BILL ANALYSIS
Bill No: AB
1009
SENATE COMMITTEE ON GOVERNMENTAL ORGANIZATION
Senator Roderick D. Wright, Chair
2009-2010 Regular Session
Staff Analysis
AB 1009 Author: V. Manuel Perez
As Amended: September 4, 2009
Hearing Date: October 14, 2009
Consultant: Art Terzakis
SUBJECT
Bonds
DESCRIPTION
AB 1009 is an urgency measure that makes substantive
changes to the California Industrial Development Financing
Act of 1980 so that California can take advantage of
certain provisions of the federal stimulus bill.
Specifically, this measure:
(1) Expands the permissible projects to include those
that create or produce "intangible" products as well
as traditional tangible products;
(2) Provides a uniform mechanism for the issuance of
Recovery Zone Facility Bonds (RZFBs) by all cities and
by counties (and by 'on-behalf-of' entities if
permitted) and for a means by which the state can
confirm compliance with the American Recovery and
Reinvestment Act of 2009 (ARRA) and collect data on
the projects funded by these types of Private Activity
Bonds (PABs); and,
(3) Provides a means whereby the California Industrial
Development & Financing Advisory Committee (CIDFAC)
can receive grant funds or other moneys, from
ARRA-initiated program or other sources, for the
purpose of offsetting the costs of issuing Industrial
Development Bonds (IDBs), thereby making this
AB 1009 (V. Manuel Perez) continued
Page 2
financing mechanism more economically accessible to
California businesses.
EXISTING LAW
Existing law establishes in state government the California
Debt Limit Allocation Committee (CDLAC), with duties that
include annually determining a state ceiling on the
aggregate amount of private activity bonds that may be
issued, and allocating that amount among state and local
agencies. Existing law defines the term "state ceiling" for
those purposes with regard to an amount specified in
federal law.
Existing law, the California Industrial Development
Financing Act, authorizes cities, counties, cities and
counties, and redevelopment agencies to establish
industrial development authorities that are authorized to
issue IDBs, the proceeds of which may be used to fund
capital projects of private enterprise under terms and
conditions specified in the act.
BACKGROUND
Federal Law: Federal law limits how much tax-exempt debt a
state can issue in a calendar year, with the cap determined
by a population-based formula. CDLAC was created to set and
allocate California's annual debt ceiling, and administers
the tax-exempt bond program to issue the debt.
The primary objective of the California Industrial &
Financing Advisory Committee (CIDFAC) is to provide
manufacturers in California with an alternative, low-cost
source of funds to finance capital expenditures. To this
end, CIDFAC reviews the public benefits generated by a
project, particularly job creation, and determines whether
these benefits will significantly outweigh any detrimental
public effects from the project. In addition, CIDFAC
maintains a statewide perspective to ensure that one entity
of the state is not adversely affected by the issuance of
IDBs by another jurisdiction.
The American Recovery and Reinvestment Act (ARRA) of 2009
included two new federal tax credits available to states
and local governments: (1) Recovery Zone Bonds and (2)
Qualified Energy Conservation Bonds. There are two types of
AB 1009 (V. Manuel Perez) continued
Page 3
Recovery Zone Bonds: (1) Recovery Zone Economic Development
Bonds (RZEDBs) and (2) Recovery Zone Facility Bonds
(RZFBs). Both are for public infrastructure to promote
economic activity, job training and educational programs in
a designated "recovery zone" area. The nationwide volume
cap for the RZEDBs is $10 billion and RZFBs is $15 billion,
with approximately $806 million of RZEDBs and $1.21 billion
of RZFBs going to California's cities and counties.
The Qualified Energy Conservation Bonds are for projects
that reduce energy consumption including automotive battery
technologies that reduce reliance on fossil fuel, renewable
energy resources and green community programs. California's
allocation of the QECBs is $381 million of the $3.2 billion
nationwide volume cap.
