BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                    AB 1195


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          Date of Hearing:  May 4, 2015


                      ASSEMBLY COMMITTEE ON BANKING AND FINANCE


                               Matthew Dababneh, Chair


          AB 1195  
          (Ridley-Thomas) - As Introduced February 27, 2015


          SUBJECT:  California Debt Limit Allocation Committee:  American  
          Recovery and Reinvestment Act of 2009


          SUMMARY:  Makes changes to the California Debt Limit Allocation  
          Committee (CDLAC) to reflect the American Recovery and  
          Reinvestment Act (ARRA) of 2009.  Specifically, this bill:  


          1)Revises the definition of "private activity bond" to include  
            Section 142 (k) of the Internal Revenue Code (IRC).  (refer to  
            existing federal law below)


          2)Revises the definition of "state ceiling" to include the  
            amount specified by Section 142 (k) of the IRC.  (refer to  
            existing federal law)


          3)Amends the findings and declarations to include:


             a)   Sections 1112 and 1401 of the ARRA establish an  
               aggregate amount of bond authority that can be issued in  
               each state.  Said amount may be determined from time to  
               time by federal law, federal notice, or both federal law  








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               and notice;


             b)   Section 142(k) of the IRC establishes a volume ceiling  
               on the aggregate amount of qualified education facility  
               bonds that can be issued in each state. The qualified  
               educational facilities volume ceiling is the product of ten  
               dollars ($10) multiplied by the state population in each  
               calendar year;


             c)   Section 142(k)(5)(B)(i) of the IRC authorizes each state  
               to allocate the qualified educational facilities volume  
               ceiling in the manner the state determines appropriate;  
               and,


             d)   A substantial public benefit is served by constructing  
               educational facilities for the state's children.


          EXISTING STATE LAW establishes the CDLAC which states in the  
          findings and declarations:


          1)The Tax Reform Act of 1986 (Public Law 99-514) establishes a  
            unified volume ceiling on the aggregate amount of private  
            activity bonds that can be issued in each state. The unified  
            volume ceiling is the product of seventy-five dollars ($75)  
            multiplied by the state population in 1987 and fifty dollars  
            ($50) multiplied by the state population in each succeeding  
            calendar year.



          2) The federal act requires each state to allocate its volume  
            ceiling according to a specified formula unless a different  
            procedure is established by Governor's proclamation or state  
            legislation.








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          3)Therefore, it is necessary to designate a state agency and  
            create an allocation system to administer the state unified  
            volume ceiling.



          4)A substantial public benefit is served by promoting housing  
            for lower income families and individuals.



          5)A substantial public benefit is served by preserving and  
            rehabilitating existing governmental assisted housing for  
            lower income families and individuals.



          6)A substantial public benefit is served by providing federal  
            tax credits or reduced interest rate mortgages to assist  
            teachers, principals, vice principals, assistant principals,  
            and classified employees who are willing to serve in high  
            priority schools to purchase a home. (Government Code, Section  
            8869.90 et seq.)
          EXISTING FEDERAL LAW:


          1)Establishes Section 142(k) of the IRC which provides for a  
            separate volume ceiling, also apportioned to the states, for  
            Qualified Public Education Facility Bonds (QPEFB).  QPEFBs are  
            designed to provide tax-exempt conduit financing for turnkey  
            private development of public elementary and secondary school  
            facilities.  (26 U.S.C. Sec. 42 (k))


             a)   Defines "qualified public educational facility" as any  
               school facility which is: 








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               i)     part of a public elementary school or a public  
                 secondary school, and 


               ii)    owned by a private, for-profit corporation pursuant  
                 to a public-private partnership agreement with a State or  
                 local educational agency.


