BILL ANALYSIS Ó SENATE COMMITTEE ON APPROPRIATIONS Senator Ricardo Lara, Chair 2015 - 2016 Regular Session AB 974 (Bloom) - Redevelopment dissolution: housing projects: bond proceeds ----------------------------------------------------------------- | | | | | | ----------------------------------------------------------------- |--------------------------------+--------------------------------| | | | |Version: March 26, 2015 |Policy Vote: T. & H. 8 - 2, | | | GOV. & F. 4 - 1 | | | | |--------------------------------+--------------------------------| | | | |Urgency: No |Mandate: No | | | | |--------------------------------+--------------------------------| | | | |Hearing Date: August 17, 2015 |Consultant: Mark McKenzie | | | | ----------------------------------------------------------------- This bill meets the criteria for referral to the Suspense File. Bill Summary: AB 974 would allow redevelopment successor agencies, and entities performing the housing functions of former redevelopment agencies (RDAs), to spend bond proceeds from bonds issued by former RDAs between January 1, 2011 and June 28, 2011 for specified projects that were planned for development prior to 2011. Fiscal Impact: Significant General Fund impacts, potentially tens of millions in some years, most of which would occur beginning in 2021 and through 2041, as a result of the bill allowing for AB 974 (Bloom) Page 1 of ? continued debt repayment on bonds issued in 2011 from tax increment that would otherwise be redistributed to taxing entities if the bonds were defeased. The amount of continued debt service payments from tax increment revenues would escalate to a peak of $99 million in 2026 and decline to approximately $42 million in 2041 (the typical 30 year term of most affected bonds), preventing a like amount from being distributed to local agencies that receive a portion of the property tax, including schools. Since the General Fund must backfill any amounts that would otherwise go to schools under Proposition 98's minimum funding guarantees, this bill would result in future General Fund impacts that could reach the tens of millions, reaching a peak in 2026 and declining thereafter. (This does not account for any potential economic benefits resulting from allowing the completion of projects funded by the 2011 bonds) Background: Historically, the Community Redevelopment Law has allowed a local government to establish redevelopment agencies (RDAs) and capture all of the increase in property taxes that is generated within the project area beyond the base year value (referred to as "tax increment") over a period of decades. Prior to their dissolution pursuant to ABx1 26 (Blumenfield) Ch. 5/2011, RDAs used tax increment financing, oftentimes issuing long-term debt in the form of tax allocation bonds, to address issues of blight, construct affordable housing, rehabilitate existing buildings, and finance development and infrastructure projects. When RDAs were abruptly dissolved pursuant to ABx1 26, many held balances of unencumbered bond proceeds that were intended to fund future redevelopment activities, but were not needed to meet those RDAs' existing obligations. Existing law establishes procedures for winding down RDA activity, including a requirement that successor agencies dispose of former RDAs' assets under direction of an oversight board. Successor agencies are required to make any payments related to enforceable obligations, as specified in an adopted biannual recognized obligation payment schedule (ROPS), and remit unencumbered balances of RDA funds to the county auditor-controller for distribution to local taxing entities in the county. The DOF reviews each ROPS to determine if the listed payments meet the statutory criteria for repayment, and AB 974 (Bloom) Page 2 of ? has the authority to disallow any payments that do not meet those criteria. Successor agencies must use bond proceeds derived from bonds issued prior to January 1, 2011 for the purposes for which the bonds were sold. If those purposes cannot be achieved, the proceeds can be used to defease the bonds. Successor agencies cannot enter into new enforceable obligations. Existing law, AB 1484 (Budget Committee), Chap 26/2012, requires DOF to provide a successor agency with a "finding of completion" after the agency remits specified RDA property tax allocations and unencumbered cash assets to the county auditor-controller through a due diligence process. Once the successor agency receives a finding of completion, the agency is authorized to, among other things, expend bond proceeds in excess of the amounts needed to satisfy approved enforceable obligations 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. SB 375 (Steinberg) Ch. 728/2008, requires the Air Resources Board (ARB) to provide each region that has a metropolitan planning organization (MPO) with a greenhouse gas emission reduction target for the automobile and light truck sector for 2020 and 2035, respectively. Each MPO, in turn, is required to include within its regional transportation plan a sustainable communities strategy (SCS) designed to achieve the ARB targets for greenhouse gas emission reduction. Each MPO must submit its SCS to ARB for review. ARB must accept or reject the MPO's determination that the implementation of a submitted SCS submitted would achieve the greenhouse gas emission reduction targets. Proposed Law: AB 974 would authorize RDA successor agencies and housing successors to use bond proceeds derived from bonds issued AB 974 (Bloom) Page 3 of ? between January 1, 2011 and June 28, 2011 for the projects that meet the following criteria, as determined by a resolution of the oversight board: The project must be consistent with the applicable regional SCS or alternative planning strategy, as specified. 