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 |
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|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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