          2)Created, on February 13, 2009, in direct response to the  
            economic crisis and at the urging of President Obama, Congress  
            passed the ARRA of 2009.  The three immediate goals of the  
            ARRA were: create new jobs and save existing ones, spur  
            economic activity and invest in long-term growth, foster  
            unprecedented levels of accountability and transparency in  
            government spending.  In 2011, the original expenditure  
            estimate of $787 billion was increased to $840 billion to be  
            in line with the President's 2012 budget and with scoring  
            changes made by the Congressional Budget Office since the  
            enactment of the ARRA.  In addition to offering financial aid  
            directly to local school districts, expanding the Child Tax  
            Credit, and underwriting the computerization of health  
            records, the ARRA was targeted at infrastructure development  
            and enhancement.  (26 U.S.C. Secs. 54a and 1400U-1)



          FISCAL EFFECT:  None. 





          COMMENTS:  











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          AB 1195 designates the CDLAC as the state agency authorized to  
          administer the QPEFBs and authorizes the CDLAC to allocate  
          federal bond funds to finance public school facilities.   
          Government Code, Section 8869.80 establishes that CDLAC will be  
          the state's allocating agency for the award and administration  
          of the limited federal private activity bond authority, called  
          the Private Activity Volume Ceiling.  Section 142 (k) of the  
          federal IRC provides for a separate volume ceiling, also  
          apportioned to the states, for QPEFB.  As with the Private  
          Activity Volume Ceiling, the federal IRC requires CDLAC to be  
          authorized by Governor's proclamation or state legislation to  
          administer and allocate the QPEFB Volume Ceiling.  AB 1195 will  
          permit CDLAC to allocate this federal resource for the  
          development of public education schools and related  
          improvements.  


          Need for the bill:


          According to the author, 


          "Public elementary and secondary schools have limited financing  
          options for the construction or improvement of their facilities.  
           In contrast, private developers have more flexibility in their  
          ability to finance transaction and access to resources.  In  
          acknowledgement of these differences, Section 142 (k) of the  
          federal IRC created a type of tax-exempt private activity bond  
          that can be used to finance school facilities called QPEFB.   
          These bonds are designed to provide tax-exempt conduit financing  
          for turnkey private development of public elementary and  
          secondary school facilities.  The tax-exempt private activity  
          bond proceeds can be used to fund the following project:  school  
          buildings, any functionally related and subordinate facility and  
          land with respect to a school building, including any stadium or  
          other facility primarily used for school events, and any  
          property subject to accelerated depreciation under Section 168  
          of the IRC for use in a school facility.  QPEFBs are apportioned  








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          to the states but fall outside the current limits the federal  
          government places on private activity bond authority.  Federal  
          law requires that each state designate an entity to administer  
          QPEFBs in order to allocate the bonds."


          Background:


          The CDLAC is a three-member body comprised of the State  
          Treasurer as Chair, the Governor, and the State Controller.  
          CDLAC was created in 1985 by a Governor proclamation in response  
          to the 1984 Tax Reform Act, which imposed an annual limit on the  
          dollar amount of tax-exempt private activity bonds that may be  
          issued in a state.  Private activity bonds included student loan  
          bonds and industrial development bonds (including exempt  
          facility bonds, small-issue industrial development bonds, and  
          bonds for industrial parks). The annual limit was derived by  
          multiplying the state's population by $150, resulting in a $3.8  
          billion ceiling at that time. The Act also required each state  
          to designate an entity to allocate the state's ceiling among  
          various state and local issuers.


          The 1986 Tax Reform Act made major changes to the allocation of  
          private activity bond authority. It reduced the annual volume  
          cap to $75 per capita in 1986 and 1987 and $50 per capita  
          thereafter.  The Act also brought bonds for single-family and  
          multifamily housing under the state ceiling. As a result, a new  
          Governor's proclamation was issued in 1986 re-affirming CDLAC as  
          the state's sole entity responsible for allocating the annual  
          ceiling, and expressly authorizing CDLAC to establish procedures  
          and reserve amounts of the ceiling for certain purposes or  
          issuers. In 1987, the California State Legislature statutorily  
          established CDLAC by enacting Chapter 943.


