BILL ANALYSIS Ó SENATE GOVERNANCE & FINANCE COMMITTEE Senator Lois Wolk, Chair BILL NO: SB 1 HEARING: 3/13/13 AUTHOR: Steinberg FISCAL: Yes VERSION: 12/3/12 TAX LEVY: No CONSULTANT: Weinberger SUSTAINABLE COMMUNITIES INVESTMENT AUTHORITIES Allows local governments to form Sustainable Communities Investment Authorities to administer economic development and affordable housing programs. Background and Existing Law Until 2011, the Community Redevelopment Law allowed local officials to set up redevelopment agencies (RDAs), prepare and adopt redevelopment plans, and finance redevelopment activities. A redevelopment agency kept the property tax increment revenues generated from increases in property values within a redevelopment project area. As a redevelopment project area's assessed valuation grew above its base-year value, the resulting property tax revenues - the property tax increment - went to the RDA instead of going to the underlying local governments. When a redevelopment agency diverted property tax revenues from a school district, the State General Fund paid the difference. Citing a significant State General Fund deficit, Governor Brown's 2011-12 budget proposed eliminating 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. The California Supreme Court's 2011 ruling in California Redevelopment Association v. Matosantos upheld AB X1 26, but invalidated AB X1 27 (Blumenfield, 2011), which would have allowed most RDAs to avoid dissolution. RDAs' dissolution deprived many local governments of the primary tool they used to eliminate physical and economic SB 1 -- 12/3/12 -- Page 2 blight, finance new construction, improve public infrastructure, rehabilitate existing buildings, and increase the sup-ply of affordable housing. Legislators, local government officials, affordable housing advocates, and others want to develop alternative tools to promote local economic development. Proposed Law Senate Bill 1 allows local government officials to establish a Sustainable Communities Investment Authority (Authority) and use property tax increment revenues to finance the implementation of a Sustainable Communities Investment Plan within a Sustainable Communities Investment Area. SB 1 specifies: I. The process to form an Authority. II. How the Community Redevelopment Law governs an Authority. III. Requirements for forming a Sustainable Communities Investment Area. IV. Elements to be included in a Sustainable Communities Investment Plan. V. How tax increment revenues are allocated to, and used by, an Authority. VI. Other provisions governing Authorities' activities. I. Formation process . Senate Bill 1 allows local governments to form a Sustainable Communities Investment Authority in one of five ways: A city, county, or special district can create an Authority by entering into a joint powers agreement that establishes a governing board and designates a Sustainable Communities Investment Area. A city can create an Authority, appoint the Authority's governing board, designate a Sustainable Communities Investment Area within the city, and establish the parameters of the proposed economic development within a proposed Sustainable Communities Investment Area with county approval of the economic development parameters and the Sustainable Communities Investment Plan, including any plan amendments. A city and a county can create an Authority and appoint the Authority's governing board, which is comprised of two members appointed by the city and two members appointed by the county. The two city and the SB 1 -- 12/3/12 -- Page 3 two county members must appoint a fifth member. The governing board must designate the Sustainable Communities Investment Area in an incorporated area or in both an incorporated area and an unincorporated area. The city and county must approve the Sustainable Communities Investment Plan, including any plan amendments. A county board of supervisors can create an Authority and appoint the Authority's governing board if the Sustainable Communities Investment Area is within an unincorporated area. A city can create an Authority, which constitutes a legally distinct entity from that city, and appoint the Authority's governing board, which may designate a Sustainable Communities Investment Area only within the incorporated limits of that city. Senate Bill 1 requires an Authority's governing board to consist of five members appointed for four-year terms. The governing body of an Authority created by a city and county must be composed of five members appointed by the mayor of that city, if the appointment is subject to confirmation by the county board of supervisors. Senate Bill 1 excludes school districts from participating in an Authority. II. Community Redevelopment Law . The Community Redevelopment Law governs the manner in which local officials create redevelopment agencies, adopt redevelopment plans, and finance redevelopment activities. Senate Bill 1: Deems an Authority to be an "agency," as defined in the Community Redevelopment Law. Specifies that an Authority has all of the rights, responsibilities, and obligations of a redevelopment agency. States