BILL ANALYSIS Ó SENATE GOVERNANCE & FINANCE COMMITTEE Senator Lois Wolk, Chair BILL NO: SB 536 HEARING: 4/6/11 AUTHOR: DeSaulnier FISCAL: Yes VERSION: 2/17/11 TAX LEVY: No CONSULTANT: Weinberger PROPERTY TAX ALLOCATION FROM PUBLIC UTILITY PROPERTY (URGENCY) Creates a special formula for allocating unitary property tax revenues to the Oakley Redevelopment Agency. Background and Existing Law The California Constitution requires the State Board of Equalization (BOE) to assess public utilities for property tax purposes. The BOE assesses a regulated utility's property as a unit, instead of assessing the individual value of separate properties owned by the utility. State law allocates the property tax revenues from state-assessed public utilities differently than the property tax revenues from locally-assessed properties. Until 1988-89, state law allocated property tax revenues from all state-assessed property on a situs basis among tax rate areas. The complexity and administrative cost of tracking property holdings and allocating property tax revenues among thousands of small geographic locations led the Legislature to create the current countywide method for allocating unitary property tax revenues (AB 2890, Hannigan, 1986). Under the countywide method, the BOE allocates the unitary assessed value of utility property among the counties based on the amount of property within each county. County auditors allocate the property tax revenues from unitary properties using a formula based on the amount of unitary revenues received by the county's taxing jurisdictions in 1987-88. For years after 1987-88, each taxing jurisdiction receives up to 102% of its prior year unitary property tax revenues. The county auditor allocates the remaining property tax revenue from the county's unitary roll to all taxing jurisdictions in proportion to their shares of SB 536 -- 2/17/11 -- Page 2 property tax revenues derived from locally-assessed property. In other words, this unitary tax allocation method creates a countywide pool of property tax revenues generated by growth in the value of state-assessed properties. Each local taxing agency gets a share of the countywide pool, regardless of whether any state-assessed property is within that agency's boundaries. The Legislature has created some exceptions to this countywide unitary tax allocation method. When the City of Chula Vista (San Diego County) was willing to accept a proposed electrical power plant, legislators directed that the resulting property tax revenues would be allocated to schools and the county government under the unitary tax method, but the share that would have gone to all cities in San Diego County under the unitary tax method would instead go just to Chula Vista (AB 1108, Peace, 1993). The Legislature approved similar exceptions for an electrical power plant in the City of Escondido (AB 2558, Plescia, 2004), a PG&E education and training center in the City of Livermore (SB 53, Lockyer, 1991), and a PacBell computer center in the City of Fairfield, (AB 454, Klehs, 1987). The Legislature also created an exception to the countywide unitary tax allocation method for all newly constructed public-utility-owned, large-scale electrical generation, substation, and transmission facilities. That exception allocates a greater share of unitary property tax revenues to the city or county in which a qualified electrical facility is located (SB 1317, Torlakson, 2006). The Community Redevelopment Law allows local officials to set up redevelopment agencies, adopt redevelopment plans, and finance redevelopment activities using property tax increment revenues. When a redevelopment agency adopts a redevelopment plan for a project area and selects a base year, the agency "freezes" the amount of property tax revenues that schools and other local governments receive from the property in that area. In future years, as the project area's assessed valuation grows above the frozen base, the resulting property tax revenues - the property tax increment - go to the redevelopment agency instead of going to the schools and the other underlying local governments. State law requires redevelopment officials to SB 536 -- 2/17/11 -- Page 3 make pass-through payments to schools and other local governments to mitigate the long-term fiscal effects of property tax increment financing (AB 1290, Isenberg, 1993). State law also requires redevelopment officials to set aside 20% of an agency's property tax increment revenues to increase, improve, and preserve the supply of affordable housing (AB 3674, Montoya, 1976). The California Energy Commission is considering a proposal to construct a 600 megawatt power plant within a redevelopment project area in the City of Oakley (Contra Costa County). Oakley officials say that the modified allocation method created by the 2006 Torlakson bill doesn't allocate enough revenue to their redevelopment project area. They want the Legislature to create an exception to that modified allocation method to send more unitary property tax revenues from the proposed power plant to the Oakley Redevelopment Agency. Proposed Law Senate Bill 536 creates a new method for allocating unitary property tax revenues from new