Purpose of AB 1009: According to the State Treasurer's
Office the tax credit bonds will be allocated to states
based on a formula laid out in the ARRA. The state is then
to reallocate the funds to local cities and counties. There
is currently not an authority to administer the new tax
credit bonds, and CDLAC needs statutory language to be able
to administer the funds. AB 1009 would expand the
definition of "state ceiling" to include the Recovery Zone
Bonds and the Qualified Energy Conservation Bonds that were
made available to states and local governments through
ARRA.
CIDFAC provides manufacturers in California with an
alternative, low-cost source of funds to finance capital
expenditures. ARRA broadened the definition of
'manufacturing facility' to include facilities that are
used in the creation or production of intangible property
(i.e., patents, copyrights, formulas, processes, designs,
know-how, and other similar items) and created a new type
of bond called the Recovery Zone Facility Bonds (RZFBs) to
promote economic activity in designated "recovery zone"
area . This bill would amend CIDFAC's statute to reflect
these aspects of ARRA which would include "intangible"
property in the "manufacturing facility" definition and
allow the Authority to issue RZFBs. These changes permit
CIDFAC to provide low-cost financing to many more companies
in California, which will increase employment or otherwise
contribute to economic development.
Detailed analysis of proposed changes by Section
AB 1009 (V. Manuel Perez) continued
Page 4
(Government Code):
Section 91501 : The changes in this preamble language
amends the original intent to reflect the fact the federal
stimulus bill broadens the definition of 'manufacturing
facility' for the purposes of IDB financing to include
facilities that are used in the creation or production of
intangible property (i.e., patents, copyrights, formulas,
processes, designs, know-how, and other similar items). By
broadening the definition in this way, the IDB financing
tool is now available to a variety of businesses (e.g.,
software manufacturer, R&D facilities for biotech or
pharmaceutical companies, etc.) as well as traditional
manufacturers of tangible products. The changes also
clarify the types of public benefits derived from the
issuance of IDBs (e.g., including both the creation and
retention of jobs) and those expected from the issuance of
RZFBs (e.g., general economic development).
Section 91502 : By adding the phrase "including equipment
and furnishings" to this and other sections in the
Industrial Development Act (IDA), CIDFAC staff clarifies
that 'facilities' as used in relevant federal tax law
refers to buildings, land, equipment, furnishings, etc.
Also, the ARRA eliminates the 'ancillary facilities'
restrictions in federal tax law and thereby authorizes the
use of IDB proceeds to finance any assets that are
"functionally related and subordinate" to a manufacturing,
research & development, or production facility, provided
that such assets must be located on the site of the core
facility. This proposed change in the IDA accommodates the
elimination of these restrictions.
Section 91502.1(b)(4) : This change reflects the broader
public benefits expected of RZFBs.
Sections 91503(a)(4) & (6) and (b)(2), (3), and (4) : The
change in Section (a)(4) adds commercial uses within a
recovery zone as one of the "activities or uses" for bonds
issued under the IDA. By making this change, RZFBs can be
issued by local industrial development authorities,
redevelopment agencies, cities, and counties. This change
essentially adds RZFBs to the list of the PABs (including
IDBs, empowerment zone bonds, etc.) that are authorized
under the IDA.
AB 1009 (V. Manuel Perez) continued
Page 5
The changes in Section (a) (6) allows bonds authorized
under the IDA to be used to finance facilities that create
or produce intangible property, which accommodates the
expanded definition of 'manufacturing facility' in ARRA.
The changes in Sections (b) (2), (3), and (4) address the
fact that RZFBs can be issued to finance a broader group of
private activity facilities than IDBs. In other words,
RZFBs can be used for an array of private activity projects
recognized under federal tax law. The exceptions are that
RZFBs cannot be used to finance housing projects or any of
the 'sin' projects enumerated in federal tax law (e.g.,
golf courses, country clubs, massage parlors, hot tub
facilities, suntan facilities, racetracks, liquor stores,
etc.).
Sections 91504 (h) and (i)(1) & (6)et al : The change in
(h) simply clarifies that limited liability companies
(LLCs) can act as borrowers for IDBs, empowerment zone
bonds, and RZFBs. The reference to 'rehabilitation' in
(i)(1) & (6) and elsewhere in the CIDFAC statute clarifies
that IDB, empowerment zone bond, and RZFB proceeds can be
used to rehabilitate and renovate existing facilities.
