BILL ANALYSIS                                                                                                                                                                                                    Ó



          SENATE COMMITTEE ON APPROPRIATIONS
                             Senator Ricardo Lara, Chair
                            2015 - 2016  Regular  Session

          SB 1329 (Hertzberg) - Property taxation:  certificated aircraft
          
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          |Version: April 26, 2016         |Policy Vote: GOV. & F. 5 - 0,   |
          |                                |          JUD. 4 - 2            |
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          |Urgency: No                     |Mandate: Yes                    |
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          |Hearing Date: May 16, 2016      |Consultant: Robert Ingenito     |
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          This bill may meet the criteria for referral to the Suspense  
 
          File.



          Bill  
          Summary: SB 1329 would (1) extend for five years the existing  
          methodology for valuing certificated aircraft, excluding a 10  
          percent fleet reduction discount, and (2) permit trial de novo  
          for suits for refunds of locally-assessed property taxes on  
          certificated aircraft.

          Fiscal Impact: The aggregate fiscal impact of this bill is  
          unknown and subject to considerable uncertainty. First, the  
          bill's removal of the 10 percent fleet reduction discount would  
          increase revenue by an unknown amount, up to several million  
          dollars annually. Next, the bill's extension of "trial de novo"  
          provisions to property tax refund litigation involving  
          certificated aircraft could lead to court-determined property  
          tax reductions of an unknown amount that potentially exceed the  
          aforementioned revenue increase. Changes in local property tax  







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          revenues, in turn, affect General Fund Proposition 98 spending  
          by up to roughly 50 percent (the exact amount depends on the  
          specific amount of the annual Proposition 98 guarantee, which in  
          turns depends upon a variety of economic, demographic and  
          budgetary factors. Ultimately, the bill could result in an  
          increase or a decrease in annual General Fund spending through  
          2021-22 relative to current law (See Staff Comments).

          Finally, the Board of Equalization (BOE) would incur minor and  
          absorbable costs related to updating publications and its  
          internet site, and possible witness subpoenas or amicus briefs  
          related to litigation over valuation issues as a result of the  
          bill.


          Background: All property, real and personal, is subject to property tax,  
          unless a specific constitutional or statutory exemption applies.  
          The Constitution limits the maximum amount of any ad valorem tax  
          on real property at 1 percent of full cash value, and precludes  
          reassessment unless the property is newly constructed or changes  
          ownership; in contrast, county assessors value personal  
          property, such as certificated aircraft, annually. The  
          Legislature first directed county assessors in 1850 to tax  
          property; however, assessors in different counties often applied  
          different tax rates and methods of assessment. The  
          inconsistencies were especially acute between counties dominated  
          by mining and agriculture. As a response, the California  
          Constitution of 1879 created BOE to equalize property tax rates  
          and assessment practices among counties. In 1910, voters amended  
          the Constitution to direct BOE to tax certain property that  
          crossed county lines, including that owned by railways, firms  
          selling gas and electricity, or telephone companies.  The taxes  
          were exclusively levied for state purposes on a gross receipts  
          taxation basis. In 1933, the constitution was amended again and  
          the 'in lieu" gross receipts taxation on public utilities was  
          substituted with the ad valorem assessment by BOE that was  
          allocated to the local jurisdictions according to situs. 
          Valuing Certificated Aircraft. Generally, assessors value  
          business personal property, such as aircraft, by multiplying the  
          taxpayer's cost of acquiring it by an inflation adjustment to  
          estimate the cost to replace the property at current market  
          prices. This "reproduction cost new" is then multiplied by a  
          "percent good factor" (a depreciation factor) to provide an  
          estimate of the depreciated reproduction cost of the property,  








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          which becomes the taxable value of the property for the fiscal  
          year.  


