BILL ANALYSIS                                                                                                                                                                                                    



          SENATE COMMITTEE ON TRANSPORTATION AND HOUSING
                              Senator Jim Beall, Chair
                                2015 - 2016  Regular 

          Bill No:          AB 974            Hearing Date:     7/7/2015
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          |Author:   |Bloom                                                 |
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          |Version:  |3/26/2015                                             |
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          |Urgency:  |No                     |Fiscal:      |Yes             |
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          |Consultant|Eric Thronson                                         |
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          SUBJECT:  Redevelopment dissolution:  housing projects:  bond  
          proceeds


            DIGEST:  This bill allows both successor agencies and housing  
          successors to commit remaining proceeds from non-housing and  
          housing redevelopment bonds, respectively, issued between  
          January 1, 2011, and June 28, 2011, provided that the remaining  
          proceeds are approved by the oversight board and used for  
          projects that meet specific criteria.

          ANALYSIS:
          
          Historically, the Community Redevelopment Law allowed a local  
          government to establish a redevelopment area and capture all of  
          the increase in property taxes generated within the area  
          (referred to as "tax increment") over a period of decades.  The  
          law requires redevelopment agencies to deposit 20% of tax  
          increment into a Low and Moderate Income Housing Fund (L&M Fund)  
          to be used to increase, improve, and preserve the community's  
          supply of low- and moderate-income housing available at an  
          affordable housing cost.  

          In 2011, the Legislature enacted two bills, AB 26X (Blumenfield)  
          and AB 27X (Blumenfield), Chapters 5 and 6, respectively, of the  
          First Extraordinary Session.  AB 26X eliminated redevelopment  
          agencies (RDAs) and established procedures for winding down the  
          agencies, paying off enforceable obligations, and disposing of  
          agency assets.  AB 26X established successor agencies, typically  
          the city that established the agency, to take control of all  







          AB 974 (Bloom)                                      Page 2 of ?
          
          
          redevelopment agency assets, properties, and other items of  
          value.  Successor agencies are to dispose of an agency's assets  
          as directed by an oversight board, made up of representatives of  
          local taxing entities, with the proceeds transferred to the  
          county auditor-controller for distribution to taxing agencies  
          within each county.

          AB 26X also included provisions allowing the host city or county  
          of a dissolving RDA to retain the housing assets and functions  
          previously performed by the agency, except for funds on deposit  
          in the agency's L&M Fund, and thus become a housing successor.   
          If the host city or county chooses not to become the housing  
          successor, a local housing authority or the California  
          Department of Housing and Community Development (HCD) takes on  
          that responsibility. 

          AB 27X allowed RDAs to avoid elimination if they made payments  
          to schools in the current budget year and in future years.  In  
          December 2011, the California Supreme Court in California  
          Redevelopment Association v. Matosantos upheld AB 26X and  
          overturned AB 27X.  As a result, all of the state's roughly 400  
          RDAs dissolved on February 1, 2012, and successor agencies began  
          implementing AB 26X's provisions to distribute former  
          redevelopment assets and pay the remaining obligations.

          Subsequent legislation, AB 1484 (Budget Committee, Chapter 26,  
          Statues of 2012), allowed a successor agency to expend remaining  
          proceeds from non-housing redevelopment bonds issued before  
          January 1, 2011, for the purposes for which the bonds were sold  
          or to defease the bonds.  AB 1484 also allowed a housing  
          successor to commit remaining proceeds of bonds backed by the  
          L&M Fund and issued for the purposes of affordable housing prior  
          to January 1, 2011. 

          This bill:

          1)Allows both successor agencies and housing successors to  
            commit remaining proceeds from non-housing and housing  
            redevelopment bonds, respectively, issued between January 1,  
            2011, and June 28, 2011, provided that the remaining proceeds  
            are approved by the oversight board and used for projects that  
            meet all of the following criteria:

             a)   The project must be consistent with a region's  
               sustainable communities strategy or equivalent planning  








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               strategy designed to reduce greenhouse gas emissions.
             b)   Two or more significant planning actions, as defined,  
               occurred on or before December 31, 2010, related to the  
               project.
             c)   Documentation dated on or before December 31, 2010, is  
               provided indicating the intention to finance all or a  
               portion of the project with the future issuance of  
               long-term debt.
             d)   Any construction contract over $100,000 must include a  
               provision ensuring prevailing wage is paid by the  
               contractor and all subcontractors.
             e)   Any construction contract over $250,000 must require  
               prospective contractors to establish their financial  
               ability and experience in performing large construction  
               contracts.

