BILL ANALYSIS Ó AB 852 Page 1 CONCURRENCE IN SENATE AMENDMENTS AB 852 (Burke) As Amended June 15, 2015 Majority vote -------------------------------------------------------------------- |ASSEMBLY: |55-24 |(April 27, |SENATE: |27-13 |(September 2, | | | |2015) | | |2015) | | | | | | | | | | | | | | | -------------------------------------------------------------------- Original Committee Reference: L. & E. SUMMARY: Specifies that "public work" for purposes of prevailing wage law also means any construction, alteration, demolition, installation, or repair work done under private contract on a general acute care hospital when the project is paid for in whole or in part with the proceeds of conduit revenue bonds issued by a public agency. The Senate amendments provide that this bill does not apply to a project for a rural general acute care hospital with a maximum of 76 beds. FISCAL EFFECT: According to the Senate Appropriations Committee, this bill would increase workload for the Department of Industrial Relations at a cost of $125,000 in the first year, and $120,000 ongoing (special funds), which could lead to potential General Fund cost pressure. Additionally, this bill AB 852 Page 2 could impact revenues to the California Health Facilities Financing Authority (CHFFA). COMMENTS: Bonds that are issued for the purpose of making loans to entities other than state or local governments are commonly referred to as "conduit bonds" or "conduit issues," and state or local governments which issue these bonds are commonly referred to as "conduit issuers." (Your Responsibilities as a Conduit Issuer of Tax-Exempt Bonds, Publication 5005 (4-2012) Catalog #59471F, Department of the Treasury, Internal Revenue Service). According to the Internal Revenue Service, a conduit issuer in a conduit bond financing typically issues the bonds and loans the bond proceeds to a conduit borrower. A conduit borrower is generally responsible for the payment of debt service on the conduit bond issue and is usually contractually obligated to maintain the tax-exempt status of the bonds. The author of the measure states that the proposed changes with this bill, would add conduit bond financing to the types of subsidies that trigger prevailing wage coverage, thereby recognizing that public funds (through foregone tax revenues) are being used to subsidize the project. According to the author, conduit revenue bond financing is a method by which the public subsidizes a private development project. A public entity acts as the "issuer" of the bonds so the interest payments on the bonds will be tax-exempt to the bondholders under the income tax code. Because the bondholders will not be taxed on the interest, they are willing to accept a lower return on their investment, and the cost of borrowing is lower. The bond proceeds are transferred to a private developer, which is responsible for making the payments to the bondholders. The public entity issuing the bonds acts purely as a "conduit" - it does not receive the bond proceeds or pay back the bondholders. But the tax code looks to the form of the transaction, not its substance, so the interest on the bonds is still tax-exempt to the bondholders. The public thereby subsidizes the private development project by foregoing the tax revenues that would otherwise be paid by the bondholders. AB 852 Page 3 According to the author, due to the fact that private entities utilize these bonds to save money in interest payments, it makes sense to ensure that any work being paid for by proceeds from conduit bonds should, at the very least, go towards providing a livable wage for the construction workers building the projects that the bonds fund. Additionally, they argue, the prevailing wage ensures that the most skilled and qualified workers build these complex medical facilities. According to supporters, this bill will close a loophole in state law by requiring healthcare companies electing to receive tax-exempt conduit bond financing from a public agency to pay construction workers the prevailing wage and therefore attract the most competent and skilled local workforce to build these complex medical facilities. It is also worth noting that this bill narrows the focus of its predecessor, SB 615 (Galgiani) of 2013, by shifting the focus of the public works from "a hospital or health care facility project" to a general acute care hospital. Analysis Prepared by: Ben Ebbink / L. & E. / (916) 319-2091 FN: 0001635