BILL ANALYSIS Ó
-----------------------------------------------------------------
|SENATE RULES COMMITTEE | AB 1195|
|Office of Senate Floor Analyses | |
|(916) 651-1520 Fax: (916) | |
|327-4478 | |
-----------------------------------------------------------------
CONSENT
Bill No: AB 1195
Author: Ridley-Thomas (D)
Introduced:2/27/15
Vote: 21
SENATE GOVERNANCE & FIN. COMMITTEE: 7-0, 6/17/15
AYES: Hertzberg, Nguyen, Beall, Hernandez, Lara, Moorlach,
Pavley
SENATE EDUCATION COMMITTEE: 9-0, 7/15/15
AYES: Liu, Runner, Block, Hancock, Leyva, Mendoza, Monning,
Pan, Vidak
ASSEMBLY FLOOR: 77-0, 5/7/15 - See last page for vote
SUBJECT: California Debt Limit Allocation Committee:
American Recovery and Reinvestment Act of 2009
SOURCE: State Treasurer John Chiang
DIGEST: This bill allows the California Debt Limit Allocation
Commission (CDLAC) to allocate private activity bond ceiling to
applicants seeking to issue qualified public education facility
bonds.
ANALYSIS:
Existing law:
1) Excludes interest income from municipal bonds for state tax
AB 1195
Page 2
purposes.
2) Establishes CDLAC as 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.
3) Charges CDLAC with annually determining the total statewide
volume cap, or ceiling, for tax-exempt private activity bonds,
including any carry forward, and allocating amounts to
individual applicants, including 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.
4) Prohibits public agencies from issuing tax-exempt private
activity bonds without CDLAC approval.
This bill:
1)Allows for the issuance of "qualified public education
facility bonds" (QPEFBs), by adding references to Internal
Revenue Code (IRC) sections authorizing them to CDLAC's
organizing statutes which guide approval of all other private
activity bonds, including:
a) The definition of "state ceiling" and "private activity
bond," to allow CDLAC to approve applications from school
districts seeking to issue QPEFBs.
b) The requirement that the CDLAC allocation for QPEFBs
becomes irrevocable upon issuance of the bonds.
c) The requirement on a state or local agency to notify
CDLAC in writing after any election to carry forward an
AB 1195
Page 3
allocation.
d) The prohibition against an applicant issuing QPEFBs
using a carry forward allocation without CDLAC approval.
e) The designation of the Treasurer as the state official
charged with ensuring that QPEFBs meet IRC requirements.
2)Makes technical and conforming changes.
3)States legislative findings and declarations supporting its
provisions.
Background
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, lenders must generally include any interest payments as
taxable income, while borrowers 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.
State and local agencies generally use proceeds from 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. In such a case,
federal law defines a bond as "public purpose," and therefore
tax-exempt, 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.
Bonds meeting either part of the test are considered government
bonds, so interest payments are excluded from income for tax
AB 1195
Page 4
purposes. Bonds that don't are considered private activity
bonds. However, federal law 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
comply with federal law's requirements, the bond changes from
tax-exempt to taxable, thereby making interest payments
includible in the bondholder's 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 Tax Reform Act of 1986, instead enacting separate
ceilings for each specific bond. The Economic Growth and Tax
Reconciliation Act of 2001 added 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.
AB 1195
Page 5
Comments
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 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.
AB 1195 authorizes a new form of school facility finance, the
QPEFB, 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.
FISCAL EFFECT: Appropriation: No Fiscal
Com.:NoLocal: No
SUPPORT: (Verified8/11/15)
AB 1195
Page 6
State Treasurer John Chiang (source)
OPPOSITION: (Verified8/11/15)
None received
ARGUMENTS IN SUPPORT: 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."
ASSEMBLY FLOOR: 77-0, 5/7/15
AYES: Achadjian, Alejo, Travis Allen, Baker, Bigelow, Bloom,
Bonilla, Bonta, Brough, Brown, Burke, Calderon, Chang, Chau,
Chávez, Chiu, Chu, Cooley, Cooper, Dababneh, Dahle, Daly,
Dodd, Eggman, Frazier, Beth Gaines, Gallagher, Cristina
Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez,
Gordon, Gray, Grove, Hadley, Harper, Holden, Irwin, Jones,
Jones-Sawyer, Kim, Lackey, Levine, Linder, Lopez, Low,
Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin,
Nazarian, Obernolte, O'Donnell, Olsen, Patterson, Perea,
Quirk, Rendon, Ridley-Thomas, Rodriguez, Salas, Santiago, Mark
AB 1195
Page 7
Stone, Thurmond, Ting, Wagner, Waldron, Weber, Wilk, Williams,
Wood, Atkins
NO VOTE RECORDED: Campos, Roger Hernández, Steinorth
Prepared by:Colin Grinnell / GOV. & F. / (916) 651-4119
8/20/15 17:02:06
**** END ****