BILL ANALYSIS                                                                                                                                                                                                    



           SENATE COMMITTEE ON GOVERNANCE AND FINANCE
                         Senator Robert M. Hertzberg, Chair
                                2015 - 2016  Regular 

                              
          
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          |Bill No:  |AB 974                           |Hearing    | 7/15/15 |
          |          |                                 |Date:      |         |
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          |Author:   |Bloom                            |Tax Levy:  |No       |
          |----------+---------------------------------+-----------+---------|
          |Version:  |3/26/15                          |Fiscal:    |Yes      |
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          |Consultant|Weinberger                                            |
          |:         |                                                      |
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                           REDEVELOPMENT SUCCESSOR AGENCIES



          Allows redevelopment successor agencies to spend proceeds from  
          bonds issued by former redevelopment agencies in 2011.


           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.  
           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.







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          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.  A successor agency that is specifically  
          designated to retain the housing assets and functions previously  
          performed by the former RDA is known as a "housing successor  
          agency."  Each successor agency has an oversight board that is  
          responsible for supervising it and approving its actions.  The  
          Department of Finance (DOF) can review and request  
          reconsideration of an over-sight board's decisions.

          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.

          A successor agency receives a "finding of completion" from DOF  
          if the agency complies with state laws that require it to remit  
          specified RDA property tax allocations and cash assets  
          identified through a "due diligence review" (AB 1484, Assembly  
          Budget Committee, 2012).  Nearly 340 successor agencies have  
          received a finding of completion.

          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  








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          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.

          Citing the costs associated with retiring proceeds from bonds  
          issued by RDAs in 2011 and the potential benefits of investing  
          those proceeds in development projects, some local officials  
          want the Legislature to allow successor agencies to spend 2011  
          bond proceeds under specified conditions.


           Proposed Law

           Assembly Bill 974 allows a successor agency, including a housing  
          successor agency, to use bond proceeds derived from bonds issued  
          between January 1, 2011, and June 28, 2011, only for projects  
          which meet the following criteria, as determined by a resolution  
          issued by the oversight board:
                 The project must be consistent with the applicable  
               regional sustainable communities strategy or alternative  
               planning strategy adopted pursuant to state law that the  
               State Air Resources Board has determined would, if  
               implemented, achieve the greenhouse gas emission reduction  
               targets established by the board or, if a sustainable  
               communities strategy is not required for a region by law, a  
               regional transportation plan that includes programs and  
               policies to reduce greenhouse gas emissions.

                 Two or more of the following significant planning or  
               implementation actions must have occurred on or before  
               December 31, 2010:

                  o         An action approved by the governing body of  
                    the city, county, city and county, the board of the  
                    former redevelopment agency, or the planning  
                    commission directly related to the planning or  
                    implementation of the project.

                  o         The project is included within an approved  
                    city, county, city and county, or redevelopment agency  








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                    planning document, including a redevelopment agency  
                    five-year implementation plan, capital improvement  
                    plan, master plan, or other planning document.

                  o         The expenditure by the city, county, city and  
                    county, or project sponsor, of more than $25,000 on  
                    planning related activities for the project within one  
                    fiscal year, or $50,000 in total, over multiple fiscal  
                    years.

                 The successor agency must provide documentation, dated  
               on or before December 31, 2010, indicating the intention to  
               finance all or a portion of the project with the future  
               issuance of long-term debt, or documentation showing that  
               the issuance of long-term redevelopment agency debt was  
               being planned on or before December 31, 2010.

                 Each construction contract over $100,000 must include a  
               provision that prevailing wage will be paid by the  
               contractor and all of that contractor's subcontractors.

                 For each construction contract over $250,000, the  
               successor agency must require prospective contractors to  
               submit a standardized questionnaire and financial  
               statements as part of their bid package, to establish the  
               contractor's financial ability and experience in performing  
               large construction projects.

          AB 974 allows a successor agency to use 2011 bond proceeds to  
          reimburse a city, county, or city and county that funded an  
          eligible project that meets specified criteria with funds other  
          than redevelopment funds between June 28, 2011 and the bill's  
          effective date.

          AB 974 requires that any successor agency requesting the use of  
          bond proceeds pursuant to the bill's provisions must place that  
          request on its Recognized Obligation Payment Schedule in a  
          specified manner.