          1)Authorizes a housing successor to reimburse with the bond  
            proceeds issued in 2011 a city or county that funded an  
            eligible project with other funds as long as the project meets  
            the purpose for which the bonds were issued.

          2)Requires bonds to be refinanced as soon as possible to reduce  
            the debt service costs by lowering interest rates.

          COMMENTS:

          1)Purpose.  According to the author, it is estimated that  
            approximately $750 million in 2011 RDA bond proceeds are  
            currently sitting idle and cannot be used.   If these proceeds  
            were spent on their intended projects, it is estimated that  
            19,000 high-wage construction and related jobs would be  
            generated.  The state has asserted that the vast majority of  
            the 2011 RDA bonds must be defeased and their proceeds not  
            spent on projects; however, over 90% of these bonds cannot be  
            defeased for 10 years.  During this 10-year period, nearly $1  
            billion will be spent on the debt service payments for these  
            bonds, and the bond proceeds will continue to go unused.  The  
            vast majority of these bonds were issued for public works  
            projects such as infrastructure construction and repair, new  
            public facilities, and affordable housing. Further, the author  
            argues that bondholders who purchased tax-exempt bonds for  
            specific public works projects (approximately 70% of the bonds  
            in question) were promised tax-free returns.  Per federal tax  
            law, tax-exempt bond proceeds must be used for their intended  
            purpose, or the bonds could be subject to losing their  








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            tax-exempt status.

          2)Defeasance vs spending.  The core issue presented by this bill  
            is whether remaining bond proceeds should be spent or repaid  
            as soon as possible.  While many bonds cannot be repaid for 10  
            years, spending the money means that the bonds will not be  
            repaid for up to 30 years, which of course entails significant  
            additional interest.  All these costs are funded through local  
            tax increment, meaning that expending tax revenues on these  
            projects reduces the amount of revenues available for other  
            local governmental entities.  Spending bond proceeds instead  
            of repaying the bondholders will result in the completion of  
            additional projects, many of which are likely to be beneficial  
            to the community, if not the state, but this comes with an  
            opportunity cost.  Cities, counties, special districts, and  
            the state by way of the school funding backfill will have  
            fewer resources to spend on other needs or priorities.

          3)Opposition.  Opponents argue that allowing successor agencies  
            to use proceeds from bonds issued after the governor announced  
            his proposal to dissolve RDAs improperly rewards agencies that  
            deliberately acted to circumvent the dissolution process,  
            often by rushing to sell bonds at above-market interest rates.  
             $750 million in bond proceeds is at stake, but the ultimate  
            cost to schools, counties, cities, and special districts is $2  
            billion when the additional interest payments are included.   
            Opponents prefer to see the bond proceeds used to retire  
            redevelopment debt so that tax increment is more quickly  
            available to all taxing entities, including schools, which  
            otherwise the state's General Fund must support.  In other  
            words, this bill requires the whole state to pay for these 39  
            "Mardi Gras" agencies.

          4)Previous legislation.  This bill is very similar to AB 2493  
            (Bloom) of 2014, which would have allowed successor agencies  
            to use proceeds derived from bonds issued between January 1,  
            2011, and June 28, 2011, if the project was consistent with a  
            sustainable communities strategy or reduced greenhouse gas  
            emissions.  AB 2493 was vetoed by Governor Brown, with the  
            following veto message:

            "I applaud the author's efforts to craft legislation to target  
            specific projects for funding from 2011 bond proceeds.   
            Funding for this measure, however, would come at the expense  
            of lost property tax dollars to cities and counties that chose  








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            not to incur debt during this period, as well as special  
            districts and schools.  The cost to the general fund to  
            backfill schools could be significant, to the tune of $500  
            million, at a time when the state is still recovering from  
            deep recession.

