BILL ANALYSIS                                                                                                                                                                                                    

                             Senator Ricardo Lara, Chair
                            2015 - 2016  Regular  Session

          AB 974 (Bloom) - Redevelopment dissolution:  housing projects:   
          bond proceeds
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          |Version: March 26, 2015         |Policy Vote: T. & H. 8 - 2,     |
          |                                |          GOV. & F. 4 - 1       |
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          |Urgency: No                     |Mandate: No                     |
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          |Hearing Date: August 17, 2015   |Consultant: Mark McKenzie       |
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          This bill meets the criteria for referral to the Suspense File. 

          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.

          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  

          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  

          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  
                 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  
                  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  
                 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.

          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.

          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  

          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.

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