BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |AB 1195 |Hearing |6/17/15 |
| | |Date: | |
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|Author: |Ridley-Thomas |Tax Levy: |No |
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|Version: |2/27/15 |Fiscal: |No |
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|Consultant|Grinnell |
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California Debt Limit Allocation Committee: American Recovery
and Reinvestment Act of 2009
Allows CDLAC to allocate private activity bond ceiling to
applicants seeking to issue qualified public education facility
bonds.
Background and Existing Law
Generally, when borrowers repay lenders, the loan principal is
neither taxable income to the borrower, nor deductible to the
lender; no one is better off because the loan must be repaid.
However, the lender must generally include any interest payments
as taxable income, while the borrower can usually deduct any
interest expense, but federal law has exempted interest payments
from income on municipal bonds issued by state and local
agencies for federal tax purposes since the inception of the
federal income tax. The California Constitution and state law
similarly excludes income from municipal bonds for state tax
purposes (Article XIIIA, Section 26). This interest exclusion
increases an investor's rate of return when purchasing a
municipal bond, which leads to lower interest rates. This
subsidy is very powerful: public agencies have an interest cost
3.5% lower than comparable taxable bonds at the current 35%
federal income tax rate.
I. Bonds. State and local agencies generally use proceeds from
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municipal bond sales for a wide variety of public purposes;
however, public agencies sometime loan bond proceeds to
non-government entities for many of the same uses, like
airports, transit, school facilities, and housing, among others.
Beginning in the 1930s, state and local governments began to
issue tax-exempt Industrial Development Revenue bonds (IDBs) to
support private investment. Unlike general obligation bonds, the
payment of IDB interest and principal is paid out of the profits
or proceeds of the project being financed, and the debt is
secured by the subsidized project rather than by the tax
revenues of the jurisdiction. Congress limited the tax
exemption for IDBs several times to respond to increases in
issuance by restricting the interest exclusion to bonds meeting
the definition of "public purpose." Despite the limitation,
issuance increased to $62.4 billion in 1983, representing 68
percent of total state and local borrowings, resulting in a
significant revenue loss for the federal government. In
response, Congress enacted the Tax Reform Act of 1986, which
among other reforms, tightened federal law's definition of
"public purpose," and instituted a state-by-state ceiling to
limit the volume of bonds issued by public agencies for the
benefit of private parties. Under the Act, a bond is "public
purpose," and therefore qualified for the interest exclusion, if
either:
Less than 10% of the proceeds are used directly or
indirectly by a non-governmental agency, or
Less than 10% of the proceeds are secured directly or
indirectly by property used in a trade or business.
Federal law determines whether bond interest is taxable or
tax-exempt. Bonds meeting either part of the test are
considered government bonds, so interest payments are excluded
from income for tax purposes. Bonds that don't are considered
private activity bonds. However, the Act allows states to issue
tax-exempt qualified private activity bonds up to a certain
amount, known as the volume cap or ceiling, currently set at $75
per person, or $250 million, whichever is more, indexed annually
for inflation. While the interest paid on qualified private
activity bonds is generally excluded from income, the federal
Alternative Minimum Tax may apply. When a state or local agency
issues a tax-exempt private activity bond, but the Internal
Revenue Service subsequently finds that the project did not
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comply with federal law's requirements, the bond changes from
tax-exempt to taxable, thereby making interest payments
includible in income for tax purposes
Federal law allows states to issue tax-exempt qualified private
activity bonds up to the cap for exempt facilities, mortgage
revenue, qualified 501(c) (3)s, qualified student loans,
qualified small-issues, and qualified redevelopment, as defined.
Federal law excludes from the ceiling bonds for certain
governmentally owned facilities and bonds issued to finance the
activities of certain charitable organizations. If a state's
ceiling for a calendar year is more than the total amount of
tax-exempt private activity bonds issued during the year, the
difference is carried forward for up to the next three years,
but can only be used to issue bonds for exempt facilities,
qualified mortgages or mortgage credit certificates, qualified
student loans or qualified redevelopment.
In recent years, Congress has subsequently created new forms of
private activity bonds, and excluded them from the ceiling set
by the 1986 Act, instead enacting separate ceilings for each
specific bond. The Economic Growth and Tax Reconciliation Act
of 2001 added qualified public education facilities bonds
(QPEFBs) to the list of exempt facility bonds. Qualified public
education facilities include elementary and secondary public
school facilities which are owned by private, for-profit
corporations pursuant to public-private partnership agreements
with a State or local educational agency. Issuance of these
bonds is subject to a separate annual per-State ceiling equal to
$10 per person (or $5 million, if greater) in lieu of the
general State volume cap ceiling. No state or local agency has
issued a QPEFB to date.
