BILL ANALYSIS                                                                                                                                                                                                    Ó






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          |SENATE RULES COMMITTEE            |                        AB 974|
          |Office of Senate Floor Analyses   |                              |
          |(916) 651-1520    Fax: (916)      |                              |
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                                   THIRD READING 


          Bill No:  AB 974
          Author:   Bloom (D)
          Amended:  3/26/15 in Assembly
          Vote:     21  

           SENATE TRANS. & HOUSING COMMITTEE:  8-2, 7/7/15
           AYES:  Beall, Cannella, Allen, Galgiani, McGuire, Mendoza,  
            Roth, Wieckowski
           NOES:  Gaines, Leyva
           NO VOTE RECORDED:  Bates

           SENATE GOVERNANCE & FIN. COMMITTEE:  4-1, 7/15/15
           AYES:  Hertzberg, Beall, Lara, Pavley
           NOES:  Moorlach
           NO VOTE RECORDED:  Nguyen, Hernandez

           SENATE APPROPRIATIONS COMMITTEE:  5-2, 8/27/15
           AYES:  Lara, Beall, Hill, Leyva, Mendoza
           NOES:  Bates, Nielsen

           ASSEMBLY FLOOR:  46-29, 6/2/15 - See last page for vote

           SUBJECT:   Redevelopment dissolution:  housing projects:  bond  
                     proceeds


          SOURCE:    Author


          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  








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          proceeds are approved by the oversight board and used for  
          projects that meet specific criteria.


          ANALYSIS:   


          Existing law:
          1)Eliminates redevelopment agencies (RDAs) and establishes  
            procedures for winding down the agencies, paying off  
            enforceable obligations, and disposing of agency assets.  

          2)Establishes successor agencies, typically the city that  
            established the RDA, to take control of all RDA 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.

          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  
               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  







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               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.

          Background
          
          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, ABX1 26  
          (Blumenfield) and ABX1 27 (Blumenfield), Chapters 5 and 6,  
          respectively, of the First Extraordinary Session.  ABX1 26  
          eliminated RDAs and established procedures for winding down the  
          agencies, paying off enforceable obligations, and disposing of  
          agency assets.  ABX1 26 established successor agencies,  
          typically the city that established the agency, to take control  
          of all RDA assets, properties, and other items of value.   
          Successor agencies are to dispose of an RDA'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.

          ABX1 26 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  







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          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 takes on that  
          responsibility. 

          ABX1 27 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 ABX1 26 and  
          overturned ABX1 27.  As a result, all of the state's roughly 400  
          RDAs dissolved on February 1, 2012, and successor agencies began  
          implementing ABX1 26's provisions to distribute former  
          redevelopment assets and pay the remaining obligations.

          Subsequent legislation, AB 1484 (Assembly 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.

          Comments

          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.

          Prior Legislation
          
          This bill is very similar to AB 2493 (Bloom) of 2014, which  







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          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 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.

          FISCAL EFFECT:   Appropriation:    No          Fiscal  
          Com.:YesLocal:   No

          According to the Senate Appropriations Committee, this bill will  
          likely incur significant General Fund impacts, potentially tens  
          of millions of dollars in some years, most of which would occur  
          beginning in 2021 and through 2041, as a result of the bill  
          allowing for 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  







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          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 of dollars, 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.)


          SUPPORT:   (Verified8/28/15)


          City of Santa Monica
          City of West Hollywood 


          OPPOSITION:   (Verified8/28/15)


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

          ARGUMENT IN SUPPORT:  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  







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          proceeds must be used for their intended purpose, or the bonds  
          could be subject to losing their tax-exempt status.
          
          ARGUMENT IN 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.

          ASSEMBLY FLOOR:  46-29, 6/2/15
          AYES:  Alejo, Bloom, Bonilla, Bonta, Brown, Burke, Calderon,  
            Campos, Chau, Chiu, Chu, Cooley, Cooper, Dababneh, Daly, Dodd,  
            Eggman, Cristina Garcia, Eduardo Garcia, Gatto, Gipson, Gomez,  
            Roger Hernández, Holden, Jones-Sawyer, Levine, Lopez, Low,  
            McCarty, Medina, Mullin, Nazarian, O'Donnell, Perea, Quirk,  
            Rendon, Ridley-Thomas, Salas, Santiago, Mark Stone, Thurmond,  
            Ting, Weber, Williams, Wood, Atkins
          NOES:  Achadjian, Travis Allen, Baker, Bigelow, Brough, Chang,  
            Dahle, Beth Gaines, Gallagher, Gray, Grove, Hadley, Harper,  
            Irwin, Jones, Kim, Lackey, Linder, Maienschein, Mathis, Mayes,  
            Melendez, Obernolte, Olsen, Patterson, Steinorth, Wagner,  
            Waldron, Wilk
          NO VOTE RECORDED:  Chávez, Frazier, Gonzalez, Gordon, Rodriguez

          Prepared by:Eric Thronson / T. & H. / (916) 651-4121
          8/31/15 17:35:41


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