BILL ANALYSIS Ó AB 2046 Page 1 ASSEMBLY THIRD READING AB 2046 (Gomez) As Amended March 24, 2014 2/3 vote. Urgency LOCAL GOVERNMENT 6-0 ----------------------------------------------------------------- |Ayes:|Levine, Alejo, Bradford, | | | | |Gordon, Mullin, Rendon | | | ----------------------------------------------------------------- SUMMARY : Authorizes California joint powers authorities (JPAs) to issue bonds and enter into loan agreements to finance or refinance private projects located outside this state. Specifically, this bill : 1)Allows JPAs to issue or cause to be issued bonds and enter into loan agreements, as specified, for the financing or refinancing of a project that is situated in another state, including working capital related to that project, if all of the following apply: a) The project is owned, developed, or operated by a private entity; b) The issuance of bonds by the JPA and the financing of the project is approved by resolution, order, or other official action of the city, county, or other public body with land use planning authority over the project, or of the state in which the project is situated. This requirement does not apply to the issuance of refunding bonds if a prior financing or refinancing of the project was approved by the city, county, public body, or state; and, c) The JPA finds, based on the facts and circumstances attendant to the project or the financing or refinancing of the project, that the issuance of the bonds or the financing or refinancing of the project will result in a substantial public benefit to, and are for a public purpose of, the citizens of this state. 2)Declares that this bill is an urgency statute necessary for AB 2046 Page 2 the immediate preservation of the public peace, health, or safety within the meaning of Article IV of the Constitution and shall go into immediate effect. The facts constituting the necessity are: in order to timely provide essential bonding authority for the funding of multi-state, public-private projects that are necessary to ensure California's national and international competitiveness and public benefits in this state, it is necessary that this act take effect immediately. EXISTING LAW : 1)Allows, pursuant to the Joint Exercise of Powers Act (Act), two or more public agencies by agreement to jointly exercise any power common to the contracting parties, as specified, if authorized by their legislative or other governing bodies. 2)Establishes the Marks-Roos Local Bond Pooling Act of 1985 (Marks-Roos), which finds and declares that: a) There is a critical need within the state to expand, upgrade, and otherwise improve the public capital facilities of local government necessary to support the rehabilitation and construction of residential and economic development; and, b) It is the intent of the Legislature to assist in the reduction of local borrowing costs, help accelerate the construction, repair, and maintenance of public capital improvements, and promote greater use of existing and new financial instruments and mechanisms, such as bond pooling by local agencies. 3)States, pursuant to Marks-Roos, that it is the Legislature's intent that Marks-Roos be used to assist local agencies in financing public capital improvements, working capital, liability and other insurance needs, or projects whenever there are significant public benefits for taking that action. For the purposes of Marks-Roos, "significant public benefits" means any of the following benefits to the citizens of the local agency: a) Demonstrable savings in effective interest rate, bond preparation, bond underwriting, or bond issuance costs; AB 2046 Page 3 b) Significant reductions in effective user charges levied by a local agency; c) Employment benefits from undertaking the project in a timely fashion; or, d) More efficient delivery of local agency services to residential and commercial development. 4)Provides that a JPA, or any entity acting on behalf of or for the benefit of a JPA, may not authorize bonds to construct, acquire, or finance a public capital improvement, except as specified, unless all of the following conditions are satisfied with respect to each capital improvement to be constructed, acquired, or financed: a) The JPA reasonably expects that the public capital improvement is to be located within the geographical boundaries of one or more local agencies of the JPA that is not itself a JPA; b) A local agency that is not itself a JPA, within whose boundaries the public capital improvement is to be located, has approved the financing of the public capital improvement and made a finding of significant public benefit in accordance with the criteria specified in 3), above, after a public hearing held by that local agency within each county or city and county where the public capital improvement is to be located after notice of the hearing is published once at least five days prior to the hearing in a newspaper of general circulation in each affected county or city and county. If the public capital improvement to be financed will provide infrastructure, services, or a golf course to support, or in conjunction with, any development project, the local agency for purposes of this requirement shall be the city, county, or city and county with land use jurisdiction over the development project; and, c) A notice with specified contents is sent by certified mail at least five business days prior to the hearing held pursuant to b), above, to the Attorney General and to the California Debt and Investment Advisory Commission (CDIAC), AB 2046 Page 4 with specified exceptions. 