          AB 974 requires a successor agency to detail in the resolution  
          adopting the Recognized Obligation Payment Schedule how each  
          project will meet specified requirements and all documentation  
          showing how the project meets those must be attached to the  
          resolution.  The resolution adopting the Recognized Obligation  








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          Payment Schedule, including the supporting documentation, must  
          be forwarded to the Department of Finance for review and  
          approval or denial. 

          AB 974 specifies that a successor agency must use bond proceeds  
          that cannot be spent on projects, pursuant to the bill's  
          requirements, either to defease bonds or purchase bonds for  
          cancellation.

          If bond proceeds derived from bonds issued between January 1,  
          2011, and June 28, 2011 can be used for projects that meet  
          requirements specified in AB 974, the bill requires that the  
          corresponding bonds must be refinanced, when refinancing is  
          allowed according to the bond's indenture, to reduce debt  
          service costs by lowering interest rates.


           State Revenue Impact

           No estimate.


           Comments

           1.  Purpose of the bill  . State law offers successor agencies no  
          good options for disposing of billions of dollars of unspent RDA  
          bond proceeds.  If the 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.  Even if an agency wants to defease the 2011 bonds,  
          much of the debt that was issued in 2011 can't be retired for at  
          least 10 years after it was issued.  In the meantime, that debt  
          continues to generate interest costs while producing no  
          offsetting economic benefits.  By contrast, AB 974 will support  
          the completion of infrastructure projects that have already  
          received millions of dollars of public investments, support  
          state policy goals, and generate billions of dollars of economic  
          activity that will benefit residents throughout California.

          2.   Forgiving Mardi Gras sins .  In what has been called a "Mardi  








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          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.   Related legislation  .  AB 794 is substantially similar to AB  
          2493 (Bloom, 2014), which Governor Brown vetoed.  The Governor's  
          veto message states:

               This bill permits successor agencies and housing successors  
               of former redevelopment agencies to use proceeds derived  
               from bonds issued between January 1, 2011, and June 28,  
               2011, if the project is consistent with a sustainable  
               communities strategy or reduces greenhouse gas emissions.  
               Expenditure of the bond proceeds would be subject to  
               approval by the Department of Finance (DOF).

               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 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. 









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

          AB 113 (Assembly Budget Committee, 2015), which is one of this  
          year's proposed budget trailer bills, contains provisions that  
          enact some of the Governor's proposed changes to the  
          redevelopment dissolution process, including an alternative  
          approach to allowing the expenditure of 2011 redevelopment bond  
          proceeds.  Under the alternative approach in AB 113, successor  
          agencies that get the Department of Finance to approve a last  
          and final recognized obligation payment schedule can expend up  
          to 30% of any unencumbered 2011 bond proceeds and can spend an  
          additional share - ranging from 25% to 5% - that corresponds to  
          the date on which the bonds were issued.  AB 113 is awaiting a  
          vote on the Senate Floor.

          4.   Let's get technical  .  To make AB 974's provisions more clear  
          and consistent, the Committee may wish to consider making the  
          following technical amendment to the bill:

                 On page 10, line 33, strike out "met" and insert "meet"

          5.   Double-referred  .  Because AB 974 relates to the use of  
          former RDA bond proceeds for projects that include affordable  
          housing development, Senate Rules Committee double-referred the  
          bill, first to the Senate Transportation & Housing Committee,  
          which hears bills related to housing policy, and then to the  
          Senate Governance & Finance Committee, which hears bills related  
          to RDAs' dissolution.  At its July 7 hearing, the Senate  
          Transportation & Housing Committee passed AB 974 on an 8-2 vote.


           Assembly Actions

           Assembly Local Government Committee:      5-3
          Assembly Housing & Community Development Committee:  4-3
          Assembly Appropriations Committee:           12-5
          Assembly Floor:                              46-29


           Support and  
          Opposition   (7/9/15)








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           Support  :  Cities of Lynwood, Santa Monica, Union City and West  
          Hollywood.


           Opposition :  California Professional Firefighters; California  
          Special Districts Association; California State Association of  
          Counties, Counties of Los Angeles and Santa Clara; Urban  
          Counties Caucus.



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