BILL ANALYSIS                                                                                                                                                                                                    Ó



          SENATE COMMITTEE ON GOVERNANCE AND FINANCE
                         Senator Robert M. Hertzberg, Chair
                                2015 - 2016  Regular 

                              
          
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          |Bill No:  |SB 710                           |Hearing    |5/6/15   |
          |          |                                 |Date:      |         |
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          |Author:   |Galgiani                         |Tax Levy:  |No       |
          |----------+---------------------------------+-----------+---------|
          |Version:  |2/27/15                          |Fiscal:    |No       |
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          |Consultant|Weinberger                                            |
          |:         |                                                      |
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                         Joint exercise of powers:  financing



          Authorizes California joint powers authorities (JPAs) to issue  
          bonds and enter into loan agreements to finance or refinance  
          private projects that are located outside of California.


           Background and Existing Law

           The Joint Exercise of Powers Act allows two or more public  
          agencies to exercise their common powers by signing joint powers  
          agreements.  Sometimes an agreement creates a joint powers  
          authority (JPA).

          Public agencies use the JPA law and the related Marks-Roos Local  
          Bond Pooling Act to form bond pools to finance public works,  
          working capital, insurance needs, and other public benefit  
          projects.  JPAs can issue one large Marks-Roos Act bond and then  
          loan the capital to local agencies, thus creating a "bond pool."  
           Bond pooling saves money on interest rates and finance charges.  
           It also lets smaller local agencies enter the bond market.

          The California Constitution exempts interest on bonds issued by  
          the state, or a local government in the state, from taxes on  
          income.  Federal tax law exempts interest on state and local  
          bonds as well, but California does not exempt interest on bonds  
          issued by other states or local governments located in other  
          states. 







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          Certain types of non-governmental borrowers can take advantage  
          of tax-exempt financing through "conduit revenue bonds," which  
          are issued by many types of governmental agencies, including  
          state financing authorities, chartered cities, counties, joint  
          powers authorities, redevelopment agencies, and local housing  
          and industrial development authorities.  These bonds may be  
          issued for various purposes, including economic development,  
          educational and health facilities, and multi-family housing.   
          The issuing agency loans the funds obtained from the financing  
          to a non-governmental borrower who builds and operates the  
          project.  A conduit revenue bond is payable solely from the loan  
          payments received from the non-governmental party, so the  
          governmental issuer normally has no liability for debt service  
          on the bonds.  A private firm may only use a governmental  
          agency's authority to issue tax-exempt debt if a public benefit  
          will be provided by the project that is financed.  

          A JPA can issue tax-exempt revenue bonds to finance projects  
          that provide a public benefit and are located within the  
          geographic boundaries of its member agencies.  State law  
          requires local approval of the construction, acquisition, and  
          financing of public benefit projects.  The local agency with  
          approval power must be the city, county, or city and county  
          within whose boundaries the public benefit project is to be  
          located; the law also specifies that the local agency with  
          approval power must have land use jurisdiction over the project  
          (SB 147, Kopp, 1998; AB 457, Canciamilla, 2001).

          Other states, including Wisconsin, Colorado, and Arizona, allow  
          public entities formed under their laws to issue conduit  
          financing bonds for projects located outside of those states'  
          boundaries.  Some California JPAs want the Legislature to grant  
          them similar authority to issue conduit financing bonds for  
          projects that are not located in California.


           Proposed Law

           Senate Bill 710 allows a joint powers authority, until January  
          1, 2021, to issue bonds and enter into a loan agreement to  
          finance or refinance a project that is situated in another  
          state, including working capital related to that project, if all  
          of the following apply:








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                 The project is owned, developed, or operated by a  
               private entity.

                 The city, county, or other public body with land use  
               planning authority over the project, or the state in which  
               the project is situated, approves, by resolution, order, or  
               other official action, the authority's bond issuance and  
               the project's financing.  This approval requirement does  
               not apply to the issuance of refunding bonds if the city,  
               county, public body, or state approved a prior financing or  
               refinancing of the project.

                 The authority has at least 25 local agency members and  
               the authority has issued bonds and entered into loan  
               agreements to finance at least 25 separate projects.

                 The authority finds, based on the facts and  
               circumstances attendant to the project or the financing or  
               refinancing of the project, that the issuance of the bonds  
               or the financing or refinancing of the project will result  
               in a substantial public benefit to California because one  
               or more of the following is satisfied:
                  o         At least 20% of the net proceeds of the issue  
                    are allocated to the financing of one or more  
                    projects, including related working capital, located  
                    in California.

                  o         The borrower of the proceeds has its principal  
                    place of business in California and, if that borrower  
                    is subject to income or franchise tax in California or  
                    any other state, that borrower has paid to California  
                    for the most recent tax year income or franchise tax  
                    of at least $50,000, or half of its total income or  
                    franchise tax liability to all states, whichever is  
                    less.

                  o         If the borrower has little or no assets other  
                    than the project to be financed and is owned by  
                    another company or companies, then the company or  
                    companies that own a majority of interest in the  
                    borrower must have its or their principal place of  
                    business in California.

                  o         The borrower of the bond proceeds or a  








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                    controlled group of which it is a member has at least  
                    50 full-time equivalent employees in this state.

                  o         The borrower of the bond proceeds or a  
                    controlled group of which it is a member has paid to  
                    California for the most recent tax year income or  
                    franchise tax of at least $100,000.

                  o         In the case of the financing of one or more  
                    multifamily rental family projects, the developer of  
                    the project or projects has its principal place of  
                    business in California.  Any such developer subject to  
                    personal or corporate income tax in California or any  
                    other state has paid to California for the most recent  
                    tax year income or franchise tax of at least $50,000,  
                    or half of its total income or franchise tax liability  
                    to all states, whichever is less.