5)Provides exemptions to 4), above, for bonds issued to finance: the undergrounding of utility and communication lines; facilities for the generation or transmission of electrical energy for public or private uses, as specified; facilities for the production, storage, transmission, or treatment of water, recycled water, or wastewater; public school facilities; and, public highways located within the jurisdiction of a JPA, as specified. 6)Allows JPAs to issue bonds, including, at the option of the JPA, bonds bearing interest, to pay the cost of any public capital improvement, working capital, or liability or other insurance program. In addition, for any purpose for which a JPA may execute and deliver or cause to be executed and delivered certificates of participation in a lease or installment sale agreement with any public or private entity, the JPA, at its option, may issue or cause to be issued bonds, rather than certificates of participation, and enter into a loan agreement with the public or private entity. FISCAL EFFECT : None COMMENTS : 1)Purpose of this bill. This bill seeks to allow California JPAs to finance private projects located outside the state. This bill is sponsored by the California Municipal Finance Authority (CMFA). 2)Author's statement. According to the author, "Today, some (JPAs) perform beyond the local community, and their activities transcend state lines. To best assist these organizations in achieving their financing goals, JPA's need the ability to finance projects on a nationwide basis through the issuance of taxable and/or tax-exempt bonds. These projects may be located partially in our state and partially in another state (multi-state projects), or wholly in one or more other states (out-of-state projects). "Beyond our state's boundaries, the practice of issuing debt for multi-state and out-of-state projects is already a reality. In recent years, municipal issuers located in Arizona, Colorado, Florida, Illinois, Texas and Wisconsin, AB 2046 Page 5 among other states, have already issued bonds to finance multi-state and out-of-state projects. These projects provide cost and time savings to borrowers, an improved public finance process and economies of scale. Some of those projects are located in California, however companies and non-profit organizations seeking to develop their multi-state projects may look beyond California for cost effective bond financings. "The public benefits to California for assisting in the financing of multi-state and out-of-state projects can include, among others, (i) time, efficiency and transaction cost benefits to private enterprises with substantial operations, employment or headquarters in California, (ii) creating the perception that California is friendly to private enterprise, (iii) putting California based public finance professionals (including commercial lenders, underwriters, financial advisors, attorneys and others) on an even footing with their competitors in other states, and (iv) in the case of certain JPA's, generating substantial contributions to California charitable organizations for the purpose of benefitting California communities." 3)Joint Exercise of Powers Act. JPAs have existed in California for nearly 100 years, and were originally created to allow multiple local governments in a region to pool resources to meet common needs. The Act authorizes state and local agencies to create and use a joint powers agreement, which is a legal document that allows the contracting parties to exercise powers that are common to all of the contracting parties. A joint powers agreement can be administered by one of the contracting agencies, or it can be carried out by a new, separate public entity. Joint powers agreements are an attractive tool for local governments because they facilitate more efficient service provision through collaboration, and they allow local entities to issue bonds without voter ratification. Current law authorizes JPAs to jointly exercise any power common to the contracting parties, if authorized by their legislative or governing body. 4)Marks-Roos Bond Pooling. Marks-Roos provides JPAs with broad powers to issue bonds for a wide variety of purposes, and was established to facilitate local bond pooling and allow local agencies to achieve reduced issuance costs. Marks-Roos bonds AB 2046 Page 6 may only be issued by JPAs, and JPAs issuing bonds under Marks-Roos need not follow other bond act requirements in the issuance of bonds, such as voter approval. Marks-Roos bonds are bonds of the issuing JPA, not bonds of the member agencies. As such, the JPAs member agencies are not liable or otherwise obligated on the bonds unless they