BILL ANALYSIS Ó SENATE GOVERNANCE & FINANCE COMMITTEE Senator Lois Wolk, Chair BILL NO: AB 243 HEARING: 6/12/13 AUTHOR: Dickinson FISCAL: Yes VERSION: 6/5/13 TAX LEVY: No CONSULTANT: Lui INFRASTRUCTURE AND REVITALIZATION FINANCING DISTRICTS Allows a local government to use infrastructure and revitalization financing districts to finance specified projects. 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). To form an IFD, 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 approval of voters in the proposed district, specifically: 2/3-vote to create the district, 2/3-vote to issue bonds, and a majority-vote to set the district's appropriations limit. 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 local officials obtain voter approval. Until 2011, the Community Redevelopment Law allowed local officials to set up redevelopment agencies (RDAs), prepare and adopt redevelopment plans, and finance redevelopment activities. Citing a significant State General Fund AB 243 -- 6/5/13 -- Page 2 deficit, Governor Brown's 2011-12 budget proposed eliminating redevelopment agencies (RDAs) and returning billions of dollars of property tax revenues to schools, cities, and counties to fund core services. Among the statutory changes that the Legislature adopted to implement the 2011-12 budget, AB X1 26 (Blumenfield, 2011) dissolved all RDAs. Public officials continue to search for ways to raise the 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. With the dissolution of RDAs, local governments and lawmakers seek to adapt IFD's tax increment financing mechanism. Proposed Law Assembly Bill 243 renames Infrastructure Financing Districts as "Infrastructure and Revitalization Financing Districts." AB 243 makes the following changes to the statutes governing the districts: I. Voter approval . Current law requires local officials to prepare an infrastructure financing plan and 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. AB 243 authorizes local officials to create an infrastructure and revitalization financing district (IRFD) and issue debt with 55% voter approval. For an IRFD created to finance a project on a former military base, the bill eliminates the vote-requirements to: Form the IRFD, provided that, at the time of the approval of the IRFD's formation, all of the land in the proposed IRFD is owned by one or more public entities, military base reuse authorities, or entities controlled by governmental agencies. AB 243 -- 6/5/13 -- Page 3 Issue debt to finance facilities described in the infrastructure financing plan, provided that, at the time of the approval of the IRFD's formation, all of the land within the proposed district, or designated project area within the district on which the facilities are to be financed, is owned by one or more public entities, military base reuse authorities, or entities controlled by governmental agencies. AB 243 provides that bonds, which are authorized for an IRFD to finance a project on a former military base, may be issued in one or more series, upon an IRFD's adoption of a resolution that contains specified information. II. Types of projects . Current law allows IFDs to finance: The purchase, construction, expansion, improvement, seismic retrofit rehabilitation of any real property, The planning and design work directly related to the purchase, construction, expansion, or rehabilitation, and Other authorized costs pertaining to replacement dwelling units or action seeking to void the creation of a district. An IFD must finance only public capital facilities of communitywide significance, like highways, transit, water systems, sewer projects, flood control, child care facilities, libraries, parks, and solid waste facilities. An IFD is prohibited from financing routine maintenance, repair work, or the costs of ongoing operations or providing services. AB 243 adds to the list of authorized improvements that an IRFD may finance to include: Watershed lands used for the collection and treatment of water for urban uses. Brownfields restoration and other environmental mitigation. Purchase of land and property for development purposes and related site improvements. Acquisition, construction, or repair of housing for rental or purchase, including multipurpose facilities. Acquisition, construction, or repair of commercial or industrial structures for private use. The repayment of the transfer of funds to a military base reuse authority pursuant to state law. AB 243 -- 6/5/13 -- Page 4 Existing law requires that any IFD that constructs dwelling units must set aside at least 20% of those units to increase and improve the community's supply of low- and moderate-income housing at an affordable housing cost. AB 243 requires that any IRFD that constructs dwelling units must set aside at least 20% of those units to increase and improve the community's supply of low- and moderate-income housing at an affordable housing cost, as defined in state law, or at an affordable rent, as defined in state law. AB 243 provides that an IRFD may only finance facilities or services authorized in this bill. The additional facilities or services may not supplant existing facilities or services in the territory when the district was created, except if those facilities or services are nonfunctional, obsolete, hazardous, or in need of upgrading