BILL ANALYSIS
SENATE COMMITTEE ON BANKING, FINANCE,
AND INSURANCE
Senator Ronald Calderon, Chair
AB 1718 (Blumenfield) Hearing Date: June 30,
2010
As Amended: May 28, 2010
Fiscal: Yes
Urgency: No
VOTES: Assembly: Not Relevant
Sen. R. & T. (06/23/10):3-0/Pass
SUMMARY Would reauthorize and recast the Senior Citizens and
Disabled Citizens Property Tax Postponement Program, and shift
funding for that program from the state General Fund to a
newly-created Senior Citizens and Disabled Citizens Property Tax
Postponement Fund, which would hold moneys voluntarily deposited
by a county or city and county, as specified.
DIGEST
Existing law
1. Formerly provided for the Senior Citizens and Disabled Citizens
Property Tax Postponement Program, which authorized the State
Controller to pay property taxes on behalf of qualifying
low-income seniors and low-income blind or disabled persons.
These property tax payments were considered loans from the state
General Fund to the seniors and blind or disabled persons. The
recipients of these loans (or their estates) were required to
pay these loans back, when they relinquished ownership of their
homes. This program was suspended on February 20, 2009, for
fiscal reasons.
This bill
1. Would re-establish the Senior Citizens and Disabled
Citizens Property Tax Postponement Program, as follows, and
as described elsewhere in this analysis:
a. Funding for the program would come from counties or
a city and county that voluntarily invested surplus
AB 1718 (Blumenfield), Page 2
funds, which would be held in trust on their behalf by
the State Controller. Moneys invested by that local
government would have to remain in the Senior Citizens
and Disabled Citizens Property Tax Postponement Account
(SCDCPTPA) for a minimum of ten years (early withdrawals
would not be permitted). Monies invested in the SCDCPTPA
would earn interest at the greater of 5% per year or the
interest rate on the U.S. Treasury's 10-year bond note as
of the date of deposit, plus 2 percentage points, payable
10 years after the deposit date. For reference, the
10-year Treasury note traded at 3.11% as of the date this
analysis was prepared, and varied from 3.07% to 4.01%
during the course of the past year. Its five-year high
was 5.3%, reached in June 2008.
b. To participate in the program, seniors 62 years of
age or older, with incomes no greater than $35,500 (an
amount that would be adjusted annually for inflation) and
equity of at least 30% in their principal residences, or
persons deemed blind or disabled pursuant to a specified
section of the Welfare and Institutions Code, with
similar incomes and similar home equity, would apply to
the Controller. If accepted into the program, they would
be issued a certificate of participation by the
Controller, and would have their property taxes paid by
the Controller on their behalf. Payments made on their
behalf, plus the interest that accrued on these payments,
would be secured by a lien, in favor of the state of
California, upon the participant's residence. This lien
would have the priority of a county property tax lien
(i.e., it would have so-called "superlien" status, and
would take priority over all other liens recorded before
it, other than IRS or other tax liens).
Participants would be required to pay a $75 annual fee to
offset the Controller's costs to administer the program,
and would be required pay their loans back at the end of
a ten-year period. Interest rates on their loans would
be two percentage points higher than the interest rates
paid to local governments who invest money in the
SCDCPTPA (i.e., the greater of 7% per year or the
interest rate on the U.S. Treasury's 10-year bond note as
of the date the applicant is approved to participate in
the program, plus 4 percentage points, rounded to the
nearest full percent).
AB 1718 (Blumenfield), Page 3
2. Would make conforming changes to the Senior Citizens
Mobilehome Property Tax Postponement Law and the Senior
Citizens Possessory Interest Holder Property Tax
Postponement Law, and would repeal the Senior Citizens
Tenant-Stockholder Property Tax Postponement Law.
COMMENTS
1. Purpose of the bill To reauthorize a program that provided
needed property tax relief to low-income seniors and
low-income blind or disabled persons, before it was
discontinued in 2009, due to the state's General Fund budget
shortfall.
2. Background Established in 1977, the Senior Citizens and
Disabled Citizens Property Tax Postponement Law helped
eligible elderly and disabled persons on fixed incomes
remain in their homes, by paying their property taxes for
them, and recovering the amounts paid on their behalf, plus
interest, when these persons passed away, sold their homes,
or otherwise transferred ownership of their properties.
Although all loans are eventually repaid, with interest, the
program is not self-supporting every year. It was suspended
in February 2009, for budgetary reasons. Those who were
participating in the program at the time the program was
suspended had their 2008-09 property taxes paid by the
state, but - unless they found other means with which to pay
their 2009-2010 property taxes - are now delinquent on those
taxes.
According to the author's office, approximately 5,500 people
participated in the program, at the time it was suspended.
