BILL ANALYSIS Ó
SB 710
Page 1
Date of Hearing: July 1, 2015
ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT
Brian Maienschein, Chair
SB
710 (Galgiani) - As Amended June 23, 2015
SENATE VOTE: 39-0
SUBJECT: Joint exercise of powers.
SUMMARY: Authorizes California joint powers authorities to
issue bonds and enter into loan agreements to finance or
refinance projects located outside this state. Specifically,
this bill:
1)Allows, until January 1, 2022, a joint powers authority (JPA)
to issue or cause to be issued bonds and enter into a loan
agreement, as specified, for the financing or refinancing of a
project that is situated in another state, including working
capital related to that project, if all of the following
apply:
a) The project is owned, developed, or operated by a
private entity;
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b) The issuance of bonds by the JPA and the financing of
the project is approved by resolution, order, or other
official action of the city, county, or other public body
with land use planning authority over the project, or of
the state in which the project is situated. This provision
does not apply to the issuance of refunding bonds if a
prior financing or refinancing of the project was approved
by the city, county, public body, or state;
c) The JPA has at least 25 local agency members and has
issued bonds and entered into loan agreements to finance at
least 25 separate projects;
d) The JPA 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 this state because one or
more of the following is satisfied:
i) At least 20% of the net proceeds of the issue are
allocated to the financing of one or more projects,
including working capital related thereto, located in
this state;
ii) The borrower of the bond proceeds has its principal
place of business in this state and, if that borrower is
subject to income or franchise tax in this state or any
other state, that borrower has paid to this state for the
most recent tax year income or franchise tax of at least
$50,000 or one-half of its total income or franchise tax
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liability to all states, whichever is less. 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 shall have its or
their principal place of business in this state;
iii) The borrower of the bond proceeds or a controlled
group of which it is a member has at least 50 full-time
equivalent employees in this state;
iv) The borrower of the bond proceeds or a controlled
group of which it is a member has paid to this state for
the most recent tax year income or franchise tax of at
least $100,000; or,
v) In the case of the financing of one or more
multifamily rental housing projects, the developer of
that project or projects has its principal place of
business in this state, and any such developer subject to
personal or corporate income tax in California or other
states has paid to this state for the most recent tax
year income or franchise tax of at least $50,000 or
one-half of its total income or franchise tax liability
to all states, whichever is less; and,
e) The JPA authorizes the issuance of the bonds in a public
meeting subject to the Ralph M. Brown Act (Brown Act) or
the Bagley-Keene Open Meeting Act (Bagley-Keene Act), as
those acts are applicable to any member of the JPA,
including any applicable public notice requirement.
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2)Requires the finding required by 1)d), above, to be conclusive
and incontestable 30 days following the adoption of a
resolution of the JPA containing this finding.
3)Prohibits proceeds of bonds issued, pursuant to this bill,
other than those amounts required to pay bond issuance or
administration fees of the JPA, from being used to finance any
working capital of the JPA.
4)Provides that the interest on bonds issued, pursuant to this
bill, shall not be exempt from income taxation, and shall be
included in gross income under the state's personal income tax
law and corporation income tax law, as specified.
5)Requires any JPA created, pursuant to the Joint Exercise of
Powers Act (JPA Act), to comply with the California Public
Records Act (CPRA), the Brown Act, and the Bagley-Keene Act,
to the extent those acts are applicable to any member of the
JPA, and states that this provision is declaratory of existing
law.
6)Prohibits any JPA created, pursuant to the JPA Act, from
utilizing any funds derived from bonds issued, pursuant to 1),
above, as that provision of law read on the effective date of
this bill, for political purposes, including, but not limited
to, lobbying.
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7)Requires, on or before January 1, 2021, the Legislative
Analyst to prepare and submit to the Legislature a report on
the issuance of bonds and the financing of projects, pursuant
to 1) through 3), above. No later than July 1, 2020, JPAs
that issue bonds, pursuant to 1) through 3), above, shall
provide information concerning those bonds, the projects
financed, the public benefits accruing to this state, and such
other information requested by the Legislative Analyst's
Office (LAO) for the purpose of preparing the report. The
report may include recommendations for modifying or extending
the application of 1) through 3), above.
8)Provides that this bill is an urgency statute necessary for
the immediate preservation of the public peace, health, or
safety within the meaning of Article IV of the Constitution
and shall go into immediate effect. The facts constituting
the necessity are:
In order to timely provide essential bonding authority for
the funding of multistate, public-private projects that are
necessary to ensure California's national and international
competitiveness and public benefits in this state, it is
necessary that this act take effect immediately.