that the terms "Sustainable Communities Investment Area" and "Sustainable Communities Investment Plan," as used in the bill, are equivalent to a redevelopment project area and a redevelopment plan. Requires an Authority to comply with most provisions of the Community Redevelopment Law, excluding specified statutes authorizing pass-through payments to local taxing entities. SB 1 -- 12/3/12 -- Page 4 Exempts an Authority from specified statutes that suspend redevelopment agencies' activities, prohibit redevelopment agencies' issuance of debt, and govern redevelopment agencies' dissolution. III. Sustainable Communities Investment Areas . Before redevelopment officials could wield their extraordinary powers of property tax increment funding and property management (including eminent domain), the Community Redevelopment Law required them determine if an area was blighted. Senate Bill 1 allows an Authority to designate one or more Sustainable Communities Investment Areas (Areas). The bill allows an Authority to rely on a legislative determination of blight and frees an Authority from having to make a separate finding of blight or conduct a survey of blight within a project area. Senate Bill 1 requires that an Area can include only three types of territory: Transit priority areas where a transit priority project, as defined in statute, may be constructed. If the project area is based on proximity to a planned major transit stop or a high-quality transit corridor, the stop or the corridor must be scheduled to be completed within a specified planning horizon. A transit priority area can include a military base reuse plan that meets the definition of a transit priority area and a contaminated site within a transit priority area. If the Area includes a high-speed rail station, the radius of the Area may be up to one mile from a high-speed rail station. If the Area consists of a radius greater than a half-mile, at least 50% of the tax increment revenue derived from the area must be used to support construction of the high-speed rail station and related infrastructure. Transit priority project areas must be within the boundaries of a metropolitan planning organization that has adopted a sustainable communities strategy that specified state and local officials determine would achieve the region's greenhouse gas reduction targets. Areas that are small walkable communities, as defined in state law, except that small walkable communities may also be designated in a city that is within the area of a metropolitan planning organization. An Authority may not designate more SB 1 -- 12/3/12 -- Page 5 than one small walkable community project area within a city. A "small walkable community project" is a project that is located in a small walkable community project area, which is an area within an incorporated city that is not within the boundary of a metropolitan planning organization and meets all the following requirements: o Has a project area of approximately one-quarter-mile diameter of contiguous land completely within the existing incorporated boundaries of the city. o Has a project area that includes a residential area adjacent to a retail downtown area. o The project area has an average net density of at least eight dwelling units per acre or a floor area ratio, as defined, for retail or commercial use of not less than 0.50. Sites that have land use approvals, covenants, conditions and restrictions, or other effective controls restricting the sites to clean energy manufacturing, and that are consistent with the use, designation, density, building intensity, and applicable policies specified for the Area in the applicable sustainable communities strategy, if those sites are within the geographic boundaries of a metropolitan planning organization. The bill defines "clean energy manufacturing" as the manufacturing of: o Components, parts, or materials for the generation of renewable energy resources. o Equipment designed to make buildings more energy efficient, or component parts of such equipment. o Public transit vehicles, or component parts. o Alternative fuel vehicles, or component parts. IV. Sustainable Communities Investment Plans . The Community Redevelopment Law specifies numerous elements that must be included in a redevelopment plan for a project area. In addition, Senate Bill 1 requires a Sustainable Communities Investment Plan to include: A fiscal analysis of projected tax increment revenue and other revenue and projected expenses over SB 1 -- 12/3/12 -- Page 6 five-year planning horizons for the life of the Authority. A statement of the principal goals and objectives of the plan together with findings of the public purposes and uses that will be achieved. A statement of how the plan will relieve blight as follows: o How it will implement the goals of a sustainable communities strategy, if the Sustainable Communities Investment Area is within a metropolitan planning organization. o How it will contribute to more efficient transportation infrastructure. o How it will contribute to a reduced cost for the combined costs of housing and transportation for California