public utility-owned, state-assessed, "qualified property." SB 536 defines "qualified property" as all plant and associated equipment, including substation facilities and fee-owned land and easements, placed in service by a public utility in the Oakley Redevelopment Project Area on or after January 1, 2011 and related to: Electrical substation facilities that either operate at 50,000 volts or more or have a transformer with a high-side voltage of 50,000 volts or more. Electric generation facilities that have a nameplate generating capacity of 50 megawatts or more. Electric transmission line facilities of 200,000 volts or more. SB 536's unitary property tax allocation method differs from the countywide allocation method that applies SB 536 -- 2/17/11 -- Page 4 generally to revenues from utilities' state-assessed property and from the 2006 Torlakson bill's modified method for allocating revenues from qualified electrical facility property in three significant ways: I. Non-debt service allocation . Generally, under the countywide unitary tax allocation method, property tax revenues from the non-debt service portion of the tax applied to state-assessed property go into a countywide pool which is then allocated by a formula that: Establishes a unitary tax base for any jurisdiction which had state assessed property within its boundaries in the 1987-88 fiscal year. Annually increases each local agency's unitary base by up to 2% (provided that there are sufficient revenues). Allocates the remaining revenues to all local agencies in the county in proportion to each agency's share of non-unitary property tax revenues. The modified method for allocating revenues from qualified electrical facility property allocates revenues to a county, school entities, and non-enterprise special districts in proportion to the revenues they received from the utility in the prior year under the countywide allocation method. Of the remaining revenues, 90% goes to the city or county where the electrical facility is built and 10% goes to the local government that provides water service to the qualified electrical facility property. Senate Bill 536 requires the revenues from the property tax assessed on public utility-owned, state-assessed qualified property to be allocated entirely to the county in which the qualified property is located. The county auditor then allocates the property tax revenues derived from the non-debt-service portion of the property tax on qualified property as follows: First, allocate to the county in which the qualified property is located and to all of the school entities located in that county, the amount of property tax revenues that would have otherwise been allocated to the county and school entities or districts had the bill not been enacted. Second, allocate to the East Contra Costa Fire Protection District an amount equal to 2% of the property tax revenues. Third, allocate to any regional park district an amount SB 536 -- 2/17/11 -- Page 5 of property tax revenues equal to the amount of property tax revenues allocated to that special district in 2010-11. Fourth, allocate to the redevelopment agency governing the project area in which the qualified property is located, the balance of the property tax revenues. II. Debt service allocation . Generally, unitary property tax revenues from the debt-service rate that applies to state-assessed properties are allocated to each taxing jurisdiction that levies a rate in excess of 1% for voter-approved debt service in proportion to the percentage of total property tax revenues each jurisdiction received from taxes on state-assessed property in the prior year. Under the modified allocation method for qualified electrical facilities, revenues from the debt-service rate are allocated using the general method, except that school entities receive an amount equivalent to the same percentage of property tax revenues they received from the utility in the prior fiscal year. Senate Bill 536 allocates revenues from the debt-service rate in two steps: First, the revenues go to taxing jurisdictions in those Contra Costa County tax rate areas in which the qualified electrical facility is located in an amount equivalent to the BOE's current-year assessed value of the qualified property multiplied by any override rate adopted by the local agency for the year. Second, the balance of the revenues are allocated pursuant to the general allocation statute. III. Property valuation . Generally, the BOE annually reassesses state-assessed property at its current market value on January 1. The modified allocation method for qualified electrical facilities excludes from the definition of qualified property any additions, modifications, reconductoring, or equivalent replacements to the plant and associated equipment made after the plant and associated equipment are placed in service. Senate Bill 536 includes, in the definition of qualified property, any additions, modifications, reconductoring, or equivalent replacements to the plant and associated equipment made after the plant and associated equipment are placed into service. SB 536 -- 2/17/11 -- Page 6 IV. Affordable housing . Senate Bill 536 requires the Oakley Redevelopment