          Certificated aircraft used by air carriers is subject to  
          property tax when in revenue service in the State. Assessors may  
          only value certificated aircraft (defined as aircraft operated  
          by a domestic or foreign air carrier engaged in passenger or  
          fleet service) with "situs" in California on a fleet basis. This  
          means that the assessed value basis is not the value of any  
          single aircraft owned by an air carrier, but rather the value of  
          all aircraft of each type that is flown into the State. Aircraft  
          regularly fly in and out of California and the various  
          California counties with major airports; typically no single or  
          particular aircraft remains located in the State on a permanent  
          basis. Under the "fleet" concept, aircraft types that have  
          gained situs in California by their entry into revenue service  
          in this state are valued as a fleet, while only an allocated  
          portion of the entire fleet's value is ultimately taxed to  
          reflect actual presence in California's counties. For example,  
          assessors must value an airlines' entire A380 fleet if only one  
          enters the State, but doesn't value any of its 747's if none of  
          them do so, regardless of the total number or value of A380s or  
          747s the airline owns.  Once assessors calculate value, they  
          must apportion it among counties based on a weighted average of  
          (1) the fleet's ground and flight time (75 percent), and (2)  
          arrivals and departures (25 percent) measured only during the  
          "representative period," currently designated by BOE as one full  
          week in January, with the selected week varying.  This  
          apportioned fleet value is then multiplied by the appropriate  
          rate for the tax rate area in that county.


          Prior to January 1, 1999, California law did not specify an  
          assessment methodology for valuing certificated aircraft, or for  
          valuing the carrier's taxable possessory interest in the  
          publicly owned airport in which the aircraft operated. In  
          1997-98, a group of counties and air carrier industry  
          representatives met to resolve property tax issues associated  
          with air carrier-owned and -used property. The end result was a  
          written settlement agreement to dispose of outstanding  
          litigation and appeals over the valuation of airport possessory  
          interest assessments and certificated aircraft. The Legislature  
          codified the settlement agreement in a three-piece package:








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                 Aircraft Valuation Methodology and Monetary Settlement.  
               AB 1807 (Takasugi, Chapter 86, Statutes of 1998) outlined  
               the valuation procedures for certificated aircraft until  
               2003 and provided $50 million in tax credits against future  
               tax liabilities, as well as extensive uncodified  
               legislative findings and declarations.


                 Airport Possessory Interests. AB 2318 (Knox, Chapter 85,  
               Statutes of 1998) specified the assessment methodology for  
               valuing the air carrier's taxable possessory interest in  
               publicly-owned airports.


                 Tax Credits. SB 30 (Kopp, Chapter 87, Statutes of 1998)  
               added general purpose provisions to allow counties and  
               taxpayers to enter into written settlement agreements  
               granting taxpayers tax credits.





          In 2003, the agreement expired, and assessors again locally  
          valued aircraft without specific guidance from state law. In  
          2006, assessors and the airlines again agreed on a new valuation  
          methodology (AB 964, Horton, Chapter 699, Statutes of 2005), and  
          directed a "lead assessor" to value each airline's fleet.  
          Instead of filing property statements with each county, airlines  
          filed a single consolidated statement with a single assessor  
          designated by the Aircraft Advisory Subcommittee of the  
          California Assessors' Association, which rotates generally every  
          three years. AB 964 established categories for various types of  
          aircraft (passenger aircraft and freighter aircraft), and set  
          forth a valuation methodology for each. The bill also directed  
          the lead assessor to audit the airline every four years. The new  
          methodology provided that the aircraft value was the lesser of:


                 A historical cost basis, including transportation and  
               improvement costs, as well as capitalized interest, with  
               specific provisions for leased aircraft, aircraft in a  








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               sale/leaseback or assignment of purchase rights, or  
               aircraft acquired in bankruptcy, with specified  
               adjustments, or


                 10 percent off (for a fleet adjustment) on the wholesale  
               prices listed in the "Airliner Pricing Guide," If the APG  
               ceases to exist, BOE determines the guide or adjustment.  





          AB 964 also included an adjustment factor to account for  
          economic obsolescence, where assessors analyze the change in  
          three variables to determine whether larger economic forces are  
          diminishing the aircraft's value. To determine economic  
          obsolescence for mainline jets and regional aircraft, the  
          assessor calculates three factors for both the previous calendar  
          year and the past ten years: average net revenue per seat mile,  
          net load factor, and yield. The assessor then compares each  
          factor's previous calendar year value with its value for the  
          past ten years to determine the amount of difference. Next, the  
          assessor applies a weighted average of the indicated percentage  
          adjustments: net revenue per available seat mile (35 percent),  
          net load (35 percent), and yield (30 percent). The assessor must  
          reduce the original cost by the percentage, but only if the  
          final economic obsolescence exceeds 10 percent.  


