BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 1129 HEARING: 4/9/14
AUTHOR: Steinberg FISCAL: Yes
VERSION: 2/19/14 TAX LEVY: No
CONSULTANT: Weinberger
REDEVELOPMENT SUCCESSOR AGENCIES
Amends several statutes governing redevelopment agencies'
dissolution.
Background
Until 2011, the Community Redevelopment Law allowed local
officials to set up redevelopment agencies (RDAs), prepare
and adopt redevelopment plans, and finance redevelopment
activities. 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. The RDA kept the property tax increment
revenues generated from increases in property values within
a redevelopment project area.
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.
AB X1 26 established successor agencies to manage the
process of unwinding former RDAs' affairs. With the
exception of seven cities that chose not to serve as
successor agencies, the city or county that created each
former RDA now serves as that RDA's successor agency. Each
successor agency has an oversight board that is responsible
for supervising it and approving its actions. The
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Department of Finance (DOF) can review and request
reconsideration of an oversight board's decisions.
Redevelopment agencies' elimination created substantial
policy challenges for local officials who must manage the
complex process of dissolving former RDAs. Some local
officials want the Legislature to clarify statutes that
govern the redevelopment dissolution process.
Proposed Law
I. Enforceable obligations and finding of completion . One
of the successor agencies' primary responsibilities is to
make payments for enforceable obligations entered into by
former RDAs. The statutory definition of an "enforceable
obligation" includes bonds, specified bond-related
payments, some loans, payments required by the federal
government, obligations to the state, obligations imposed
by state law, legally required payments related to RDA
employees, judgments or settlements, and other legally
binding and enforceable agreements or contracts.
Each successor agency must, every six months, draft a list
of enforceable obligations that are payable during a
subsequent six month period. This "Recognized Obligation
Payment Schedule" (ROPS) must be adopted by the oversight
board and is subject to review by DOF. Obligations listed
on a ROPS are payable from a Redevelopment Property Tax
Trust Fund, which contains the revenues that would have
been allocated as tax increment to a former RDA.
If a successor agency complies with state laws that require
it to remit specified RDA property tax allocations and cash
assets identified through a "due diligence review" process,
it receives a "finding of completion" from DOF (AB 1484,
Assembly Budget Committee, 2012). Approximately 300
successor agencies have received a finding of completion.
Senate Bill 1129 requires that a successor agency's
oversight board must approve any action to remove an
enforceable obligation from a ROPS for a successor agency
that has received a finding of completion.
Senate Bill 1129 allows a successor agency that has
received a finding of completion to enter into, or amend
existing, contracts and agreements or otherwise administer
SB 1129 -- 2/19/14 -- Page 3
projects in connection with long-term enforceable
obligations, if the contract, agreement, or project will
not commit new tax funds, or will not otherwise adversely
affect the flow of tax increment to taxing agencies. The
bill specifies that this provision applies to the
substitution of private developer capital in a disposition
and development agreement that has been deemed an
enforceable obligation.
II. Long Range Property Management Plans and Compensation
Agreements . State law allows a successor agency that has
received a finding of completion to retain a former
redevelopment agency's real property and interests in real
property, with specified exceptions. A successor agency
must prepare a long-range property management plan (LRPMP)
that addresses the disposition and use of a former
redevelopment agency's real property. Current law
specifies elements that must be included in LRPMPs and
prohibits the transfer of property to a successor agency,
city, county, or city and county unless a successor
agency's oversight board and DOF approve a LRPMP. To date,
DOF has approved more than 90 plans submitted by successor
agencies. A city, county, or city and county that wishes
to retain any properties or other assets for future
redevelopment activities, funded from its own funds and
under its own auspices, must reach a compensation agreement
with the other taxing entities to provide payments to them
in proportion to their shares of the base property tax, as
determined pursuant to state law, for the value of the
property retained. Senate Bill 1129:
Declares that the requirement to reach a
compensation agreement does not apply to the
disposition of properties pursuant to a LRPMP.
Prohibits DOF from requiring a compensation
agreement or agreements as part of the approval of a
LRPMP.
Specifies that DOF must only consider whether a
LRPMP makes a good faith effort to address the
requirements set forth in state law.
Requires DOF to approve LRPMPs as expeditiously as
possible.
Deletes a requirement that successor agencies must
dispose of former redevelopment agencies' properties
if DOF does not approve the agency's LRPMP by January
1, 2015.