Agency, once the qualified property is placed in service, to develop one new housing unit for each 40 jobs created on real property within the specified redevelopment project area. All of the new housing units: Must be affordable to, and occupied by, extremely low income persons, as defined in statute. Must comply with the requirements of the Community Redevelopment Law, with specified exceptions. Must be completed and occupied no later than 10 years after a specified date. May be located anywhere within the City of Oakley. The number of units required is not affected by whether the units are within a project area. May be used to satisfy the City of Oakley's regional housing needs allocation. To determine the number of jobs created in the specified project area, Senate Bill 536 requires the redevelopment agency to determine the number of full and part time jobs existing in the specified redevelopment project area six months before the approval of an agency's five-year implementation plan. The agency must use data from a state or federal agency in making the determination. The number of housing units that the agency must develop is 1/40th of the number of jobs calculated and must be included in the first applicable implementation plan. For each subsequent implementation plan, the number of additional units must be based on any increase in the number of jobs since the prior calculation. V. Other provisions . Senate Bill 536 also requires a public utility to provide the BOE with a description of the qualified property in the form prescribed by the BOE so that the BOE can determine the separate valuation. The BOE must transmit to the Contra Costa County auditor the information necessary to identify the qualified property and the corresponding assessed value data necessary to make the property tax revenue allocations required by the bill. SB 536 requires the county auditor to make any necessary pro rata reductions in the allocations of property tax revenues attributable to the qualified property to jurisdictions other than those receiving an allocation under the bill's provisions. The bill requires the Oakley SB 536 -- 2/17/11 -- Page 7 Redevelopment Agency to reimburse the county auditor's actual and reasonable costs for administering the property tax allocation requirements. The bill contains legislative declarations to support its special provisions applying to the Oakley Redevelopment Agency. State Revenue Impact No estimate. Comments 1. Purpose of the bill . Recognizing the need to rapidly expand the state's electrical generating capacity, and the impact that new generating facilities have on local communities, the 2006 Torlakson bill compensates communities that accept those energy projects with bigger shares of future unitary property tax revenues. However, that law compensates only cities or counties, not redevelopment agencies. SB 536 expands that modified allocation method by providing the Oakley Redevelopment Agency with a similar augmentation of future unitary property tax revenues from a power plant built within its boundaries. SB 536's allocation of property tax revenues from Oakley's power plant may generate over $2 million of additional revenue per year over the life of the power plant for the Agency. These revenues will help to fund the Agency's activities and mitigate the power plant's impact within the redevelopment project area. 2. Not increment I . SB 536 is similar to SB 1398 (DeSaulnier, 2010), which died while awaiting a concurrence vote on the Senate Floor. Unlike the version of SB 1398 that the Senate Local Government Committee approved last year, SB 536 does not require the unitary property tax revenues received by the Oakley Redevelopment Agency to be included in the agency's property tax increment. However, the bill's legislative findings and declarations - in Sections 3 and 5 - still cite the need for the Agency to receive "sufficient tax increment funding." To clarify SB 536 -- 2/17/11 -- Page 8 that the revenues allocated to the Oakley Redevelopment Agency under SB 536's provisions are not part of the agency's property tax increment, the Committee may wish to consider amending the bill to delete the remaining references to "tax increment." 3. Not increment II . By not including the additional unitary property tax revenues from the Oakley power plant in the Agency's tax increment, SB 536 exempts those revenues from the extensive statutory requirements that usually apply to redevelopment agencies' tax increment revenues. For example, the Agency will not have to make additional pass-through payments to some other local governments based on the additional revenues. The Agency will not have to set aside 20% of its additional revenues for affordable housing. By receiving property tax revenues that are not included in tax increment, the Oakley Redevelopment Agency may become a "taxing entity" under state law, which could make it eligible to claim reimbursement for state mandates. The Committee may wish to consider whether, by not including the property tax revenues that it allocates to the Oakley Redevelopment Agency in the Agency's tax increment, SB 536 sets a precedent for future exceptions to the Community Redevelopment Law's requirements. 