Roughly half of these participants have outstanding
mortgages. Although counties may not force the sale of a
home to collect on delinquent property taxes for five years,
many of those who are now delinquent on their property taxes
live in fear that they may one day lose their homes. These
fears have been compounded in a handful of cases, by
financial institutions that have required former
Postponement Program participants to set up impound accounts
for the payment of property taxes, since becoming
delinquent.
This bill envisions a county-funded postponement program, with
slightly lower income qualification caps and slightly higher
AB 1718 (Blumenfield), Page 4
equity requirements than the postponement program formerly
funded by the state. In order to entice counties to invest
money they will not be able to withdraw for ten years, the
bill offers rates of return that appear quite good in
today's low-interest rate environment. Assuming that a
county invests $1 million in the postponement program, and
assuming a rate of return of 5.11%, compounded annually (the
rate that would apply if the investment were made on the
date this analysis was prepared), that $1 million would grow
to $1.65 million by the date it could be withdrawn.
AB 1718 also seeks to entice counties to participate, by giving
property tax postponement claims superlien status. This
places the repayment of these property tax loans at the
front of the line, when ownership of the home changes, and
is something new to the Property Tax Postponement Program.
Under the former state-run program, property tax
postponement liens were judgment liens, which put them in
line in the order in which they were recorded, relative to
other liens on the property.
Three other significant differences between this bill and the
former Property Tax Postponement Program relate to the
treatment of home equity, the interest rates of the loans,
and the timing of loan repayment, each of which is discussed
below.
Treatment of Home Equity: Under the former state-funded
program, a participant was required to have at least 20%
equity in their home when they entered the program, but was
not required to retain that level of equity as a condition
of remaining in the program. AB 1718 proposes to increase
the minimum equity requirement from 20% to 30% and to
require participants to retain that minimum level of equity
each year, in order to qualify for postponement loan
assistance.
Borrower Interest Rate: Under the now-discontinued property tax
postponement program, interest rates on property tax
postponement loans equaled the effective annual yield of the
Pooled Money Investment Account rate, rounded to the nearest
full percent. The Pool's annual yield was 2.224 % in
2008-09 and has ranged from a low of 1.532% to a high of
6.104% during the past ten fiscal years. Under this bill,
recipients of property tax postponement relief must pay the
higher of 7% per year, or the U.S. Treasury 10-year bond
AB 1718 (Blumenfield), Page 5
rate plus 4%, rounded to the nearest full percent (which
would also equal 7%, if that calculation was performed as of
the date this analysis was prepared).
For purposes of illustration, assume that a property tax loan
recipient had a tax bill of $1,500 in the year in which he
or she entered the program, saw their property tax bill
increase annually by the statutorily allowed 2% per year,
and was assessed a rate of 7% on their property tax
postponement loan. At the end of ten years, $16,425 in
property taxes would have been paid on that participant's
behalf; the participant would owe the program $24,016. (As
discussed below, this contrasts with a loan balance of
$20,377, which would have accrued during the same time
period under the now-discontinued program).
Timing of Loan Repayment: The now-discontinued program required
loan recipients (or their estates) to repay the loans, when
the loan recipient relinquished ownership of the home. AB
1718 requires the loan recipient to repay the loan in full
on June 30th of the year following the expiration of the
recipient's 10-year loan, or upon a change in ownership of
the property, whichever occurs earlier. Thus, using the
example above, the low-income senior or disabled person who
outlived their 10-year loan would be required to repay the
full $24,016 on June 30th of Year 11. The low-income senior
or disabled person could not continue to have their property
taxes postponed, until they fully repaid their loan, and
would not be eligible to continue participating in the
program if their home equity fell below 30%.
This sets up a situation in which a low-income homeowner
receiving property tax assistance under the program
established by AB 1718 could have to refinance their home to
pull out equity, for the purpose of paying off their
property tax loan at the end of ten years. That loss of
equity could, in turn, render them ineligible for the
program going forward.
In contrast, under the former program, a program recipient with
a bill of $1,500 in the year in which he or she entered the
program would incur a total loan balance of $20,377 at the
end of ten years (assuming an average annual yield of the
PMIA of 4%). However, that program participant would not
have to pay the loan back, and could remain in the program,
until they either sold the house, transferred it to a
AB 1718 (Blumenfield), Page 6
relative, or passed away.
3. Support The California State Association of Counties (CSAC)
writes in strong support of AB 1718. CSAC, along with
county assessors, auditor-controllers, and treasurer-tax
collectors, has been working with Assemblymember
Blumenfield, the State Controller's Office, and the State
Treasurer's Office to identify program improvements and a
new financing mechanism, which will allow the Senior
Citizens Property Tax Postponement Program to be fully
self-funded, while continuing to allow eligible Californians
to utilize the program. CSAC observes that the original
program had a minimal start-up cost, and, in most years,
generated revenue for the state General Fund. CSAC is
committed to help this bill's author develop a workable
program that does not result in a cost to the General Fund.