          SB 710 defines "controlled group" as a group of corporations,  
          partnerships, limited liability companies, or other persons that  
          are wholly owned or controlled by a single corporation,  
          partnership, limited liability company, or other person.

          SB 710 defines the term "developer" as a corporation,  
          partnership, limited liability company, or other person that is  
          the initial controlling party within the legal entity that owns  
          the multifamily rental housing project to be financed with  
          proceeds of the bonds and that is expected to be the primary  
          economic beneficiary of, and to take the primary economic risks  
          related to, development and performance of the project.

          The bill defines "financing" as including the refinancing of  
          bonds of the authority or of bonds issued by any other state or  
          local entity located within this state.

          SB 710 defines "issue" as having the same meaning as in a  
          specified federal regulation.

          The bill defines "net proceeds of an issue" as the aggregate  
          principal amount of such issue, less the amount of such issue  
          allocated to original issue discount, issuance costs, reserve  
          funds and credit enhancement costs.








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          SB 710 defines "principal place of business" of an entity as the  
          principal place from which the trade or business of the entity  
          is directed or managed.

          The bill requires the Legislative Analyst, on or before January  
          1, 2020, to prepare and submit to the Legislature a report on  
          the issuance of bonds and the financing of projects pursuant to  
          SB 710's provisions.  No later than July 1, 2019, authorities  
          that issue bonds pursuant to the authority granted by SB 710  
          must provide information concerning those bonds, the projects  
          financed, the public benefits accruing to California and any  
          other information requested by the Legislative Analyst's Office  
          for the purpose of preparing the report.  The report may include  
          recommendations for modifying or extending the application of  
          the bill's provisions.


           State Revenue Impact

           No estimate.


           Comments

           1.  Purpose of the bill.   Activities financed with tax exempt  
          bonds increasingly transcend state boundaries and the practice  
          of issuing municipal debt for multi-state and out-of-state  
          projects is becoming more widespread.  Multi-state financing  
          provides cost and time savings to borrowers through economies of  
          scale.  In recent years, municipal issuers located in Arizona,  
          Colorado, Florida, Illinois, Texas and Wisconsin, among other  
          states, have issued bonds to finance multi-state and  
          out-of-state projects.  Although some of those projects are  
          located in California, companies and non-profit organizations  
          seeking to develop their multi-state projects must look beyond  
          California for cost effective bond financings.  Allowing  
          California JPAs to assist in financing multi-state and  
          out-of-state projects can generate time, efficiency and  
          transaction cost benefits to enterprises with substantial  
          operations, employment or headquarters in California.  Other  
          public benefits associated with these financings can include  
          enhancing California's business climate and putting  
          California-based public finance professionals on an even footing  








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          with their competitors in other states.  SB 710 helps  
          California-based conduit bond issuers maintain their leadership  
          position in a rapidly-evolving municipal finance industry.

          2.   Public benefit  . SB 710 may benefit some California-based  
          conduit borrowers through lower financing costs and generate  
          other public benefits associated with the development of  
          multi-state projects that include a California component.   
          However, some conduit financing authorized by the bill may  
          benefit out-of-state communities significantly more than our  
          own.  For example, it is unclear whether the public benefits  
          generated by a project located entirely out of state that is  
          developed by a California-based borrower will produce sufficient  
          public benefits to justify the state income tax exemption on the  
          bonds' interest.  For example, under the SB 710's criteria for  
          determining public benefit, a California JPA could finance a  
          project located entirely outside of California as long as the  
          borrower or its controlling corporate entity has at least 50  
          full-time employees in California.  The criteria specified in  
          the bill may not be sufficient to ensure that bonds issued  
          pursuant to the bill's provisions generate sufficient public  
          benefits in California.

          3.   Similar legislation  .  SB 710 is nearly identical to AB 2046  
          (Gomez, 2014), which was held in the Senate Appropriations  
          Committee last year.  SB 188 (Negrete McCleod, 2007), would have  
          allowed a single California joint powers authority, the  
          California Statewide Communities Development authority (CSCDA),  
          to issue debt for projects located outside of California. SB 188  
          died in the Senate Appropriations Committee.


           Support and  
          Opposition   (4/30/15)


           Support  :  California Municipal Finance Authority; Independent  
          Cities Finance Authority.


           Opposition  :  Howard Jarvis Taxpayers Association.











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