4. Future winners, future losers . Property tax allocation is a zero-sum game; every reallocation of property tax revenues produces winners and losers. SB 536's exception to the 2006 Torlakson bill's modified property tax allocation method will leave some local governments in Contra Costa County with higher future revenues, and others with lower future revenues, than they would have received under current law. The Oakley Redevelopment Agency wins under SB 536. However, the bill also results in lower future revenues to: Special districts . Some Contra Costa County special districts will receive lower future unitary property tax revenues under SB 536's allocation method and lower future pass-through payments from the Oakley Redevelopment Agency. Those districts include the Diablo Water District, the East Bay Regional Park District, and the Contra Costa Mosquito and Vector Control District, all of which serve the area in which the proposed power plant will be built. The Committee may wish to consider SB 536 -- 2/17/11 -- Page 9 whether SB 536 places an additional fiscal burden on already struggling special districts. Bond issuers . SB 536 modifies the method for allocating the property tax revenues from the debt-service portion of the tax rate that applies to qualified electrical facility property. While the implications of this change are difficult to determine, the bill could result in some Contra Costa County local governments, whose boundaries do not include the proposed power plant, receiving lower future property tax revenues for debt-service. The Committee may wish to consider whether SB 536's allocation of unitary property tax revenues for debt service could reduce the funds available to pay the debt for some local governments' voter-approved public works. 5. More complexity . SB 536's provisions apply narrowly to the proposed power plant project in the City of Oakley. However, by creating an exception to the already complex unitary tax allocation method that currently applies to all qualified electrical facility property, the bill may invite further exceptions. The Committee may wish to consider whether the precedent set by SB 536 will encourage other communities to ask the Legislature to enact unique unitary property tax allocation methods for revenues from other state-assessed property, creating an even more confusing patchwork of tax allocation statutes. 6. Back to the future ? The 1986 Hannigan bill responded to the complexity and cost of allocating unitary property tax revenues on a situs basis by creating a simpler countywide allocation method. To provide added revenues to communities willing to accept large electric facilities, the 2006 Torlakson legislation created a hybrid method for allocating some unitary property tax revenues through the countywide pool and some revenues on a situs basis to the city or county in which the electrical facility was located. In allocating a large share of the property tax revenues from the Oakley power plant to the Oakley Redevelopment Agency, SB 536 moves further away from the 1986 reforms and towards the old situs allocation method. The Committee may wish to consider whether this shift back towards situs-based allocation of unitary property tax revenues will erode the cost savings and simplicity achieved by the Hannigan bill. SB 536 -- 2/17/11 -- Page 10 7. May be moot ? Governor Brown's 2011-12 State Budget proposal calls for eliminating redevelopment agencies. AB 101 (Assembly Budget Committee) and SB 77 (Senate Budget and Fiscal Review Committee) contain the implementing language. The Committee may wish to consider whether SB 536 will be moot if the Oakley Redevelopment Agency ceases to exist on July 1, 2011. 8. Mandate . The California Constitution requires the state to reimburse local governments for the costs of new or expanded state mandated local programs. Because SB 536 imposes new duties on the Contra Costa County Auditor to allocate property taxes from state-assessed property, Legislative Counsel says that the bill imposes a new state mandate. SB 536 disclaims the state's responsibility for providing reimbursement by citing the bill's requirement that the Oakley Redevelopment Agency pay the county auditor's additional costs. 9. Two-thirds vote . Regular statutes take effect on the January 1 following their enactment; bills passed in 2011 take effect on January 1, 2012. The California Constitution allows bills with urgency clauses to take effect immediately if they're needed for the public peace, health, and safety. SB 536 contains an urgency clause explaining the need for the bill to take effect immediately. Additionally, Proposition 1A (2004) requires approval by a 2/3 vote in each house of the Legislature for any change in the pro rata shares in which ad valorem property tax revenues are allocated among agencies in a county. SB 536 is subject to that constitutional requirement. For both of these reasons, the bill requires a 2/3 vote on the Senate Floor. Support and Opposition (3/31/11) Support : City of Oakley Redevelopment Agency, California Rural Legal Assistance Foundation, Western Center on Law and Poverty. Opposition : Unknown. SB 536 -- 2/17/11 -- Page 11