SB 1129 -- 2/19/14 -- Page 4
III. Bond proceeds . State law allows a successor agency
that receives a finding of completion to use bond proceeds
derived from bonds issued on or before December 31, 2010,
for the purposes for which the bonds were sold. Bond
proceeds in excess of the amounts needed to satisfy
approved enforceable obligations must be expended in a
manner consistent with the original bond covenants. If
remaining bond proceeds cannot be spent in a manner
consistent with the bond covenants, the proceeds must be
used to defease the bonds or to purchase
those same outstanding bonds on the open market for
cancellation. Defeasing bonds is a method of retiring bond
debt by buying and holding risk-free U.S. Treasury
securities in an amount that is sufficient to cover all
principal and interest payments on the outstanding bonds.
Senate Bill 1129 allows a successor agency to use proceeds
of bonds issued by a former redevelopment agency in 2011,
upon approval of the oversight board, if:
The proceeds are used in a manner that is
consistent with the purposes for which the bonds were
sold, and
The oversight board, in consultation with the
appropriate metropolitan planning organization,
determines that the use of the bond proceeds is
consistent with the sustainable communities strategy
adopted by the metropolitan planning organization.
State Revenue Impact
No estimate.
Comments
1. Purpose of the bill . Local officials have identified
ambiguities and obstacles in current law which prevent them
from completing vital economic development projects that
began before redevelopment agencies were dissolved.
Because state law doesn't provide successor agencies any
flexibility to adjust contracts for enforceable obligations
in ways that don't affect tax increment, successor agencies
may be unable to finance or complete long-term phased
development projects that are already underway. State law
offers successor agencies no good options for disposing of
billions of dollars of unspent RDA bond proceeds. If the
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interest rates that a successor agency earns on securities
it buys to defease bonds are significantly lower than the
interest payments on the bonds, the agency will lose money
on the transaction. As a result, successor agencies may
choose to retain hundreds of millions of dollars of bond
proceeds for extended periods of time, while paying debt
service, without producing any new infrastructure or
economic development. Some local officials see the
requirement to enter into compensation agreements with
other taxing entities for real property retained by a
successor agency as an impediment to their ability to use
these publicly owned properties for economic development
purposes. By eliminating these types of ambiguities and
obstacles, SB 1129 will support the completion of numerous
development projects that have already received millions of
dollars of public investments, support state policy goals,
and benefit residents throughout California.
2. Forgiving Mardi Gras sins . In what has been called a
"Mardi Gras" reaction, some redevelopment officials
responded to Governor Brown's January 2011 proposal to
eliminate redevelopment agencies by accelerating their
RDAs' tax allocation bond sales. According to the
Legislative Analyst's Office, in the first six months of
2011, RDAs issued about $1.5 billion in tax allocation
bonds, a level of debt issuance greater than during all 12
months of 2010 ($1.3 billion). About two-thirds of the
bond issuances in 2011 had interest rates greater than 7
percent-compared with less than one-quarter of bond
issuances in 2010. In fact, RDAs issued more tax
allocation bonds with interest rates exceeding 8 percent
during the first six months of 2011 than they had in the
previous ten years. Because some of these atypical bond
sales were efforts to preempt the Governor's proposal by
establishing debt obligations that would tie up property
tax increment revenues well into the future, state law does
not allow successor agencies to use unencumbered proceeds
from bonds sold in 2011. The Committee may wish to
consider whether local officials should now be allowed to
use bond proceeds that were generated in an ill-conceived
rush to confound the Governor's RDA proposal.
3. Setting limits . SB 1129 would allow a successor agency
to use 2011 bond proceeds regardless of whether the agency
receives a finding of completion. The bill also would
allow a successor agency to spend 2011 bond proceeds
SB 1129 -- 2/19/14 -- Page 6
without comparing the relative costs of retiring the bonds
and obtaining other financing with the cost of paying debt
service over the full term of the bonds. In some cases, it
may not make fiscal sense to allow local officials to
finance projects with bonds issued at 9% interest, even
after accounting for the costs of retiring those bonds.
The Committee may wish to consider amending SB 1129 to
require that before a successor agency uses 2011 bond
proceeds it must receive:
A finding of completion from the DOF; and,
A finding from its oversight board, based on
substantial evidence in the record, that using the
2011 bond proceeds for specified purposes will be less
costly than retiring the 2011 bonds and using other
financing mechanisms to finance the proposed projects.