expressly agree to assume such liability. Marks-Roos bonds are issued to assist local agencies with their financing needs. "Local agencies" are defined to include the sponsoring member of the JPA or any city, county, city and county, authority, district, or public corporation of the state. In order to use the Marks-Roos Act, the local agency for which the bonds are being issued must determine that there are significant public benefits for taking that action. "Significant public benefits" are defined to mean: a) Demonstrable savings in effective interest rate, bond preparation, bond underwriting, or bond issuance costs; b) Significant reductions in effective user charges levied by a local agency; c) Employment benefits from undertaking the project in a timely fashion; or, d) More efficient delivery of local agency services to residential and commercial development. These determinations are typically made by resolution of the local agency's legislative body when the local agency approves the financing. In addition, Marks-Roos states that a JPA may not issue bonds unless a member of the JPA within whose boundaries the public capital improvement is to be located has approved the financing, among other things. This requirement provides a "nexus" between the members of the JPA and the project. Marks-Roos bonds may be issued to directly pay the cost of public capital improvements. Direct financing of these improvements generally takes the form of bonds issued by the AB 2046 Page 7 JPA and secured by payments to be made under a loan agreement, installment purchase agreement, or lease between the JPA and the local agency that is paying for the project. In this type of arrangement, the JPA acts as a conduit issuer for the local agency and has no obligation on the bonds other than to make payment from the payments made by the local agency pursuant to the underlying agreement between the JPA and the local agency. The source of revenues for the underlying agreement with the local agency can vary greatly and will determine which type of agreement is used. 5)Restrictions on Marks-Roos. SB 147 (Kopp), Chapter 35, Statutes of 1998, enacted many of the restrictions on the use of Marks-Roos after CDIAC found that some JPAs (called "roving" or "remote" JPAs) were using their Marks-Roos authority to finance projects, such as golf courses and casinos, outside their member agencies' jurisdictions in order to collect fees. These types of financing arrangements are known as "land-based'' bond deals and, in some cases, were financing wholly private projects. According to an analysis of SB 147 by the Senate Local Government Committee, "To make sure that remote JPAs don't finance speculative projects within another agency's jurisdiction, SB 147 requires greater participation from the agencies whose territory will include the projects or services. To ensure that the projects benefit the public, SB 147 requires the sponsoring agency to find that a project will promote the public interest. By placing new restrictions on remote project financing, SB 147 will help ensure that communities don't get stuck with unwanted, or financially shaky, projects (emphasis added)." Requiring the public agency to make the public benefit determination was in keeping with an informal opinion issued by the Attorney General in 1996. In addition, according to CDIAC, the sponsor of SB 147, there is not adequate oversight over a project or its financing without a geographic connection. CDIAC asserted that requiring a project to be located within the boundaries of a member agency of the JPA provides more public accountability for land-based bond deals. 6)Prior legislation. SB 188 (Negrete McLeod) of 2007 declared AB 2046 Page 8 that a JPA formed by an existing JPA with more than 450 members and any public agency in another state has the same powers as a JPA under the Act, including Marks-Roos. SB 188 also declared that any provisions of the Act that limit the location of projects, financing, or other activities to California do not apply to this type of JPA. SB 188 required, before this type of JPA could issue bonds for a project or other activity, the governmental agency with primary responsibility over land use project approval to approve the project and the use of this JPA to finance the project. SB 188 also required this type of JPA to submit an annual report to CDIAC detailing its projects, financings, and activities. SB 188 was sponsored by the California Statewide Communities Development Authority (CSCDA) in an attempt to expand its tax-exempt operations into other states. An analysis of SB 188 by the Senate Local Government Committee notes, "The public finance industry is becoming a nationwide enterprise and CSCDA wants to maintain its leadership position by becoming a multi-state bond issuer and lender. Although the Joint Exercise of Powers Act already allows other states' public agencies to join a JPA, the Marks-Roos Act imposes additional limits on membership and the location of projects. To help CSCDA maintain its leadership in the tax-exempt bond markets and expand into other states, SB 188 exempts this type of JPA from any provision of the Joint Exercise of Powers Act that might limit its activities to California." The CSCDA is operated by HB Capital Resources Ltd, a private firm that also operates the Wisconsin-based Public Finance Authority, one of several out-of-state conduit issuers that operates nationwide. SB 188 was held in the Senate Appropriations Committee. 