BILL ANALYSIS Ó AB 1760 Page 1 CONCURRENCE IN SENATE AMENDMENTS AB 1760 (Chau and Bocanegra) As Amended August 22, 2014 Majority vote ----------------------------------------------------------------- |ASSEMBLY: |55-20|(May 29, 2014) |SENATE: |24-8 |(August 26, | | | | | | |2014) | ----------------------------------------------------------------- Original Committee Reference: REV. & TAX. SUMMARY : Provides that, on or after January 1, 2015, a "local government" shall not enter into a "payment in lieu of taxes agreement" (PILOT agreement) with a "low-income housing project" owner. The Senate amendments : 1)Add a principal coauthor. 2)Add legislative findings and declarations. 3)Restructure this bill to add new sections to the Revenue and Taxation Code (RTC) that contain the provisions previously included as amendments to RTC Section 214, which implements the welfare exemption. 4)Delete the tax cancellation and refund provisions, which are now included in SB 1203 (Jackson) of the current legislative session. 5)Modify the definition of a "PILOT agreement," which is now defined as any agreement between a local government and a low-income housing project owner that requires the owner to pay the local government a charge to compensate the local government for lost property tax revenues resulting from the project receiving a welfare exemption. 6)Establish a conclusive presumption that any payments made under any PILOT agreement entered into before January 1, 2015, comply with the certification requirements of RTC Section 214(g)(2)(B) and were or are used to maintain the affordability of, or reduce rents otherwise necessary for, the units occupied by lower income households. AB 1760 Page 2 7)Provide that no inference shall be drawn from this bill's enactment with regard to whether the law, as it read prior to January 1, 2015, authorized a local government to enter into a PILOT agreement. 8)Provide that this bill shall become operative only if SB 1203 is also enacted and takes effect on or before January 1, 2015. EXISTING LAW : 1)Authorizes the Legislature to exempt from taxation property used exclusively for religious, hospital, or charitable purposes, as specified. The Legislature has implemented this "welfare exemption" in RTC Section 214. 2)Exempts low-income housing developments operated by non-profit organizations, as specified. 3)Imposes a "certification requirement" for low-income housing owners seeking the welfare exemption. Specifically, the law requires a project's owner to "[c]ertify that the funds that would have been necessary to pay property taxes are used to maintain the affordability of, or reduce rents otherwise necessary for, the units occupied by lower income households." AS PASSED BY THE ASSEMLBY , this bill: 1)Provided that, on or after January 1, 2015, a local government shall not enter into a PILOT agreement with a low-income housing project owner. 2)Provided that any PILOT agreement entered into in violation of this prohibition shall be void and unenforceable. 3)Established a presumption that any payments made under a PILOT agreement entered into before January 1, 2015, are used to maintain the affordability of, or reduce rents otherwise necessary for, the units occupied by low-income households. 4)Provided that any outstanding ad valorem tax, interest, or penalty that was levied between January 1, 2012, and January 1, 2015, as a result of a PILOT agreement shall be canceled; and any tax, interest, or penalty, as so levied, that was paid AB 1760 Page 3 before January 1, 2015, shall be refunded. 5)Defined a "local government" as any city, county, city and county, housing authority, housing successor to a redevelopment agency, or a joint powers agency that has approved land use entitlements or building permits, provided land or financing, or approved the issuance of tax-exempt bonds pursuant to the federal Tax Equity and Fiscal Responsibility Act for the low-income housing project. 6)Defined a "PILOT agreement" as any agreement entered into between a local government and a "low-income housing project" owner that requires the owner to pay the local government a "charge," including any charge designed to compensate the local government for lost property tax revenues resulting from the low-income housing project receiving a welfare exemption. 7)Specified that the term "charge" shall not include a fee that is permitted by the Mitigation Fee Act pursuant to Government Code Section 65008(d). 8)Defined a "low-income housing project" as a low-income housing project that is eligible for the welfare exemption. FISCAL EFFECT : Unknown. The State Board of Equalization (BOE) notes that information on the number of PILOT agreements in place has been difficult to obtain, making it impossible to assess the full fiscal impact of this bill. To date, the BOE has identified four low-income housing projects that have received escape assessments for prior years' taxes as a result of PILOT payments. Two of these projects have entered into five-year payment plans and have paid a total of $450,000 toward outstanding liabilities of over $6.1 million. In other projects where PILOT agreements became an issue, the local government dropped the PILOT payment requirement to ensure the project would remain