Section 91504(n) : The change in the definition of
'project' clarifies the range of possible capitol
expenditures to which IDB, empowerment zone bond, and RZFB
proceeds may be applied.
Section 91527 (n) : By adding the reference to costs of
issuance here and elsewhere in the IDA, CIDFAC will be able
to award to issuers any possible grant funds or other
moneys, available as the result of passage of the ARRA or
from other sources, it may receive to offset borrowers'
costs associated with the issuance of IDBs. Such
assistance with the cost of issuance will make IDBs a more
economically feasible finance vehicle for California
businesses. [See Section 91571(f) et al.]
Sections 91530(c) and 91531(b)(1) : Adding references to
equipment in these sections clarifies the fact that, under
pertinent federal tax law, 'facilities' refers to
buildings, land, machinery, equipment, etc. Under the IDB,
empowerment zone bond, and RZFB programs, bond proceeds may
be used for equipment purchases (and often times a project
consists of the purchase of equipment only).
AB 1009 (V. Manuel Perez) continued
Page 6
Section 91531(c) : This provision allows the Commission to
review RZFB transactions based upon the general economic
development criteria referenced in the ARRA and to
authorize the issuance of RZFBs based upon confirmation
that the project is in compliance with the ARRA. By doing
so, the Commission will be able to provide issuers with
state-level review aimed at ensuring the projects meet the
intent of the ARRA provisions for RZFBs and the Governor's
Office with RZFB project information.
Section 91538(b) : There is no need for CIDFAC's statute to
set issuance parameters such as the maximum tax-exempt bond
amounts as that is covered in federal tax law. Note that
there are efforts at the federal level to increase the
maximum IDB amount from $10 million to $20 million and, if
and when this change in federal tax law is implemented,
CIDFAC staff wants to ensure the IDA will not prevent
California's businesses from taking advantage of the
change. Also, there is no cap on the par amount of
tax-exempt RZFBs, and therefore this change accommodates
this feature of the ARRA.
With respect to the par value of taxable bonds, CIDFAC's
experience is that IDBs may be issued with a "taxable tail"
that is significantly less than the tax-exempt portion. In
these cases, the economics of the transactions are such
that it makes sense from a practical standpoint for the
borrowers to combine their taxable borrowings with their
tax-exempt borrowings. In other words, it makes more sense
for the borrower to seek one, combined loan in a single
transaction on the municipal market than it does for it to
initiate another loan transaction in the private market.
Section 91555(a) : The addition of "state agencies" and the
elimination of the reference to "industrial development
bonds" are for the purposes of (1) accommodating the
possibility that state agencies (e.g., the I-Bank) may be
able to act as pooling agent or as 'on-behalf-of' entities
for cities and counties wishing to issue RZFBs and (2)
removing the reference to CIDAFC's activities related only
to IDBs, thereby recognizing CIDFAC's role with respect to
empowerment zone bonds and RZFBs, two other types of PABs
that have economic development impacts.
Section 91571(f) : The addition of this provision permits
AB 1009 (V. Manuel Perez) continued
Page 7
CIDFAC to receive grant funds and other moneys, from
programs established by the ARRA or from other sources, for
the purpose of awarding these funds to issuers of IDBs to
offset the costs of issuing the bonds incurred by the
borrowers. By providing this type of financial assistance,
IDB financing will be a more economically accessible form
of financing for California's businesses. This provision
is consistent with the goals highlighted in CIDFAC's
strategic plan, which was adopted by the Commission on
September 24, 2008.
Section 91573(a)(2) : This provision clarifies that the
$350,000,000 volume cap for IDBs does not apply if the
funds are part of ARRA. This ARRA related financing
sunsets on December 31, 2010.
SUPPORT: State Treasurer's Office
OPPOSE: None on file.
FISCAL COMMITTEE: Senate Appropriations Committee
**********