or rehabilitation. AB 243 authorizes the additional facilities or services to supplement those facilities and services as needed to serve new developments. Existing law allows an IFD to include areas that are not contiguous. AB 243 authorizes an IRFD to be divided into project areas, each of which may be subject to distinct limitations established under IRFD law. The city council or board of supervisors may, at any time, add territory to a district or amend the infrastructure financing plan for the district by conducting the same procedures for a district's formation or bond approval. III. Polanco Act . The Polanco Redevelopment Act encourages cleanup and development of brownfields-properties contaminated by hazardous waste. The Act authorized former redevelopment agencies to conduct a cleanup and to recover the costs of that cleanup from responsible parties. AB 243 authorizes an IRFD to utilize any powers under the Polanco Act and finance any action necessary to implement the Act. AB 243 adds "infrastructure and revitalization financing district" into the Polanco's Act definition of a local agency. IV. 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 AB 243 -- 6/5/13 -- Page 5 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). AB 243 allows IRFDs to finance any project that implements a sustainable communities strategy prepared pursuant to state law. V. Military bases . AB 243 authorizes cities and counties to finance a project on a former military base, only if the project is consistent with the authority reuse plan and is approved by the military base reuse authority, if applicable. VI. Redevelopment . Existing law prohibits an IFD from including any portion of a redevelopment project area. AB 243 repeals that statutory prohibition and authorizes an IRFD to finance any project or portion of a project that is located in, or overlaps with, any redevelopment project area, former redevelopment project area, or former military base. AB 243 requires that any debt or obligation of an IRFD be subordinate to an enforceable obligation of a former redevelopment agency, pursuant to state law. VII. Housing . Current IFD law provides that if any dwelling units are proposed to be removed or destroyed, the legislative body must: Within four years of the removal or destruction, require the construction or rehabilitation, for rental or sale to persons or families of low or moderate income, of an equal number of replacement dwelling units at affordable housing cost. Within four years of the removal or destruction, require the construction or rehabilitation, for rental or sale to persons of low or moderate income, a number of dwelling units which is at least one unit but not less than 20 percent of the total dwelling units removed at affordable housing cost. Provide relocation assistance and make all the payments required to displaced persons. Ensure that removal or destruction of any dwelling units occupied by persons or families of low or moderate income not take place unless and until there are suitable housing units, at comparable cost to the units. AB 243 -- 6/5/13 -- Page 6 AB 243 adds that an equal number of replacement dwelling units may also be rented at affordable rent, as defined in state law. Current law states the Legislature's intent that an IFD's territory should be substantially undeveloped. AB 243 is silent on this intent and adds that an IRFD's establishment should not ordinarily lead to the removal of existing functional, habitable, and safe dwelling units. AB 243 requires that if dwelling units located on a former military base are destroyed or removed in connection with a base reuse plan, replacement dwelling units, as required in current law, may be located anywhere within the territory of the former military base consistent with the base reuse plan, local general plan, and infrastructure financing plan, as applicable. VIII. Net available revenue . Current law creates the Redevelopment Property Tax Fund, which receives property taxes that formerly would have been allocated to a redevelopment agency. Money deposited in the fund is used to help a successor agency wind down its affairs. Any excess funds are allocated to local governments as property taxes. AB 243 defines "net available revenue" (NAR) as periodic distributions to the city from the Redevelopment Property Tax Trust Fund, pursuant to state law, available to the city after all preexisting legal commitments and obligations from that revenue are made, pursuant to state law. It must only include revenue remaining after all current distributions, including payment of enforceable obligations, all distributions to other taxing entities, and applicable administrative fees, have been made. The bill authorizes the city's legislative body to dedicate any NAR through the financing plan. AB 243 also requires the plan to include a specification of the maximum portion of the NAR proposed to be committed to the district for each year the district will receive revenues, if applicable. The NAR portion may vary over time. IX. Resolution of intention . To begin the process for establishing an IFD, current law requires the legislative body of a city to adopt a resolution of intention, which AB 243 -- 6/5/13 -- Page 7 must include: a) a statement that the IFD is proposed to be established, with