          In 2009, AB 311 (Ma), as introduced, would have made the  
          valuation methodology and centralized provisions permanent and,  
          as amended, would have extended the effective date. However,  
          Governor Schwarzenegger vetoed the bill because one airline  
          disagreed with extending the valuation methodology, and the  
          timing of AB 964's sunset allowed another year for all the  
          parties to reach consensus. The Governor signed a similar bill  
          the following year (AB 384, Ma, 2010). AB 384 extended the lead  
          assessor model and the valuation methodology until 2015-16, but  
          differed from AB 311 by (1) replacing language specifying value  
          with a rebuttable presumption (previously, the  
          methodology-produced value was deemed to be the aircraft's fair  
          market value), (2) allowing the taxpayer to rebut the  
          presumption with appraisals, invoices, and expert testimony, and  








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          (3) allowing aircraft to be valued lower than the APG guide  
          value by capping an aircraft's value at its original cost. The  
          maximum value cap provision was added to appease the airline  
          that opposed AB 311 in the prior year. In calculating total  
          fleet values, this provision requires the county to substitute  
          the original price paid when it is lower than wholesale price  
          less 10 percent for any individual aircraft in the fleet. This  
          reduces the total fleet value for any airline able to purchase  
          new planes at deeper discounts.


          In 2015, the Legislature enacted AB 1157 (Nazarian), which  
          extended the sunset date of the lead county methodology by one  
          year, through 2016-17. Thus, under current law absent  
          legislation, beginning in 2017-18 each county would once again  
          value certificated aircraft based on its fair market value  
          without statutory guidance. 


          Trial De Novo.  Under current law, in a refund action for  
          locally assessed property taxes, where the issue is a question  
          of law, the taxpayer has a right to a trial de novo; the court  
          is able to receive and consider new evidence. However, where the  
          issue is a question of fact, the court is restricted to a review  
          of the assessment appeals board findings and decisions (i.e.,  
          the administrative record). With respect to factual issues, the  
          superior court's level of review is limited to determining  
          whether "substantial evidence" in the record exists to support  
          the appeals board's decision.


          Thus, taxpayers seeking to appeal an assessor's valuation of  
          locally-assessed property generally contact the assessor  
          initially informally to request a reconsideration of the value.  
          If this avenue proves unsuccessful, taxpayers begin the formal  
          appeal process (which can include a claim for refund) with the  
          county's board of equalization (i.e., the assessment appeals  
          board). For taxes on locally-assessed property, the Constitution  
          places the appellate authority for locally-assessed property  
          taxes with the county board of equalization, and requires this  
          appeals board to equalize the value of all property by adjusting  
          individual assessments. Seventeen county boards of supervisors,  
          primarily smaller counties, hear appeals directly, sitting as  
          the county board of equalization, while all other county boards  








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          of supervisors create one or more assessment appeals boards to  
          perform the quasi-judicial role to hold a hearing to determine  
          value of the taxpayer's property when there is a dispute.  
          Assessment appeals board members must complete a training  
          program, and possess five years' professional experience in  
          California as a certified public accountant or public  
          accountant, licensed real estate broker, attorney, or property  
          appraiser. However, in smaller counties, someone "possessed of  
          competent knowledge of property appraisal and taxation," can be  
          appointed by board of supervisor members without professional  
          experience.  


          Taxpayers who continue to disagree with the assessment appeal  
          board's value after the appellate process can file suit in  
          Superior Court within six months of the board's final  
          determination; however, for suits that aren't posing a question  
          of law, the court can only review the existing administrative  
          record to determine whether substantial evidence supports the  
          appeals board's decision, and cannot substitute its own  
          independent judgment.  In these cases, the trial court generally  
          acts as the appellate court, and only grants review for  
          "arbitrariness, abuse of discretion, or failure to follow the  
          standards prescribed by the Legislature," as they see the county  
          assessment appeals process as performing the same fact-finding  
          functions as trial courts.   


