BILL ANALYSIS
AB 1192
Page 1
Date of Hearing: May 6, 2009
ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT
Anna Marie Caballero, Chair
AB 1192 (Strickland) - As Amended: April 20, 2009
SUBJECT : Cities: powers.
SUMMARY : Prohibits a city's legislative body from selling or
leasing any existing public improvement to a private or public
entity for the purposes of renting or leasing back or
repurchasing through installment payments that existing public
improvement and declares this it is a statewide concern.
EXISTING LAW authorizes a city to purchase, lease, receive,
hold, and enjoy real and personal property and dispose of it for
the common benefit.
FISCAL EFFECT : None
COMMENTS :
1)The sponsor, the Howard Jarvis Taxpayer Association, states
that Section 18 of Article 16 of the California Constitution
prohibits cities and counties from incurring "any indebtedness
or liability in any manner or for any purpose exceeding in any
year the income and revenue provided for such year, without
the assent of two-thirds of the voters."
The sponsor says that, despite this requirement of voter
approval for the creation of any new indebtedness or liability
in any manner, local governments sometimes evade the voters'
right to approve new debt through a "lease-lease back" or
"sale-lease back." These financing procedures allow a city to
raise money by selling property and then leasing the property
back from the buyer. For example, a city might sell its city
hall to a council-controlled finance authority and then rent
the building from the finance authority. The finance
authority pays for the building by issuing bonds, using the
city hall as collateral. It pays back the bondholders with
the "rent" it collects from the city. Oxnard was able to fix
its streets by "selling" them to a finance authority.
According to the sponsor, this financing procedure is an
"indebtedness," and the new "rent" payments that service the
bonds are a "liability."
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2)One of the leading cases on the constitutionality of a
municipal lease is City of Los Angeles v. Offner (1942) (19
Cal.2d 483). There, a contractor agreed to build an
incinerator on city-owned land which the city would lease to
him for 10 years at a rental of $1 per month. He in turn
would construct the incinerator and lease both the property
and the incinerator back to the city for nine years and nine
months at a specified monthly rental. The city was given an
option to buy the incinerator at various intervals during the
term of the lease, but title to the incinerator remained in
the contractor, who would remove it if the city's option was
not exercised. The Supreme Court upheld the proposed contract
as not violative of Section 18 of Article XI, section 18
(predecessor to art. XVI, 18), saying: "[If] the lease or
other agreement is entered into in good faith and creates no
immediate indebtedness for the
aggregate installments therein provided for but, on the
contrary, confines liability to each installment as it falls
due and each year's payment is for the consideration actually
furnished
that year, no violence is done to the constitutional provision.
[Citations omitted.] If, however, the instrument creates a
full and complete liability upon its execution, or if its
designation as a 'lease' is a subterfuge and it is actually a
conditional sales contract in which the 'rentals' are
installment payments on the purchase price for the aggregate
of which an immediate and present indebtedness or liability
exceeding the constitutional limitation arises against the
public entity, the contract is void." (Id., at p. 486.)
Subsequently, in Dean v. Kuchel (1950) (35 Cal.2d 444), the
court found that a similar lease which, instead of granting
the public entity an option to buy, vested title in it at the
end of the lease term did not convert the lease into a
construction contract. The court did not see a legitimate
distinction from the Offner case because the essence of the
Offner rule is simply that payments are for the month-to-month
use of the building. (Id., at p. 448.)
Both Offner and Dean quoted with approval the rule as
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formulated in Garrett v. Swanton (1932) (216 Cal. 220)
(overruled in part on other grounds in City of Oxnard v. Dale
(1955) 45 Cal.2d 729, 737): "'In other words, such contracts
are valid where each year's installment is within the city's
income, and where each year's payment is for the consideration
actually furnished that year.'" ( Offner, supra, at p. 486;
Dean, supra, at p. 477; Italics in original.)
3)More recently, the California Supreme Court upheld the
constitutionality of these sale-lease back financing
procedures in Rider v. City of San Diego, (1998)(18 Cal. 4th
1035). In that case, there was a joint powers agreement (JPA)
between a multicity governmental agency (the port district)
that owned the local convention center, and one of the member
cities within the district (San Diego) that operated the
convention center under a management agreement with the
district. The city and the port district formed a financing
authority to issue lease revenue bonds whose proceeds would be
used to pay for an expansion of the center (under the city's
direction). Once the expansion was completed, the authority
would sublease the center to the city for an amount equal to
the authority's debt service on the bonds. The district, in
turn, would pay the city a certain amount every year to help
it meet this obligation. (Id. at pp. 1039-1041.)
The plaintiffs alleged the authority was a "hollow shell"
created by the city merely to circumvent the constitutional
requirement that local governments get voter approval before
incurring certain types of indebtedness (Id. at p. 1042). The
Supreme Court rejected this argument, holding the voter
approval requirement did not apply because, under the Joint
Exercise of Powers Act (Government Code Section 6500 et seq.),
a JPA has a "genuine separate existence" from the governmental
agencies that form it, and so does not fall under the
constitutional provision (Id., at pp. 1042-1043, 1044; see
Vanoni v. County of Sonoma (1974)(40 Cal. App. 3d 743) (flood
control district with same board members as county, and
performing traditional county functions, not subject to debt
limitation absent showing county actually controlled its
decisions).)
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4)AB 1192 attempts to overturn settled caselaw upholding the
constitutionality of cities' use
of sale-lease back financing procedures. The California Supreme
Court has ruled numerous times, as early as 1932, that Section
18 of Article 16 of the California Constitution is not
violated by sale-lease back financing procedures used by cities
when under these lease
contracts each year's installment is within the city's income
and each year's payment is for the consideration actually
furnished that year. The Committee may wish to consider
whether it is prudent to overturn 67 years of a settled
interpretation of Section 18 of Article 16 of the California
Constitution.
REGISTERED SUPPORT / OPPOSITION :
Support
Howard Jarvis Taxpayer Association [SPONSOR]
Opposition
CA Public Securities Association
CA Redevelopment Association
CA State Association of Counties
Cities of Concord, Culver City, Irvine, Lakewood, Loyalton,
Pasadena, Rialto, Sacramento,
San Ramon, Santa Rosa, and Seaside
League of CA Cities
Los Angeles Mayor Antonio R. Villaraigosa
Oxnard Chamber of Commerce
Analysis Prepared by : Jennifer R. Klein / L. GOV. / (916)
319-3958