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 RDA, 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 RDA planning document, including, an RDA 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 RDA debt was being planned on or before that date. 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 establish the contractor's financial ability and experience in performing large construction projects, as specified. AB 974 would also do the following: Authorizes a successor agency to reimburse city and/or county expenditures that funded a project that meets these criteria from the proceeds of 2011 bonds, if those AB 974 (Bloom) Page 4 of ? expenditures occurred between June 28, 2011 and the bill's effective date. Require a successor agency requesting to use bond proceeds from bonds issued between January 1, 2011 and June 28, 2011 to place that request on its ROPS, with each project listed as a separate line item. Require a successor agency to show how each project meets specified requirements in the resolution adopting the ROPS, as specified, and to forward the resolution to DOF for review and approval or denial. Require a successor agency to use bond proceeds that cannot be spent on projects, pursuant to requirements in the bill, to either defese the bonds or to purchase bonds for cancellation. Requires bonds issued in 2011 that can be used for projects, pursuant to requirements in the bill, to be refinanced, when it is permitted, to reduce debt service costs by lowering interest rates. Related Legislation: AB 2493 (Bloom), which was vetoed by Governor Brown in 2014, was substantially similar to this bill. The Governor's veto message stated the following: 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. AB 974 (Bloom) Page 5 of ? 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 (Budget Committee), which is a 2015-16 Budget Trailer Bill, 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 are granted a "last and final" ROPS by DOF would be authorized to spend 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 pending in the Senate Budget and Fiscal Review Committee. Staff Comments: 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. While some of these bond sales were deliberate attempts by RDAs to preempt the Governor's proposal to eliminate redevelopment, by establishing debt obligations that would tie up property tax increment revenues well into the future, many of those bond sales were intended for projects that had been in the planning stages long before the Governor announced his intentions. Since RDA dissolutions statutes prohibit successor agencies from spending bond proceeds issued after December 31, 2010, they are often forced to retain those proceeds for extended periods of time while paying debt service (including interest charges) out of tax increment revenues. Much of the debt that was issued in 2011 cannot be defeased or refinanced until 2021. Proponents indicate that up to $1 billion in debt service payments will AB 974 (Bloom) Page 6 of ? have been paid from tax increment by that time. AB 974 would allow successor agencies and housing successors to spend 2011 bond proceeds on projects that are consistent with the SCS and meet other specified criteria. This would essentially allow for an extension of redevelopment activity for at least 20 years to continue the debt service on these projects. As a result, successor agencies and housing successors would continue to incur administrative costs associated with the continued repayment. Staff notes that the author has provided information indicating that bill would allow for the expenditure of approximately $435 million of the estimated $715 million in unspent 2011 RDA bond proceeds by 35 cities that have projects meeting the criteria established by the bill. Since the majority of bonds issued in 2011 cannot be defeased until 2021, the state fiscal impacts of this bill would not occur until that date, and would extend for an additional 20 years in most cases. Since this bill would ensure continued debt service for 20 years from tax increment that would otherwise be distributed to local taxing agencies, AB 974 would result in increased General Fund expenditures to offset tax increment payments that would otherwise go to schools, absent the bill. -- END --