That's why local general obligation bonds need 2/3-voter approval. The courts have explained that cities need 2/3-voter approval before they dedicate portions of their general funds to pay for bonds. That's why local limited obligation bonds need 2/3-voter approval. However, because that constitutional limit doesn't mention redevelopment agencies, local officials don't need voter approval before they issue tax allocation bonds. Redevelopment agencies are not diverting local general funds, they pay for their bonds with property tax increment revenues. When Governor Deukmejian signed the 1990 Seymour bill that created IFDs, there was a political agreement that local officials should get 2/3-voter approval before they could issue IFD bonds. That requirement is statutory and not based on a constitutional limitation. There is no constitutional requirement for IFDs to seek 2/3-voter approval (or any voter-approval) before they issue bonds backed by property tax increment revenues. SB 214 repeals the statutory requirement for SB 214 -- 4/25/11 -- Page 6 2/3-voter approval on IFDs' bonds. The Committee may wish to consider what voter approval (if any) local officials should seek before issuing IFD bonds. 3. IFDs vs. redevelopment . Albert Einstein once said that the only reason for time is so that everything doesn't happen at once. When Governor Brown proposed the elimination of redevelopment, the world of IFDs and redevelopment intertwined. In the 1990 political compromise that resulted in IFDs, legislators drew clear distinctions with redevelopment projects. The land use key to redevelopment was blight, but IFDs don't have to demonstrate blight. The fiscal key to redevelopment was access to the schools' share of property tax increment revenues, but IFDs can't touch any school funds. The housing key to redevelopment was that 20% of their property tax increment revenues must be set aside to support affordable housing, but IFDs have no state funds, so IFDs need only to replace destroyed housing and provide relocation assistance. If redevelopment activities stop or decline, IFDs may become more important. 4. No state subsidy . When redevelopment agencies divert property tax increment revenues from schools, the State General Fund backfills the schools. That diversion indirectly creates state subsidy for redevelopment projects. Unlike redevelopment agencies that can capture the schools' share of property tax increment revenues, infrastructure financing districts don't benefit from state subsidies. By diverting property tax increment revenues only from those other local governments that are willing to give up a share of their revenues, IFDs rely on locally generated revenues and not a State General Fund subsidy. Is the Legislature ready and willing to grant local officials the authority to create public financing tools that locals have joined to form? 5. One building block at a time . For many years, local officials were reluctant to form IFDs because they worried about the constitutionality of using tax increment revenue from property not within a redevelopment project area. In 1998, an Attorney General's opinion allayed those concerns, and the City of Carlsbad formed an IFD to fund the public works for a new hotel and any future public works needed to develop Legoland theme park up to $1.5 million. To date, it is the only example of a finished IFD project. SB 214 -- 4/25/11 -- Page 7 Intrigued by the concept, other local officials have persuaded legislators to pass special bills that adapt the IFD statute to their local circumstances: SB 207 (Peace, 1999): border development zone IFD. SB 223 (Kelley, 1999: Salton Sea Authority IFD. SB 1085 (Migden, 2005): San Francisco waterfront IFD. AB 2882 (De La Torre, 2006): Orangeline mag-lev train IFD. The existence of one complete IFD project underscores the lack of evidence on IFD's viability as a local financing tool. Rather, the list of incomplete projects attests to the practical barriers that exist when implementing an IFD. The Committee may wish to consider if SB 214 adequately addresses external barriers when implementing an IFD. 6. Similar bill . SB 214 is similar to AB 1836 (Fueur, 2008) which would have repealed the 2/3-voter approval for local officials to form an IFD, repealed the 2/3-voter approval to issue tax bonds, and extended the time an IFD could receive property tax increment revenues from 30 years to 40 years. AB 1836's intent was to adapt IFDs to public transit projects. The bill failed passage in the Senate Local Government Committee. 7. Related bills . SB 214 is not the only bill seeking to update the IFD financing mechanism. AB 485 (Ma, 2011) utilizes IFDs to create more transit-oriented development and related low-income housing. AB 664 (Ammiano, 2011) authorizes, under existing authorization for the City of County of San Francisco to create IFDs, the adoption of a financing plan and use of IFD revenues for the portion of the San Francisco waterfront district designated as the America's Cup venue. AB 664 (Ammiano, 2011) also requires the County Board of Supervisors to submit a fiscal analysis to the California Infrastructure and Economic Development Bank for review and approval before adopting the resolution authorizing issuance of debt. AB 910 (Torres, 2011) expands the list of project IFDs can finance to include affordable housing facilities and economic development. On April 27, the Committee will hear SB 310 (Hancock, 2011) which seeks to use IFDs for transit priority projects. Support and Opposition (4/21/11) SB 214 -- 4/25/11 -- Page 8 Support : California State Association of Counties; California Professional Firefighters; California Rural Legal Assistance Foundation; California Special Districts Association; Non-Profit Housing Association of Northern California; County of Yolo; Davis Board of Education Trustee Susan Lovenburg; Imperial County Supervisor Gary Wyatt. Opposition : California Taxpayers Association.