9)Provides the following definitions:
a) "Controlled group" means a group of corporations,
partnerships, limited liability companies or other persons
that are wholly owned or controlled by a single
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corporation, partnership, limited liability company, or
other person;
b) "Developer" means 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 undertakes the development
or rehabilitation of the project;
c) "Financing" shall include refinancing of bonds of the
JPA or of bonds issued by any other state or local entity
located within this state;
d) "Issue" shall have the same meaning as in United States
Treasury Regulations Section 1.150-1(c), as in effect on
July 1, 2014;
e) "Net proceeds of an issue" means the aggregate principal
amount of that issue, less the amount of that issue
allocated to original issue discount, issuance costs,
reserve funds, and credit enhancement costs; and,
f) "Principal place of business" of an entity means the
principal place from which the trade or business of the
entity is directed or managed.
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EXISTING LAW:
1)Allows, pursuant to the JPA Act, two or more public agencies
by agreement to jointly exercise any power common to the
contracting parties, as specified, if authorized by their
legislative or other governing bodies.
2)Allows JPAs to issue bonds, including, at the option of the
JPA, bonds bearing interest, to pay the cost of any public
capital improvement, working capital, or liability or other
insurance program. In addition, for any purpose for which a
JPA may execute and deliver or cause to be executed and
delivered certificates of participation in a lease or
installment sale agreement with any public or private entity,
the JPA, at its option, may issue or cause to be issued bonds,
rather than certificates of participation, and enter into a
loan agreement with the public or private entity.
3)Allows JPAs to issue revenue bonds for specified purposes and
provides that these bonds and the interest thereon or income
therefrom are exempt from all taxation in this state other
than gift, inheritance and estate taxes.
4)Establishes the Marks-Roos Local Bond Pooling Act of 1985
(Marks-Roos), which finds and declares that:
a) There is a critical need within the state to expand,
upgrade, and otherwise improve the public capital
facilities of local government necessary to support the
rehabilitation and construction of residential and economic
development; and,
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b) It is the intent of the Legislature to assist in the
reduction of local borrowing costs, help accelerate the
construction, repair, and maintenance of public capital
improvements, and promote greater use of existing and new
financial instruments and mechanisms, such as bond pooling
by local agencies.
5)States, pursuant to Marks-Roos, that it is the Legislature's
intent that Marks-Roos be used to assist local agencies in
financing public capital improvements, working capital,
liability and other insurance needs, or projects whenever
there are significant public benefits for taking that action.
For the purposes of Marks-Roos, "significant public benefits"
means any of the following benefits to the citizens of the
local agency:
a) Demonstrable savings in effective interest rate, bond
preparation, bond underwriting, or bond issuance costs;
b) Significant reductions in effective user charges levied
by a local agency;
c) Employment benefits from undertaking the project in a
timely fashion; or,
d) More efficient delivery of local agency services to
residential and commercial development.
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6)Provides that a JPA, or any entity acting on behalf of or for
the benefit of a JPA, may not authorize bonds to construct,
acquire, or finance a public capital improvement, except as
specified, unless all of the following conditions are
satisfied with respect to each capital improvement to be
constructed, acquired, or financed:
a) The JPA reasonably expects that the public capital
improvement is to be located within the geographical
boundaries of one or more local agencies of the JPA that is
not itself a JPA;
b) A local agency that is not itself a JPA, within whose
boundaries the public capital improvement is to be located,
has approved the financing of the public capital
improvement and made a finding of significant public
benefit in accordance with the criteria specified in 5),
above, after a public hearing held by that local agency
within each county or city and county where the public
capital improvement is to be located after notice of the
hearing is published once at least five days prior to the
hearing in a newspaper of general circulation in each
affected county or city and county. If the public capital
improvement to be financed will provide infrastructure,
services, or a golf course to support, or in conjunction
with, any development project, the local agency for
purposes of this requirement shall be the city, county, or
city and county with land use jurisdiction over the
development project; and,
c) A notice with specified contents is sent by certified
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mail at least five business days prior to the hearing held,
pursuant to b), above, to the Attorney General and to the
California Debt and Investment Advisory Commission (CDIAC),
with specified exceptions.
7)Provides exemptions to 6), above, for bonds issued to finance:
the undergrounding of utility and communication lines;
facilities for the generation or transmission of electrical
energy for public or private uses, as specified; facilities
for the production, storage, transmission, or treatment of
water, recycled water, or wastewater; public school
facilities; and, public highways located within the
jurisdiction of a JPA, as specified.