residents. o How it will contribute to improved public health. o How it will promote more efficient water consumption. o How it will avoid loss of prime farmland. o How it will reduce air pollution, energy consumption and greenhouse gas emissions by reducing vehicle miles traveled. A statement of how the plan will implement the Authority's sustainable parking standards. A statement of how the plan will implement the Authority's jobs plan. Senate Bill 1 allows a Sustainable Communities Investment Plan to include: Farmworker housing. Transitional and supportive housing including former foster youth, persons with mental health treatment needs, persons with substance use disorder treatment needs, and various offender populations. Health and safety related infrastructure investments for disadvantaged and rural communities. Infrastructure investments to support countywide services including health clinics, hospitals, medical provider offices, child care facilities, day reporting centers, and grocery stores in food desert areas. V. Tax increment financing . The California Constitution and the Community Redevelopment Law allow local officials to use property tax increment revenues to repay bonds, SB 1 -- 12/3/12 -- Page 7 debts, and loans needed to finance a redevelopment project. Senate Bill 1 allows an Authority to use tax increment revenues, provided that the local government with land use jurisdiction has adopted: A sustainable parking standards ordinance that restricts parking in transit priority project areas to encourage transit use to the greatest extent feasible. An ordinance creating a jobs plan that requires all entities receiving financial support from the Authority to enter into an agreement with the Authority describing how the project will: o Further construction careers that pay prevailing wages and create living wage permanent jobs. o Implement a program for community outreach, local hire, and job training that includes disadvantaged California residents, including veterans of the Iraq and Afghanistan wars, people with a history in the criminal justice system, and single-parent families. For transit priority project areas and small walkable communities within a metropolitan planning organization, a plan consistent with the use designation, density, building intensity, and applicable policies specified for the Sustainable Communities Investment Area in the sustainable communities strategy. Within small walkable communities outside a metropolitan planning organization, a plan for new residential construction that provides a density of at least 20 dwelling units per net acre and, for nonresidential uses, provides a minimum floor area ratio of 0.75. The bill requires the Authority to consult with the metropolitan planning organization to obtain its opinion whether the plan is consistent with the use designation, density, building intensity, and applicable policies for the project area in the sustainable communities strategy. Senate Bill 1 specifies the manner in which a county auditor-controller must allocate tax increment revenue to an Authority. Specifically, the bill: Prohibits a school district's property tax increment revenues from being pledged or allocated to an Authority. Allows a taxing entity to authorize an allocation SB 1 -- 12/3/12 -- Page 8 to an Authority of all or part of the tax increment revenue that otherwise would be paid to the taxing entity. Requires a county auditor-controller to allocate to an Authority a portion of a taxing entity's portion of tax increment revenues only if a resolution adopted by the taxing entity's governing body authorizes the allocation. Prohibits a taxing entity that adopts a resolution from revoking the auditor-controller's authority if revocation would impair the Authority's ability to honor existing obligations secured by tax increment revenues. Senate Bill 1 requires that a Plan that an Authority adopts for an Area that includes land formerly or currently designated as part of a redevelopment area must subordinate tax increment amounts received by the Authority to any preexisting enforceable obligation, as defined in statute. Senate Bill 1 allows a city council or county board of supervisors to dedicate any portion of its "net available revenue" to an Authority. The bill defines "net available revenue" as periodic distributions to the city or county from the Redevelopment Property Tax Trust Fund that are available to the city or county after all preexisting legal commitments and statutory obligations funded from that revenue are made pursuant to state law. Net available revenue includes only revenue remaining after all current distributions, including payment of enforceable obligations, all distributions to other taxing entities, and applicable administrative fees, have been made. A Plan must authorize an Authority to use net available revenue in accordance with state law and state the maximum portion of the net available revenue to be committed to the Authority for each year during which the Authority will receive these revenues. The portion may vary over time. A Plan must state the date upon which the