eligible for the welfare exemption. COMMENTS : 1)The author has provided the following statement in support of this bill: Beginning in 1987, low-income housing developers were authorized to claim a property tax welfare exemption. Low-income housing developers have come to rely upon AB 1760 Page 4 the welfare exemption as a way to build housing that is affordable to low-income tenants. At the same time, some low-income housing developers have entered into PILOTs, to pay cities and counties all or a portion of the property taxes they would have received, but for the exemption. These agreements are now jeopardizing the developers' welfare exemption and threatening the future of the projects. More importantly, they are threatening the tenants that live in the developments and rely upon the housing. AB 1760 protects those tenants by preserving the welfare exemption of low-income housing developments with PILOTs and outlaws PILOTs going forward. 2)Assembly Revenue and Taxation Committee comments: a) The welfare exemption for low-income housing developments: California Constitution Article XIII, Section 4(b) authorizes the Legislature to exempt from taxation property used exclusively for religious, hospital, or charitable purposes, as specified. The Legislature has implemented this "welfare exemption" in RTC Section 214. AB 2144 (Filante), Chapter 1469, Statutes of 1987, amended RTC Section 214 specifically to exempt low-income housing developments operated by non-profit organizations. As noted in the Senate Revenue and Taxation Committee analysis, AB 2144's proponents argued that the property tax funds then being paid "could better be used in furtherance of the goals of providing low income housing." To this end, RTC Section 214(g) currently includes a "certification requirement" for low-income housing owners seeking the welfare exemption. Specifically, the law requires a project's owner to "[c]certify that the funds that would have been necessary to pay property taxes are used to maintain the affordability of, or reduce rents otherwise necessary for, the units occupied by lower income households." (RTC Section 214(g)(2)(B).) b) PILOT agreements: Since local governments do not receive their share of property taxes from exempt properties, certain local governments have entered into agreements with low-income housing developers to compensate them for their lost revenues. These agreements, known as AB 1760 Page 5 PILOT agreements, often provide for payments that closely resemble property tax payments. A recent informal survey of low-income housing developers provides some insight into the nature and structure of PILOT agreements currently in place in California. According to the survey, payment amounts are determined in various ways, including as: a portion or all of the property taxes the local government would have received without the exemption, a percentage of the project's assessed value, a flat fee, and an amount to compensate for police and fire service needs generated by the project's residents. A few PILOT agreements provided to committee staff were also structured to increase the payment amount over time. While there is no express authority for low-income housing developers to pay PILOTs, PILOTs are authorized in state statute in two cases: for low-income housing owned by either public housing authorities or federally recognized Indian tribes. c) The potential impact of a PILOT agreement on a project's welfare exemption: Recently, a question has arisen regarding whether the existence of a PILOT agreement jeopardizes a low-income development's welfare exemption. Specifically, some have argued that the existence of a PILOT agreement negates a developer's ability to certify, as required by RTC Section 214(g)(2)(B), that property tax savings are being used to reduce rents or maintain unit affordability. As a result, at least one county assessor has begun to pursue escape assessments for prior years, claiming that back property taxes are owed for prior years in which PILOT agreement payments were made. Affordable housing advocates and low-income developers alike note that the economic burden of these escape assessments jeopardizes the very feasibility of these projects. d) How this bill addresses the problem: This bill addresses the prevailing state of confusion by making clear that low-income housing developments should not face the retroactive revocation of their welfare exemption simply by virtue of having made payments under a PILOT agreement. Specifically, this bill establishes a conclusive presumption that payments made under a PILOT agreement AB 1760 Page 6 entered into before January 1, 2015, were and are used to maintain the affordability of the low-income units. This provision is intended to preserve the welfare exemption for low-income projects subject to a PILOT agreement entered into before January 1, 2015. This bill also reasserts the underlying purpose of the welfare exemption by prohibiting local governments and low-income housing owners from entering into any PILOT agreement on or after January 1, 2015. A PILOT agreement entered into in violation of this prohibition would be void and enforceable. Analysis Prepared by : M. David Ruff / REV. & TAX. / (916) 319-2098 FN: 0005425