8)Requires, pursuant to Marks-Roos, interest earned on any bonds
issued by a JPA to be free from state personal income tax and
corporate income tax.
9)Provides, pursuant to California's Revenue and Taxation Code,
that income which this state is prohibited from taxing
includes interest on bonds issued by this state or a local
government in this state.
10)Provides, pursuant to the California Constitution, that
interest on bonds issued by the state or a local government in
the state is exempt from taxes on income.
11)Exempts, pursuant to federal tax law, state taxation of
interest on federal bonds if the interest on state obligations
is exempt from tax.
FISCAL EFFECT: According to the Senate Appropriations
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Committee, pursuant to Senate Rule 28.8, negligible state costs.
COMMENTS:
1)Bill Summary. This bill seeks to allow California JPAs to
finance private projects located outside the state. The major
provisions of this bill include the following:
a) A new, significant authority for California JPAs to
issue bonds for the financing
of out-of-state projects that are privately owned, developed
or operated;
b) A requirement that the city, county, or other public
body with land use planning authority over the project, or
the state in which the project is situated approve the bond
issuance and the financing by resolution, order, or other
official action;
c) A requirement that the JPA finds that the bond issuance
or the financing or refinancing will result in a
substantial public benefit to this state because one or
more of the following is satisfied:
i) At least 20% of the net proceeds of the issue are
allocated to the financing of one or more projects,
including working capital, located in this state;
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ii) The borrower of the bond proceeds has its principal
place of business in this state and, if that borrower is
subject to income or franchise tax in this state or any
other state, that borrower has paid to this state for the
most recent tax year income or franchise tax of at least
$50,000 or one-half of its total income or franchise tax
liability to all states, whichever is less. 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 shall have its or
their principal place of business in this state;
iii) The borrower of the bond proceeds or a controlled
group of which it is a member has at least 50 full-time
equivalent employees in this state;
iv) The borrower of the bond proceeds or a controlled
group of which it is a member has paid to this state for
the most recent tax year income or franchise tax of at
least $100,000; or,
v) In the case of the financing of one or more
multifamily rental housing projects, the developer of
that project or projects has its principal place of
business in this state, and any such developer subject to
personal or corporate income tax in California or other
states has paid to this state for the most recent tax
year income or franchise tax of at least $50,000 or
one-half of its total income or franchise tax liability
to all states, whichever is less.
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d) A provision stating that income on bonds issued,
pursuant to the bill, is not exempt from taxation, but
shall be included in gross income under the state's
personal and corporate income tax laws.
e) A requirement that the LAO submit a report to the
Legislature on the implementation
of the bill; and,
f) An urgency clause.
This bill is sponsored by the California Municipal Finance
Authority (CAMF) and the Independent Cities Finance Authority
(ICFA).
2)Author's Statement. According to the author, "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
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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."
3)Joint Exercise of Powers Act. JPAs have existed in California
for nearly 100 years, and were originally created to allow
multiple local governments in a region to pool resources to
meet common needs. The JPA Act authorizes state and local
agencies to create and use a joint powers agreement, which is
a legal document that allows the contracting parties to
exercise powers that are common to all of the contracting
parties. A joint powers agreement can be administered by one
of the contracting agencies, or it can be carried out by a
new, separate public entity. Joint powers agreements are an
attractive tool for local governments because they facilitate
more efficient service provision through collaboration, and
they allow local entities to issue bonds without voter
ratification.
4)Marks-Roos Bond Pooling. Marks-Roos provides JPAs with broad
powers to issue bonds for a wide variety of purposes, and was
established to facilitate local bond pooling and allow local
agencies to achieve reduced issuance costs. Marks-Roos bonds
may only be issued by JPAs, and JPAs issuing bonds under
Marks-Roos need not follow other bond act requirements in the
issuance of bonds, such as voter approval. Marks-Roos bonds
are bonds of the issuing JPA, not bonds of the member
agencies. As such, the JPAs member agencies are not liable or
otherwise obligated on the bonds, unless they expressly agree
to assume such liability.
Marks-Roos bonds are issued to assist local agencies with
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their financing needs. "Local agencies" are defined to
include the sponsoring member of the JPA or any city, county,
city and county, authority, district, or public corporation of
the state.
In order to use the Marks-Roos Act, the local agency for which
the bonds are being issued must determine that there are
significant public benefits for taking that action.
"Significant public benefits" are defined to mean:
a) Demonstrable savings in effective interest rate, bond
preparation, bond underwriting, or bond issuance costs;
b) Significant reductions in effective user charges levied
by a local agency;
c) Employment benefits from undertaking the project in a
timely fashion; or,
d) More efficient delivery of local agency services to
residential and commercial development.