II. CDLAC. Created by the Legislature in 1987 to implement the
Act, the California Debt Limit Allocation Commission (CDLAC) is
a three-member body comprised of the State Treasurer as Chair,
the Governor, and the State Controller, housed in the Office of
the State Treasurer. CDLAC annually determines the ceiling
amount under federal law, including any carry forward, and then
allocates the annual ceiling to applicants, which include state
and local agencies, joint powers agencies, special districts,
nonprofit public benefit corporations that only issues student
loan bonds, and any other public agency legally empowered to
issue debt. No agency can issue tax-exempt private activity
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bonds without CDLAC approval.
III. Charter School Facility Construction Finance. A recent
survey completed by the National Charter School Resource agency
indicates that in California, 8.7 percent of charter schools own
their buildings, 43.6 percent are housed in district facilities,
41.5 percent are located in private facilities, and 6.2 percent
have other facilities arrangements. While some charter schools
can construct facilities from average daily attendance revenues,
others must rely on funding from school districts, which is
generally financed by a combination of tax-exempt state and
local general obligation bonds, and developer fees imposed by
school districts. Schools can also apply to the California
School Finance Authority (CSFA) in the State Treasurer's Office,
which almost exclusively provides financial assistance to
charter schools by administering state bond funds, federal and
state grants, a revolving loan fund, a credit enhancement grant
program, and conduit bond financing.
Proposed Law
Assembly Bill 1195 makes several changes to CDLAC's authorizing
statutes to allow the Commission to approve applications for
agencies to issue tax-exempt qualified public education
facilities bonds (QPEFBs) by adding references to its
authorizing federal law, Internal Revenue Code 142(k),
including:
The definition of "state ceiling," and "private activity
bond."
The requirement that any allocation of ceiling is
irrevocable upon issuance of bonds, and prohibiting any
allocation carry forward without CDLAC approval.
The requirement on a state or local agency to notify
CDLAC in writing after any election to carry forward an
allocation.
Designation of the Treasurer as the state official to
certify that the QPEFB meets the Internal Revenue Code's
requirements.
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AB 1195 also makes conforming changes to legislative findings
and declarations stating CDLAC's purposes, and by adding
references to a section of state law stating the purpose of the
chapter authorizing CDLAC.
State Revenue Impact
No estimate.
Comments
1. Purpose of 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
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."
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2. Wait and see ? Congress added QPEFBs into the IRC in 2001,
but none have yet been issued. The State Treasurer states that
Florida and New York have enacted the necessary statutory and
regulatory changes, and additionally identifies three reasons to
explain the lack of issuance: First, the IRC requires the school
be privately owned under a QPEFB, which is inconsistent with the
current model, and charter schools aren't sufficiently
sophisticated about bond resources to issue them on their own.
Second, current law may be unclear regarding whether the
private, for-profit corporation can claim the depreciation
deduction for the school, a vital economic component to induce
participation from developers. Lastly, differences in interest
rates on tax-exempt and taxable bonds are currently low, so
charter schools don't have a strong incentive in the form of
interest rate savings to seek tax-exempt financing. While
California continues to add charter schools, many of them do not
have sufficient facilities. The Committee may wish to consider
whether to wait and see whether this model works in other states
before authorizing this untried form of charter school debt
issuance.
3. Public Private Partnerships . AB 1195 authorizes a new form
of school facility finance, the Qualified Public Education
Facilities Bond, which relies on an unusual model of public
private partnership, initially proposed by the Heritage
Foundation. After the issuer sells the bond, the proceeds are
loaned to a private, for-profit developer, who then uses the
proceeds to construct the school. The developer leases the
school to the school district on a long-term basis at a cost
less than the amount necessary to repay the bonds. The developer
attempts to make up the difference by leasing out the school
building during off-hours, and applying any depreciation
deduction from the school to reduce taxable income from other
sources. The school's ownership is transferred from the
developer to the school district when the lease ends. In a
QPEFB, the repayment obligation is on the developer, not the
school district, so the market will likely price the bond
according to its assessment of the developer's creditworthiness.
Assembly Actions
Assembly Banking and Finance Committee:12-0
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Assembly Floor: 77-0
Support and
Opposition (6/11/15)
Support : State Treasurer John Chiang.
Opposition : Unknown
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