Authority will cease to receive net available revenue. The bill allows a city or county to direct the county auditor-controller to transfer any portion of the net available revenue to the Authority and allows the county auditor-controller to collect administrative costs from the Authority. Senate Bill 1 requires an Authority that receives tax increment revenues to dedicate at least 20% of allocated SB 1 -- 12/3/12 -- Page 9 tax increment revenues for affordable housing purposes, in accordance with specified provisions of the Community Redevelopment Law. VI. Other provisions . Senate Bill 1 requires that all entities that will receive more than $1,000,000 from an Authority, including projects undertaken by private developers, must comply with specified prequalification requirements for all construction contracts or subcontracts and allows an Authority to establish additional prequalification requirements. The Marks-Roos Local Bond Pooling Act allows public agencies to use JPAs to finance infrastructure. These JPAs issue Marks-Roos Act bonds and loan the capital to local agencies for public works, working capital, and insurance programs (SB 17, Marks, 1985). Senate Bill 1 allows an authority to exercise the full powers granted under the Marks-Roos Local Bond Pooling Act. Senate Bill 1 allows a state or local public pension fund system authorized by state law or local charter to invest capital in an Authority's public infrastructure projects and private commercial and residential developments. The bill specifies that eligible pension systems include the Public Employees' Retirement System, the State Teachers' Retirement System, a system established under the County Employees Retirement Law of 1937, or an independent system. State law allows counties, cities, and some other local agencies to levy "transactions and use" taxes on top of the 7.25% statewide base sales and use tax rate. Senate Bill 1 allows an authority to implement a local transactions and use tax under specified statutes, except that the resolution authorizing the tax may designate the use of tax proceeds. Senate Bill 1 allows an authority to issue bonds paid for with authority proceeds, which are deemed to be special funds to be expended by the authority for the purposes of carrying out the bill's provisions. The bill prohibits school district property tax revenues from being pledged for the repayment of bonds issued by an Authority. Senate Bill 1 deems an Authority to be a local public agency subject to the Ralph M. Brown Act, the Public SB 1 -- 12/3/12 -- Page 10 Records Act, and the Political Reform Act. State Revenue Impact No estimate. Comments 1. Purpose of the bill . Eliminating redevelopment agencies did not eliminate the need for California communities to build more affordable housing, eliminate blight, foster business activity, clean up contaminated brownfields, and create jobs. SB 1 establishes a new approach to local economic development and housing policy that is focused on building sustainable communities and creating high skill, high wage jobs. SB 1 fosters collaboration between cities and counties on local economic development efforts and mitigates the zero-sum competition for scarce property tax revenues among cities, counties, and school districts. The bill offers local governments flexibility by allowing an Authority to use a variety of tools, including tax increment financing, Community Redevelopment Law powers, local sales taxes, infrastructure financing districts, and the ability to leverage public pension fund investments. 2. Implementation . The extensive list of requirements that local governments must meet to use SB 1's economic development and housing powers may limit the number of communities in which it is eventually implemented. Not all cities and counties have territory within their jurisdictions that meets SB 1's relatively narrow requirements for the formation of project areas. Many local governments may be unable to fulfill all of the bill's requirements for using tax increment financing. Because fewer taxing entities will contribute to an Authority's tax increment revenues, and because it will take time for property values to grow, SB 1 will generate less tax increment revenue for local governments than was generated by redevelopment. The Committee may wish to consider amending SB 1 to broaden its potential SB 1 -- 12/3/12 -- Page 11 implementation. For example, the bill could be amended to expand the definition of the types of areas in which a Community Development and Housing JPA can establish a redevelopment project area. 3. Blight . SB 1 contains findings and declarations regarding the need to improve economic development patterns, create good jobs, eliminate inefficient land use patterns, reduce commuter times, make public infrastructure more affordable, and reduce energy consumption. The bill declares these problems to be a form of blight. Former RDA officials were required to determine an area to be blighted before they could exercise the Community Redevelopment Law's eminent domain powers. By contrast, SB 1 allows local officials to create a Sustainable Communities Investment Authority based on the bill's legislative blight finding. SB 1 does not establish a clear connection between financing the construction of clean energy manufacturing facilities and addressing blight, as the bill broadly defines it. What aspects of blight are mitigated by clean energy manufacturing? Could other types of manufacturing also be effective in addressing blight? The Committee may wish to consider amending SB 1 to more clearly link clean energy manufacturing and blight reduction. 