These determinations are typically made by resolution of the
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local agency's legislative body when the local agency approves
the financing.
In addition, Marks-Roos states that a JPA may not issue bonds,
unless a member of the JPA within whose boundaries the public
capital improvement is to be located has approved the
financing, among other things. This requirement provides a
"nexus" between the members
of the JPA and the project.
Marks-Roos bonds may be issued to directly pay the cost of
public capital improvements. Direct financing of these
improvements generally takes the form of bonds issued by the
JPA and secured by payments to be made under a loan agreement,
installment purchase agreement, or lease between the JPA and
the local agency that is paying for the project.
In this type of arrangement, the JPA acts as a conduit issuer
for the local agency and has no obligation on the bonds other
than to make payment from the payments made by the local
agency, pursuant to the underlying agreement between the JPA
and the local agency. The source of revenues for the
underlying agreement with the local agency can vary greatly
and will determine which type of agreement is used.
5)Restrictions on Marks-Roos. SB 147 (Kopp), Chapter 35,
Statutes of 1998, enacted many of the restrictions on the use
of Marks-Roos after CDIAC found that some JPAs (called
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"roving" or "remote" JPAs) were using their Marks-Roos
authority to finance projects, such as golf courses and
casinos, outside their member agencies' jurisdictions in order
to collect fees. These types of financing arrangements are
known as "land-based'' bond deals and, in some cases, were
financing wholly private projects.
According to an analysis of SB 147 by the Senate Local
Government Committee, "To make sure that remote JPAs don't
finance speculative projects within another agency's
jurisdiction, SB 147 requires greater participation from the
agencies whose territory will include the projects or
services. To ensure that the projects benefit the public, SB
147 requires the sponsoring agency to find that a project will
promote the public interest. By placing new restrictions on
remote project financing, SB 147 will help ensure that
communities don't get stuck with unwanted, or financially
shaky, projects (emphasis added)." Requiring the public
agency to make the public benefit determination was in keeping
with an informal opinion issued by the Attorney General in
1996.
In addition, according to CDIAC, the sponsor of SB 147, there
is not adequate oversight over a project or its financing
without a geographic connection. CDIAC asserted that
requiring a project to be located within the boundaries of a
member agency of the JPA provides more public accountability
for land-based bond deals.
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6)Previous Legislation. AB 2046 (Gomez) of 2014 was similar to
this bill. AB 2046 was held in the Senate Appropriations
Committee.
SB 188 (Negrete McLeod) of 2007 declared that a JPA formed by
an existing JPA with more than 450 members and any public
agency in another state has the same powers as a JPA under the
Act, including Marks-Roos. SB 188 also declared that any
provisions of the Act that limit the location of projects,
financing, or other activities to California do not apply to
this type of JPA. SB 188 required, before this type of JPA
could issue bonds for a project or other activity, the
governmental agency with primary responsibility over land use
project approval to approve the project and the use of this
JPA to finance the project. SB 188 also required this type of
JPA to submit an annual report to CDIAC detailing its
projects, financings, and activities. SB 188 was sponsored by
the California Statewide Communities Development Authority
(CSCDA) in an attempt to expand its tax-exempt operations into
other states.
An analysis of SB 188 by the Senate Local Government Committee
notes, "The public finance industry is becoming a nationwide
enterprise and CSCDA wants to maintain its leadership position
by becoming a multi-state bond issuer and lender. Although
the Joint Exercise of Powers Act already allows other states'
public agencies to join a JPA, the Marks-Roos Act imposes
additional limits on membership and the location of projects.
To help CSCDA maintain its leadership in the tax-exempt bond
markets and expand into other states, SB 188 exempts this type
of JPA from any provision of the Joint Exercise of Powers Act
that might limit its activities to California."
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The CSCDA is operated by HB Capital Resources Ltd, a private
firm that also operates the Wisconsin-based Public Finance
Authority, one of several out-of-state conduit issuers that
operates nationwide. SB 188 was held in the Senate
Appropriations Committee.
7)CMFA and ICFA. According to its website, "The CMFA mission is
to support economic development, job creation and social
programs throughout the State of California while giving back
to California communities. By supporting our member
communities and their local charities with a portion of the
revenue generated through the issuance of taxable and
tax-exempt bonds for public, private and non-profit entities,
the CMFA is able to directly contribute to the health and
welfare of the residents of California.