          The 1998 Omnibus Budget Act raised the volume cap on private  
          activity bonds to $75 per capita or a minimum of $225 million.  








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          However, the increase would take place incrementally over the  
          years 2003 through 2007.


          The Community Renewal Tax Relief Act of 2000 accelerates the  
          scheduled increase contained in the 1998 Act by raising the  
          volume cap to $62.50 per capita of the state's population or  
          $187.5 million, whichever is higher, for calendar year 2001 and  
          $75 per capita or $225 million, whichever is higher, in calendar  
          year 2002 and thereafter. The 2000 Act also allows for the  
          volume cap to be indexed for inflation starting in calendar year  
          2003.

          QPEDB:


          A qualified public educational facility is any school facility  
          which is part of a public elementary school or a public  
          secondary school that is owned by a private, for-profit  
          corporation pursuant to a public-private partnership agreement  
          with a State or local education agency.  A public-private  
          partnership agreement is required under the IRC for each QPEFB  
          issuance.  The IRC defines this as an agreement under which the  
          corporation agree to construct, rehabilitate, refurbish, or  
          equip a school facility, and at the end of the term of the  
          agreement, to transfer the school facility to such agency for no  
          additional consideration, and the term of which does not exceed  
          the term of the issue to be used to provide the school facility.  
           Essentially, the bond proceeds are loaned to a private  
          for-profit developer, who builds the school and/or provides the  
          depreciable assets.  The school is then leased to the school  
          district on a long-term basis.  At or before the maturity date  
          of the bonds, the developer must transfer the assets to the  
          public school agency at no cost.  


          QPEFBs do not fall under the private activity volume cap that  
          the CDLAC administers.  These bonds have their own  
          federally-determined allocation which is the great of $10 per  








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          capita or $5million dollars for each state.  California is  
          eligible to receive approximately $380 million per year.  States  
          may further allocate the amounts provided in the manner that the  
          state deems appropriate.  


          Purpose:



          The purpose of CDLAC is to implement Section 1301 of the Federal  
          Tax Reform Act of 1986 and Section 146 of the IRC which impose a  
          limit on the amount of tax-exempt private activity bonds which a  
          state may issue in a calendar year (i.e. the annual state  
          ceiling). Section 146(d), as amended by the Community Renewal  
          Tax Relief Act of 2000, permits a state to set its annual  
          ceiling at $187,500,000 or an amount equal to $62.50 per capita  
          of its population, whichever is higher, in calendar year 2001.  
          In calendar year 2002 and thereafter, the ceiling will rise to  
          $225,000,000 or an amount equal to $75 per capita, whichever is  
          higher. Beginning in calendar year 2003, the ceiling will be  
          adjusted annually for inflation.


          The actions of CDLAC are fundamentally defined and limited by  
          federal tax law.  Federal tax law defines the term "private  
          activity bond"; limits the volume of private activity bonds  
          which a state may issue in a calendar year; defines the types of  
          programs and projects which qualify for tax-exempt bond  
          financing under the volume cap; and specifies recordkeeping  
          requirements.

          CDLAC responsibilities include: 





          1)To set the annual state ceiling: CDLAC is required to  








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            establish the state ceiling as soon as  practical after the  
            start of each calendar year.



          2)Allocate the State Ceiling: CDLAC is granted the sole  
            authority for allocating the annual ceiling.



          3)Other Administrative Functions: CDLAC is authorized to prepare  
            forms, establish procedures, set priorities, require a  
            performance deposit, assess fees, and perform other  
            administrative functions as necessary.



          REGISTERED SUPPORT / OPPOSITION:




          Support


          California State Treasurer (Sponsor)




          Opposition


          None on file.




          Analysis Prepared by:Kathleen O'Malley / B. & F. / (916)  








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          319-3081