4. Compensation agreements and LRPMPs . SB 1129 eliminates
a requirement that a city, county, or city and county must
negotiate a compensation agreement with other taxing
entities for former RDA properties that it retains pursuant
to a long-range property management plan. The bill's
proponents argue that the Legislature never intended for
compensation agreements to be a condition of the LRPMP
process and that such agreements unnecessarily restrict
local officials' ability to manage and develop former RDA
properties. The bill's opponents argue that compensation
agreements are important tools that allow local governments
to protect the collective investment of the local
governments that funded the acquisition of former RDA
property. Nothing in current law requires that a
successor agency or city must provide compensation at fair
market value - or provide any compensation at all - for
property that is retained for governmental use. But, the
requirement to negotiate a compensation agreement can help
ensure that properties acquired with property taxes
diverted from many local governments don't produce a
windfall only for a few local governments if those
properties are used for economic development purposes. The
Committee may wish to consider whether SB 1129 should
eliminate the requirement to negotiate compensation
agreements for former RDA properties.
5. Recognized obligation payment schedules . DOF sometimes
disallows an item that appears on a successor agency's ROPS
even though that item has appeared on a previous ROPS that
the DOF approved. Local officials object that this
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practice is confusing, unpredictable, and unfair. Current
law allows a successor agency to apply for a "final and
conclusive" determination from DOF to definitively confirm
an enforceable obligation. Alternatively, SB 1129 requires
an oversight board to grant approval before any item is
removed from a ROPS submitted by a successor agency that
has received a finding of completion. This language is
ambiguous and could be misinterpreted as requiring
oversight board approval before a successor agency submits
a ROPS that doesn't contain an item listed on a previous
ROPS. However, the intent of the requirement is to prevent
the DOF from reversing its approval of ROPS items that it
has previously reviewed and approved. The Committee may
wish to consider whether the process for obtaining a "final
and conclusive" determination under current law provides a
local officials with sufficient certainty regarding DOF's
enforceable obligation decisions. If not, the Committee may
wish to provide more clarity by amending SB 1129 to require
DOF to specifically identify each item on a ROPS that it
has reviewed and approved.
6. Next in line ? SB 1129's provision don't address the
full range of concerns that local officials have regarding
the redevelopment dissolution process. Changing state law
to address some local concerns with redevelopment
dissolution may invite a long line of similar proposals
from other local governments. For example, officials in
communities throughout the state have objections to DOF
decisions rejecting hundreds of requests from successor
agencies to recognize loan agreements, cooperative
development agreements, and other covenants between a
former RDA and the city or county that created it as
enforceable obligations. SB 1129 may lay the groundwork
for expanding the statutory definition of an enforceable
obligation to include other types of local government-RDA
agreements.
7. Zero-sum game . Allocating former RDAs' property tax
increment revenues is a zero-sum game; every reallocation
creates winners and losers. A successor agency that, under
SB 1129's provisions, finances projects using proceed from
bonds issued in 2011 will receive larger allocations of
former property tax increment revenues in some fiscal years
than it would under current law. Other local governments -
including school districts - will receive smaller
allocations than they would under current law. One fiscal
SB 1129 -- 2/19/14 -- Page 8
loser will be the State General Fund, which must backfill
the revenues that the schools won't get. Similarly, by
allowing successor agencies to retain some former RDA
properties without providing any compensation to other
taxing entities, SB 1129 may reduce revenues that would
have gone to schools and other local governments through
compensation agreements that are required under current
law.
8. Technical amendments . On February 18, 2014, Governor
Brown signed Assembly Bill 471 (Atkins), which amended
several statutes that would also be amended if SB 1129 is
enacted. Because AB 471 was an urgency statute, approved
by a two-thirds vote in both houses of the Legislature,
that bill's changes to state law took effect immediately.
Because SB 1129's language does not reflect the changes
that AB 471 made to state law, enacting SB 1129 in its
current form would have the unintended effect of repealing,
or "chaptering out," some of AB 471's provisions. The
Committee may wish to consider amending SB 1129 to include
the changes made to state law by AB 471. Also, to clarify
the bill's language, the Committee may wish to consider
replacing the word "capitol" with the word "capital" on
page 18, line 27.
Support and Opposition (4/3/14)
Support : BRIDGE Housing; California Infill Builders
Federation; California Rural Legal Assistance Foundation;
City of Folsom; City of Santa Cruz Mayor Lynn Robinson;
Glendale City Employees Association; San Bernardino Public
Employees Association; San Luis Obispo County Employees
Association; Western Center on Law and Poverty; David
Ashton; Rachel Bradley; Brian Foster; Michael Kusiak; Steve
Ontiveros; Peter Rosen; Carey Sanchez Para; Scott San
Filippo; Rebecca Stanek-Rykoff; Dorothy Theodore; Mark Yin.
Opposition : Santa Clara County; California Special
Districts Association.