4. Compliance . SB 1 allows Sustainable Communities Investment Areas to be formed around sites that have land use approvals, covenants, conditions and restrictions, or other effective controls restricting the sites to clean energy manufacturing. The bill does not specify whether those sites must remain dedicated to clean energy manufacturing after a project area is formed or whether tax increment revenues from the Area can be used for subsequent development that is unrelated to clean energy manufacturing. The Committee may wish to consider amending SB 1 to ensure that an Authority develops clean energy manufacturing in a project area formed around a site dedicated for that purpose and does not use tax increment revenues generated in that project area to finance unrelated activities. 5. Taxation complication . SB 1 allows an Authority to impose a transactions and use tax rate within its boundaries and to adopt a resolution designating the use of the tax proceeds. Unlike transactions and use tax rates SB 1 -- 12/3/12 -- Page 12 currently being levied, an Authority's tax rate would be imposed within a territory that would not be contiguous with a city or county's boundaries. By departing from current practice and allowing transactions and use taxes to be imposed within small parts of cities and counties, SB 1 may complicate the Board of Equalization's administration and collection of these taxes. 6. Clarification . As a condition of allocating tax increment revenues to an Authority, SB 1 requires a local government to adopt a plan for new residential and non-residential construction within small walkable communities outside of a metropolitan planning organization (MPO). The bill requires an Authority to consult with the MPO to obtain its opinion whether that plan is consistent with the use designation, density, building intensity, and applicable policies for the project area in the sustainable communities strategy. Because the small walkable community is located outside of an MPO's boundaries, it is unclear what MPO should be consulted and what applicable policies from a sustainable communities strategy would apply to the project area. The Committee may wish to clarify this provision by amending SB 1 to delete the requirement that an MPO must be consulted on a plan for residential construction in a small walkable community that is outside of an MPO. 7. Legislative history . SB 1 is identical to SB 1156 (Steinberg, 2011), which the Governor vetoed. The Governor's veto message stated that new investment programs, like the one proposed by SB 1156, should be considered after the winding down of redevelopment is complete and General Fund savings are achieved. The Senate Governance & Finance Committee passed an early version of SB 1156 on a 6-3 vote. 8. Double referral . The Senate Rules Committee has ordered a double-referral of SB 1, first to the Senate Governance & Finance Committee which has policy jurisdiction over the statutes governing local governments' finances, and then to the Senate Transportation & Housing Committee, which has jurisdiction over the bill's housing-related provisions. 9. Related bills . At its March 13 hearing, the Committee also will hear SB 33 (Wolk), which makes it easier for SB 1 -- 12/3/12 -- Page 13 local governments to form Infrastructure Financing Districts (IFDs) to finance local development projects with tax increment revenues. Other bills that seek to provide local governments with alternative financing mechanisms to replace redevelopment include: SB 628 (Beall) removes the voter-approval requirements to create an IFD and issue bonds for a transit priority project. AB 229 (J. Pérez) allows local government to create Infrastructure and Revitalization Financing Districts. AB 243 (Dickinson) allows local governments to create Infrastructure and Revitalization Financing Districts. AB 294 (Holden) authorizes IFDs to use the county's Educational Revenue Augmentation Fund portion of tax increment revenues. AB 662 (Atkins) repeals the prohibition against forming an IFD within a former redevelopment area. AB 690 (Campos) lowers the voter approval threshold to create an IFD and requires a job creation plan that ensures that for every $1 million invested, 10 prevailing wage jobs are created. Support and Opposition (3/7/13) Support : Alameda-Contra Costa Transit District; California Association of Realtors; California Labor Federation; California Special Districts Association; California State Association of Counties; California Transit Association; City of West Sacramento. Opposition : Western Electrical Contractors Association.