The Urban Counties Caucus understands that AB 1718 is a work in
progress, but supports the effort to reinstate the
discontinued property tax postponement program. "This
program was eliminated last year because the program failed
to pay for itself in 2007-08 and 2008-09 mostly due to the
housing crisis. However, in most years this program pays
for itself and often generates revenue for the General
Fund."
The Howard Jarvis Taxpayers Association (HJTA) has long been in
favor of the Senior Citizens Property Tax Postponement
Program. In a declining economy, ensuring that seniors on
fixed incomes are able to stay in their homes is of prime
importance to HJTA.
4. Opposition The California Land Title Association (CLTA) is
opposed to the bill, unless it is amended. CLTA cites
several problems that would be created by the bill, and will
remain opposed until and unless these problems are
addressed.
First, CLTA asks whether it is sound public policy to give
property tax postponement liens a superpriority over other
liens, such as child support liens. "California's 'first in
time, first in right' law creates a fair procedure where
liens for lenders, general creditors, judgment creditors,
and custodial parents, etc., protect themselves by quickly
recording a lien with the county recorder's office in which
AB 1718 (Blumenfield), Page 7
the affected real property is located. This recordation
process creates 'constructive notice' to the world that the
recording party wishes to protect their interest from all
competing creditors and they do so according to the
recordation date of their liens. Even custodial parents
owed child support are required to record an 'abstract of
support' lien on real property and wait for reimbursement
behind other previously recorded liens, or other tax liens
which are granted a 'superpriority' status. Thus,
superpriority status of liens is very rarely created in
California law so as not to disrupt this predictable and
orderly process."
CLTA believes that the judgment lien status given to loans under
the now-discontinued property tax postponement program was
appropriate, because existing Revenue and Taxation Code
Section 20605 prohibits a lender from requiring a borrower
to pay into an impound account to cover taxes. If a lender
cannot charge for taxes through an impound account, then
their security interest in the property must trump that of
the Controller's lien, as set forth in existing law. Under
current law, a lender's security interest in real property
for which it has provided a loan is protected by a deed of
trust recorded against the property, which, for all
practical purposes, is superior to all other recorded liens
on the real property.
In addition to its philosophical disagreement with the lien
priority this bill would give property tax postponement
loans, CLTA raises several technical concerns with the
bill's provisions. First, CLTA observes that the bill will
create secret liens, putting consumers, title companies,
lenders, and other interested parties at risk. As AB 1718
is currently drafted, subdivision (b) of Government Code
Section 18162 does not specifically require the recordation
of any paper or digital document to reflect the
superpriority lien. Because there is no requirement that
the lien be recorded, it may not be discovered by a consumer
or title company that exercises due diligence by searching
county title records. If a consumer purchases a property
that has one of these secret, superpriority liens, the
consumer will take ownership of the property, subject to the
outstanding taxes owed, because the existence of this lien
will not be identified in escrow. Amendments are necessary
to clearly require the superpriority liens to be recorded.
AB 1718 (Blumenfield), Page 8
Even if the bill is amended to require that the superpriority
lien be recorded, it is entirely possible that some
transactions will occur, in which an innocent bona fide
purchaser buys a home during the period of time between
payment of property taxes by the Controller and the
recordation of the lien. Because this bill would give the
Controller's lien superpriority status upon recordation,
that lien would leapfrog back in time and become the
obligation of the bona fide purchaser. This time period
between the payoff of the county tax collector and the
recordation of the lien is dangerous to consumers purchasing
these homes. Language should be added to the bill, to
provide protections to bona fide purchasers.
CLTA also observes that the bill's language is internally
inconsistent. Existing law (much of which is preserved by
the bill) assigns property tax postponement loans judgment
lien status (essentially, giving them a priority that
reflects the date on which they are recorded, relative to
the other liens on the property). New language proposed by
the bill would assign these loans superpriority status.
"Either the lien is a judgment lien (with the force, effect,
and priority of a judgment lien) or it is a 'superpriority
lien' with tax preferred status. It can't be both." These
inconsistencies must be reconciled.
Furthermore, in setting lien priority, AB 1718 fails to
distinguish between loans that are already in place and new
loans that will be made after enactment of the bill.
Without language to clarify the prospective application of
the bill, loans that currently have judgment lien status
will become superpriority liens. Outstanding title policies
written to protect lenders are likely to face increased
claims, because these lenders' preexisting liens will become
subordinate to the Controller's superpriority liens under
the provisions of the bill. This will be the case, even
though the statutory language giving these loans superlien
status was not in effect when the title insurance policies
were sold to the lenders. Like lenders, title companies are
likely to face increased risks, because they will be unable
to charge increased premiums to cover these types of
anticipated losses. Language to clarify the prospective
application of the bill is needed.