a description of the boundaries; b) a statement of the type of public facilities proposed to be financed; c) a statement that the tax increment revenue from affected taxing entities may be used; and d) a time and place for a public hearing on the proposal. AB 243 adds, to the resolution of intention, a required statement that the city's NAR may be used to finance facilities and the maximum portion of NAR to be committed to the district each year during which the district will receive revenues. X. Term life . Current law limits the terms of IFDs' bonds to no more than 30 years. AB 243 sets the maximum term of an IRFD's bond to 40 years from the date on which the ordinance forming the district is adopted, or a later date, if specified by the ordinance, on which the allocation of tax increment will begin. AB 243 provides that the IRFD may issue debt with a final maturity date of up to 30 years from the date of issuance of each debt issue, subject to the time limit on tax allocation to the district. XI. Fire district approval . Before an IFD can divert property tax increment from another taxing entity, current law requires every local agency that will contribute its property tax increment revenue to the IFD to 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 and where the county board of supervisors is the governing authority, AB 243 requires the special district to act on an IRFD's plan by adopting a separate resolution. XII. Reporting . Current IFD law is silent on reporting measures. AB 243 requires that no later than June 30 each year after the adoption of an IRFD's financing plan, the legislative body must post on its website an annual report, which must contain all of the following: A summary of the district's expenditures. A description of the progress made toward the district's adopted goals. A status assessment regarding the completion of the IRFD's projects. XIII. Bond sale . Current law allows IFD bonds to be sold AB 243 -- 6/5/13 -- Page 8 at discount not to exceed 5% of par at public sale. Bonds may be sold at no less than par to the federal government at private sale without any public advertisement. At least five days prior to the sale, a notice must be published in a general circulation newspaper and financial newspaper published in the Cities of San Francisco and Los Angeles. AB 243 authorizes bonds to be sold at discount not to exceed five percent of par at negotiated sale. AB 243 limits any negotiated bond sale for an IRFD's bond issuances from exceeding $5 million. XIV. Definitions . AB 243 defines the following terms: "City" means a city, county, city and county, or joint powers authority, where that entity acts as the military base reuse authority established pursuant to state law. "District" means an IRFD. The bill provides than an IRFD is a "district" within the meaning of the California Constitution Article XIIA, Section 1. "Infrastructure and revitalization financing district" means a legally constituted governmental entity established for the sole purpose of financing facilities authorized by the bill. "Project area" means a defined area in a district in which the district's activities share a common purpose or goal and an overall financing plan. "Public works" means public facilities or facilities authorized to be financed by an IRFD that are to be financed in whole or in part by the district. XV. Findings and declarations . AB 243 makes finding to support the bill's purpose. State Revenue Impact No estimate. Comments 1. Purpose of the bill . The elimination of redevelopment agencies removed local governments' major financing tool for remedying blight and spurring economic development. AB 243 facilitates the formation of and broadens the purposes AB 243 -- 6/5/13 -- Page 9 of an infrastructure and revitalization financing district (IRFD), making it a useful tool for economic development, affordable housing, sustainable communities, military base reuse, and brownfields cleanup and mitigation. Local officials use tax increment financing to divert part of the property tax revenue stream to a separate IFD. A local government must consent and opt-in to the IFD's formation; if an agency doesn't want to participate, its tax increment revenue shares aren't touched. Although IFDs don't raise taxes or generate new revenue, the Legislature required voter approval of IFDs' plans, bonds, and appropriations limits. A local government must consent and opt-in to the IFD's formation; if an agency doesn't want to participate, its tax increment revenue shares aren't touched. AB 243 reduces the vote requirement, from 2/3 to 55%, to create an IRFD and to issue bonds, while retaining the required consent of all taxing entities to participate. This encourages local cooperation and includes appropriate protections for state and local taxpayers. Legislators and voters who have elected their local representatives should let local officials do their job-setting local priorities for spending local revenues. 