"The CMFA shares 25% of all issuance fees directly with its
member communities. In addition, a grant equal to 25% of the
issuance fee is made to the California Foundation for Stronger
Communities to fund charities designated by the member
communities. A portion of the annual fees received by the
CMFA will also be directed to charitable activities within
California communities. This unique commitment to 'give back'
directly to the communities in which we operate sets the CMFA
apart."
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According to its website, "The Independent Cities Finance
Authority is an unaffiliated Joint Powers Authority (JPA) with
the ability to help cities achieve their goals. Since its
inception in 1988, ICFA has assisted in funding over $500
million in critical community projects, from hospitals, to
charter schools, municipal utilities to housing for low and
moderate-income families and seniors. ICFA is well positioned
outside of laborious bureaucracies. Our bonds are issued
quickly, often providing essential financing for projects that
would falter without it. ICFA helps cities to achieve their
finance requirements efficiently?"
CMFA and ICFA are not required by law to make charitable
contributions.
8)Policy Considerations: This bill raises a number of questions
the Committee may wish to consider:
a) Expanding the Purpose of JPAs. Is it appropriate to
expand the authority of California JPAs to allow the
issuance of bonds for private projects that are located
outside California, given the original intent of the JPA
Act and Marks-Roos?
b) Severing the Geographical Nexus. This bill severs the
geographical nexus between the bond-issuing JPA and the
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jurisdiction in which the local agency project is located.
Are there appropriate safeguards in the bill to ensure
oversight of and accountability for these financed
projects?
c) Substantial Public Benefit: Criteria. This bill's
criteria for a "substantial public benefit" is different
from the criteria for a "significant public benefit" in
existing law, pursuant to Marks-Roos. The Committee may
wish to consider whether the public benefits identified in
this bill are sufficient to merit the new authority this
bill grants California's JPAs.
d) Substantial Public Benefit: Who Decides? This bill
allows the bond-issuing JPA to determine the "substantial
public benefit" to this state, rather than the local
jurisdiction in which the project will be located. Does
this give the local agency enough oversight over these
projects? Is there an inherent conflict of interest in
vesting this decision with the entity that stands to
benefit financially from such a determination? Would it be
more prudent for a financially disinterested party to make
this finding?
e) Approval in Public Meetings. While this bill requires
the California JPA to authorize the issuance of bonds in a
public meeting, it doesn't require a public meeting when
the out-of-state jurisdiction approves projects financed by
California JPAs. It only requires this approval to be
accomplished "by resolution, order, or other official
action of the city, county, or other public body with land
use planning authority over the project, or of the state in
which the project is situated." Is this sufficient public
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involvement for the jurisdictions in which these projects
will be located?
f) Refinancing. This bill states that the approval process
required by the bill "does not apply to the issuance of
refunding bonds if a prior financing or refinancing of the
project was approved by the city, county, public body, or
state." This would appear to allow California JPAs to
engage in re-financings without any "official action" of
the out-of-state jurisdiction. Is this a policy the
Committee wishes to support?
g) Tax Exemption. This bill provides that the interest on
bonds issued, pursuant to the bill, is not exempt from
income taxation, and shall be included in gross income
under the state's personal and corporate income tax laws.
However, the California Constitution provides that interest
on bonds issued by the state or a local government in the
state is exempt from taxes on income. In instances where
the State Constitution and local laws conflict, the
Consitution generally prevails. The Committee may wish to
consider the implications of this contradiction.
9)Urgency clause. This bill contains an urgency clause. The
Committee may wish to consider asking the author to explain
the need for an expedited process for this bill.
10)Arguments in support. The California Municipal Finance
Authority, co-sponsor of this measure, states, "The public
benefits to California for assisting in the financing of
multi-state and out-of-state projects include, among others,
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(i) time, efficiency, cost savings and employment or
headquarters in California, (ii) creating the perception that
California is friendly to private enterprise, (iii) putting
California-based public finance professionals (including
commercial lenders, underwriters, financial advisors,
attorneys and others) on an even footing to compete with
public finance professionals based in other states, and (iv)
in the case of certain JPAs, generating substantial
contributions to California charitable organizations for the
express purpose of benefitting California communities."
11)Arguments in opposition. None on file.
12)Double-Referral. This bill is double-referred to the Revenue
and Taxation Committee.
REGISTERED SUPPORT / OPPOSITION:
Support
California Municipal Finance Authority [CO-SPONSOR]
Independent Cities Finance Authority [CO-SPONSOR]
Opposition
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None on file
Analysis Prepared by:Angela Mapp / L. GOV. / (916)
319-3958