            "I recognize that the cost to local governments to defease  
            these high interest rate bonds is significant.  Therefore, I  
            am directing DOF [the California Department of Finance] to  
            develop a plan to address the outstanding bond debt of these  
            agencies."

            To address the governor's concern expressed in his veto  
            message, the author has included in this bill a requirement  
            that successor agencies refinance their 2011 bonds.  The  
            author argues that this requirement reduces some of the future  
            fiscal impacts to the state and other taxing entities.  It  
            seems likely agencies would do this anyway; however, it is  
            unclear how this change will adequately address the Governor's  
            concerns.

          5)Splitting the difference.  The opponents of this bill raise  
            valid concerns about rewarding bad behavior at the expense of  
            others.  Others have questioned the economic and social  
            benefits that some of the projects may provide should they be  
            funded through the mechanisms in this bill.  For example,  
            according to the bill's supporters, some of the projects to be  
            funded with this money include libraries, highway landscaping,  
            parking structures, and law-enforcement facilities.   
            Notwithstanding the merits of these and other projects,  
            opponents are concerned about funding them on the backs of  
            others.

            On the other hand, the bill supporters report that roughly  
            $135 million of the $750 million outstanding is for affordable  
            housing projects.  About 60% of those projects could be used  
            under the conditions laid out in this bill, meaning roughly  
            $80 million could be made available with this bill for  
            affordable housing around the state.  Given the dire need for  
            affordable housing, the committee may wish to amend the bill  
            to specify that only funds allocated for affordable housing  
            projects could be available for expenditure under this bill,  
            instead of all types of projects that otherwise meet the  
            bill's criteria.









          AB 974 (Bloom)                                      Page 6 of ?
          
          
          6)Double referred.  The Senate Rules Committee has referred this  
            bill to both this committee and the Committee on Governance  
            and Finance.  If this bill passes out of this committee, then  
            it will next be heard in the Governance and Finance Committee.

          Related Legislation:
          
          AB 113 (Assembly Budget Committee) - this budget trailer bill  
          includes a number of provisions related to former RDAs and  
          successor agencies, including language very similar to this  
          bill.  AB 113 is currently pending in the Senate Budget and  
          Fiscal Review Committee.

          AB 806 (Dodd) - among other things, allows the successor agency  
          to amend or modify existing contracts and agreements, or  
          otherwise administer projects in connection with enforceable  
          obligations approved pursuant to existing law if the successor  
          agency has received a finding of completion.  AB 806 is  
          currently pending in the Senate Governance and Finance  
          Committee.

          AB 2493 (Bloom, 2014) - similar to this bill, would have allowed  
          successor agencies to use proceeds derived from bonds issued  
          between January 1, 2011, and June 28, 2011, if the project was  
          consistent with a sustainable communities strategy or reduced  
          greenhouse gas emissions.  AB 2493 was vetoed by Governor Brown.

          AB 981 (Bloom, 2013) - would have allowed successor agencies to  
          use proceeds of bonds issued by an RDA between January 1, 2011,  
          and June 28, 2011, for projects of the former RDA, upon the  
          issuance of a finding of completion by the state.  AB 981 bill  
          was held in the Assembly Appropriations Committee.

          Assembly Votes:

            Floor:    46-29
            Appr:     12-5
            H&CD:       4-2
            LGov:       5-3
          
          FISCAL EFFECT:  Appropriation:  No    Fiscal Com.:  Yes     
          Local:  No


            POSITIONS:  (Communicated to the committee before noon on  








          AB 974 (Bloom)                                      Page 7 of ?
          
          
          Wednesday,
                          July 1, 2015.)
          
            SUPPORT:  

          City of West Hollywood

          OPPOSITION:

          California Professional Firefighters
          California Special Districts Association
          California State Association of Counties
          County of Los Angeles
          County of Santa Clara
          Urban Counties Caucus

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