7)California Municipal Finance Authority. According to its Web site, "The CMFA mission is to support economic development, job creation and social programs throughout the State of California while giving back to California communities. By supporting our member communities and their local charities with a portion of the revenue generated through the issuance of taxable and tax-exempt bonds for public, private and non-profit entities, the CMFA is able to directly contribute to the health and welfare of the residents of California. AB 2046 Page 9 "The CMFA shares 25% of all issuance fees directly with its member communities. In addition, a grant equal to 25% of the issuance fee is made to the California Foundation for Stronger Communities to fund charities designated by the member communities. A portion of the annual fees received by the CMFA will also be directed to charitable activities within California communities. This unique commitment to 'give back' directly to the communities in which we operate sets the CMFA apart." The CMFA is not required by law to make charitable contributions. 8)Policy considerations: This bill raises a number of questions the Legislature may wish to consider: a) Is it appropriate to expand the authority of California JPAs to allow the issuance of tax-exempt bonds for private projects that are located outside California, given the original intent of the Act and Marks-Roos? b) This bill severs the geographical nexus between the bond-issuing JPA and the jurisdiction in which the local agency project is located. Are there appropriate safeguards in the bill to ensure oversight of and accountability for these financed projects? c) This bill allows the bond-issuing JPA to determine the "substantial public benefit to" the citizens of this state. Is there an inherent conflict of interest in vesting this decision with the entity that stands to benefit financially from such a determination? Would it be more prudent for a financially disinterested party to make this finding? d) This bill allows the out-of-state jurisdiction to approve projects financed by California JPAs "by resolution, order, or other official action of the city, county, or other public body with land use planning authority over the project, or of the state in which the project is situated." It does not require a publicly noticed hearing prior to this approval. Is this sufficient public involvement? AB 2046 Page 10 e) This bill states that the approval process described above "does not apply to the issuance of refunding bonds if a prior financing or refinancing of the project was approved by the city, county, public body, or state." This would appear to allow California JPAs to engage in re-financings without any "official action" of the out-of-state jurisdiction. Is this a policy the Legislature wishes to support? 9)Urgency clause. This bill contains an urgency clause. The Legislature may wish to consider asking the author to explain the need for an expedited process for this bill. 10)Arguments in support. Supporters state, "We would welcome legislation that would allow us to finance public benefit projects for projects outside of California by issuing bonds through the CMFA, which would allow for more non-profit entities benefitting from the CMFA charitable donations?Beyond our state's boundaries, the practice of issuing debt for multi-state and out-of-state projects is already a reality?Companies and non-profit organizations seeking to develop their multi-state projects may look beyond California for cost effective financings. AB 2046 will ensure that California remains competitive with other states that already have the authority to finance multi-state projects." 11)Arguments in opposition. The Howard Jarvis Taxpayers Association, in opposition, writes, "JPA's have been allowed for years to use (certificates of participation) to finance in-state public and private projects. California Communities, a JPA run by local government associations is among the most well-known of these. While we believe this form of financing is itself questionable on several policy grounds, at least the projects financed are located within the boundaries of California. The same argument cannot be made for AB 2046 and the funding of out of state projects. This is a broadening of a JPA's finance authority that takes them far away from the citizens they purport to represent. Making matters worse these taxpayers have no ability to use their voice at the ballot box if they disagree with this proposal, as JPA's can currently issue bonds without voter approval. The lack of safeguards and an appropriate nexus make it extremely difficult to justify the need for this bill." AB 2046 Page 11 Analysis Prepared by : Angela Mapp / L. GOV. / (916) 319-3958 FN: 0003147