2. Bond sales . "Competitive sale" and "negotiated sale" are two principal methods by which a bond issuer selects an underwriter to purchase its bonds and resell them to investors. In a competitive sale, underwriters deliver sealed bids to the bond issuer. The underwriter with the lowest bid is awarded the sale of the bonds. The appropriate method for selling bonds depends on specific details of each individual debt issuance, but competitive sales of GO bonds usually cost less than negotiated sales. AB 243 allows negotiated sales, a significant change in how districts may currently sell bonds. While negotiated bond sales provide an opportunity to pre-market bonds that potential investors may not be familiar with, competitive sales provide the certainty of lower interest rates. Because local governments need more certainty, the Committee may wish to consider amending AB 243 to delete the authorization for negotiated sales. 3. Net available revenues . 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 AB 243 -- 6/5/13 -- Page 10 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. These new bonds are similar to limited obligation bonds because they rely on a pledge of existing revenues, but they also involve pledging other governments' revenues. AB 243 authorizes cities and counties to use revenue in excess of general property tax revenue, after bonds and pass-through payments. IFDs take a long time to accumulate the necessary capital to bond against large-scale projects. Authorizing cities and counties to use excess general property tax revenue, after all legal commitments are paid, provides a necessary additional source of revenue for an IRFD. However, it is unclear whether the use of net available revenue is different from a limited obligation bond, which requires 2/3-voter approval. 4. Timing . Albert Einstein once said, "The only reason for time is so that everything doesn't happen at once." In 2011, when Governor Brown proposed to eliminate redevelopment, the world of IFDs and redevelopment intertwined. In response, Legislators turned to IFDs as a possible alternative financing mechanism last session. The Governor vetoed most of the measures, noting that "expanding the scope of infrastructure financing districts is premature and [could] cause cities to focus their efforts on using the new tools provided by the measure instead of winding down redevelopment." Those timing concerns may still remain, as successor agencies continue to wind down redevelopment. 5. Technical . AB 243 adds cross-references to the definition of an IRFD in the Polanco Act. The Committee may wish to consider amending the bill to fix the cross-reference: On page 21, line 3, after "Section", strike out "52299" and insert "53399" 6. Related bills . AB 243 is not the only bill seeking to update the IFD financing mechanism or that addresses military base reuse. SB 33 (Wolk) waives the voter-approval requirements to create an IFD, extends an IFD's life term, requires annual, independent audits, and authorizes an IFD's use for projects in disadvantaged communities, hazardous cleanup, environmental mitigation, and flood protection. It is set to be heard on June 12 in the AB 243 -- 6/5/13 -- Page 11 Assembly Local Government Committee. SB 339 (Cannella) authorizes a county, by a 4/5-vote of the board of supervisors, to sell, or enter into a lease, concession, or managerial contract involving county property acquired from the closure of a military base. It is in the Assembly Local Government Committee. SB 628 (Beall) removes the 2/3-vote requirement to form an IFD, the 2/3-vote requirement to issue bonds, and the majority vote to set the appropriations limit, if an IFD proposes to implement a transit priority project (TPP), regional transportation plan, or any other project consistent with a sustainable communities strategy or alternative planning strategy. It has been referred to the Assembly Local Government and Assembly Housing and Community Development Committees. AB 121 (Dickinson) authorizes Sacramento County Board of Supervisors, by 4/5-vote of the board, to sell, or to enter into a lease, concession, or managerial contract for property from the closure of Mather and McClellan Air Force Bases. It is on the Senate Floor. AB 229 (J. Pérez) authorizes a military base reuse authority to use Infrastructure and Revitalization Financing Districts for specified projects. It was heard on June 5 in the Senate Governance and Finance Committee and passed on a 6-1 vote. AB 662 (Atkins) allows infrastructure financing districts to include portions of former redevelopment project areas and modifies the statutes governing redevelopment agencies' dissolution. It was heard on June 5 in the Senate Governance and Finance Committee and passed on a 7-0 vote. AB 690 (Campos) establishes a Jobs and Infrastructure Financing Districts (JIDs) in every city and authorizes the issuance of revenue bonds to finance specified projects. The bill eliminates existing IFD law's replacement housing provisions. It also requires a job creation plan that ensures that for every $1 million invested, 10 prevailing wage jobs are created. It is in the Assembly Local Government Committee. Assembly Actions AB 243 -- 6/5/13 -- Page 12 Assembly Local Government:6-3 Assembly Appropriations: 12-5 Assembly Floor: 44-29 Support and Opposition (6/6/13) Support : American Society of Civil Engineers; Cities of Oakland, Pasadena, Sacramento, West Sacramento; Sacramento Area Council of Governments. Opposition : Board of Equalization Member, George Runner; California Association of Realtors; California Taxpayers Association; Howard Jarvis Taxpayers Association.