          In contrast, current law provides state assessees with a right  
          to a trial de novo in a suit for the refund of state-assessed  
          property taxes. In these refund actions, the trial court is not  
          restricted to a "substantial evidence" review of the  
          administrative record, but is required to consider all  
          admissible evidence relating to the valuation of the subject  
          property. This law requires the trial court to base its decision  
          on the "preponderance of the evidence" before it. In the case of  
          local-assessee refund actions, the courts are required to give  
          these cases special precedence.  However, in the case of  
          state-assessee actions seeking a refund of property taxes,  
          courts are not required to give precedence to these actions over  
          all other civil actions in the matter of setting for hearing or  
          trial, unless special precedence is granted by another section  
          of law.









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          Proposed Law:  
          This bill would extend for five fiscal years (through 2021-22)  
          the commercial air carrier administrative provisions (the  
          extension of the lead county methodology), otherwise set to  
          expire, with one exception: the removal of the provision that  
          allows a 10 percent fleet discount from the Airliner Price Guide  
          and a related adjustment for aircraft that is less than two  
          years old. Additionally, the bill would extend the current state  
          assessee "trial de novo" provisions to a suit for the refund of  
          locally assessed property taxes exclusively for commercial air  
          carriers. Specifically, the trial court "may not be restricted  
          to the administrative record, but shall consider all the  
          evidence relating to the valuation of the property admissible  
          under the rules of evidence. The court shall base its decision  
          upon the preponderance of the evidence." The bill would repeal  
          these trial de novo provisions on January 1, 2022, consistent  
          with the sunset of the aircraft assessment valuation methodology  
          and the lead county system. These airline-related suits would  
          not be given precedence in the court scheduling. 
          Related Legislation: Among other things, AB 2622 (Nazarian) also  
          proposes to extend the sunset date for the certificated aircraft  
          assessment methodology and lead county system. That bill extends  
          the provisions for three more fiscal years. The bill is  
          currently in the Assembly Appropriations Committee. 


          Staff Comments: BOE indicates that in 2015-16, counties reported  
          certificated aircraft valuation totaling $8.0 billion. Thus, at  
          the basic one percent property tax rate, local property tax  
          revenues were $80 million. The bill's removal of the 10 percent  
          fleet discount reduction would lead to an increase in assessed  
          valuation, and in turn, an increase in property tax revenue. The  
          magnitude of the increase, however, is unknown. The reason for  
          this is, to the extent that airlines exert monoposy power when  
          purchasing aircraft from manufacturers such as Boeing, it is  
          possible that they could negotiate a price below "the wholesale  
          price listed in the Airliner Price Guide less 10 percent". In  
          other words, they may make their purchases at a price such they  
          cannot take the full 10 percent discount that the bill proposes  
          to remove. Thus, the upper bound of the annual increase in  
          property tax revenue would be $8 million. 








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          The bill's extension of "trial de novo" provisions to property  
          tax refund litigation involving certificated aircraft would have  
          an unknown impact on aircraft assessments and resulting property  
          tax revenue. Because under trial de novo, the court shall  
          consider "all evidence," it is possible that the court would  
          determine an assessed value higher than what was determined by  
          the local assessor. More likely, however, the court could  
          determine assessed value to be lower than that calculated by an  
          assessor. Thus, the specific revenue impact of the bill's  
          proposed provisions relative to current practice (the lead  
          county system) cannot be determined. 


          However, under the rules of this Committee, the bill's revenue  
          impacts must be scored relative to current law, not current  
          practice. As was discussed previously, the lead county system  
          under current law is scheduled to sunset at the end of 2016-17.  
          Consequently, the Committee must compare the estimated revenue  
          impacts of the bill vis-à-vis what certificated aircraft  
          assessments and resulting property tax collections would be if  
          the lead county system expired and assessors instead resumed  
          valuing certificated aircraft based on its fair market value  
          without statutory guidance. Because total property tax revenue  
          under that regime is unknown, estimating the revenue impact of  
          this bill cannot be done with any degree of certainty.


          Likewise, because of the linkage between local property taxes  
          and General Fund Proposition 98 spending, the impact of this  
          bill on state spending is unknown.




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