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 ****