BILL ANALYSIS                                                                                                                                                                                                    Ó




                     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  





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          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.






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          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  





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          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  





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          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.