5. Questions
AB 1718 (Blumenfield), Page 9
a. Eligibility rules: As drafted, AB 1718 is
unclear regarding the order in which applicants will
be considered. Will individuals who were in the
program before it was suspended be given first
priority? Will applications be processed on a
first-come, first-served basis? Or will there be a
"greatest need" evaluation? Will applicants from all
counties be eligible to participate, or only
applicants from counties that have contributed money
to the SCDCPTPA? Will the Controller try to provide
at least minimal assistance to all eligible
applicants, if there is insufficient money available
to fully fund all loans? Or will a loan only be
extended to a program participant, if the loan is
large enough to fully offset the recipient's entire
property tax bill?
b. Repayment of SCDCPTPF loans: As described
above, loans are due in full on June 30th of the year
following the end of the initial, 10-year loan. All
of the individuals in this program are low-income and
require assistance to pay their property taxes.
Expecting these individuals to pay off loans that
total in the tens of thousands of dollars may be
unrealistic. Should this bill be amended to provide
for different repayment rules?
6. Suggested Amendments
a. This bill was heard and passed by the Senate
Revenue and Taxation Committee on June 23, 2010. The
following amendments were taken by the author in that
Committee, in connection with a "Do Pass with
amendments to be taken in the Senate Banking, Finance
& Insurance Committee" motion:
Page 33, delete lines 29 through 31.
Page 42, delete lines 34 through 39.
Direct the County Treasurer-Tax Collectors to suggest
amending property tax collection laws to conform the
statutes to changes being made by AB 1718 (amendments
pending)
AB 1718 (Blumenfield), Page 10
In addition to the amendments taken in the Senate Revenue
and Taxation Committee, staff recommends a number of
amendments to correct timing issues and clarify the
operation of several of this bill's provisions. All of
these amendments are intended to further the author's intent
in introducing this bill, and to help the program work as it
is intended. Some of these amendments are detailed below;
others will require further discussion with the author, to
further clarify his intent.
b. Consequences of dropping below the 30% equity
floor: As described above, the bill requires each
loan recipient to maintain a minimum of 30% equity in
his or her home throughout the life of the loan, in
order to remain in the program, and gives the State
Controller the authority to determine the fair market
value of the recipient's home. Staff suggests
amendments to clarify what happens to a loan recipient
whose home equity falls below 30% (is their
outstanding loan due and payable immediately?),
identify acceptable valuation methods that may be used
by the Controller to determine the fair market value
of a loan recipient's home, and give loan recipients
an opportunity to challenge the Controller's valuation
decision.
In the alternative, staff suggests removing the
requirement that a loan recipient continue to meet the
minimum equity requirement on an ongoing basis. The
now-discontinued, state-run program required 20%
equity upon entrance into the program, but did not
continue to apply this requirement annually
thereafter. While recognizing that the counties which
agree to fund this program require some assurance that
there is enough equity left in the home to pay off the
loan when it comes due, there is a downside to the
annual equity requirement. First, the population
receiving assistance is likely to worry about whether
they will meet the requirement in the subsequent year.
Adding a source of worry to the life of a low-income
senior or low-income disabled individual seems a high
price to pay, when the whole goal of the program is
aimed at addressing the needs of these vulnerable
populations.
AB 1718 (Blumenfield), Page 11
Staff also observes that, despite the recent housing
downturn and its resulting housing value declines,
residential real property tends to appreciate over the
long-term. Kicking someone out of the program because
of low home equity, when their property might recover
in value before the loan must be paid off, may not
make good fiscal sense.
c. The topic of early withdrawals from the
SCDPPTA by counties is not contemplated by the bill,
and should be. Ten years is a very long time for a
local government to invest money. It is entirely
possible that a fiscal emergency will result in the
need for a county or city and county to access money
invested in the SCDPPTA prior to the conclusion of the
ten year investment period. Counties should know the
penalties for early withdrawal, before they make their
investments.
d. The current language of the bill relating to
the responsibilities of financial institutions
(Section 32, page 31, lines 21 through 40 and page 32,
lines 1 through 23) is broader than intended by the
author. As drafted, it would prohibit a financial
institution from recording a notice of default on a
property for five years, if the owner of that home had
ever participated in the property tax postponement
program, and become delinquent on their property
taxes. The author intended to limit this language to
persons who were participating in the property tax
postponement program, at the time it was suspended.
The language of the bill would also prohibit a financial
institution from requiring any person who had ever
participated in the property tax postponement program
from establishing an impound account for the payment
of taxes. This language does not reflect the very
real possibility that a federal program (such as a
loss mitigation program like the federal Making Home
Affordable Program) could require an impound account
to be established.
The following amendments would achieve the author's
intent, without running afoul of federal programs:
Page 31, line 29, strike "or regulation" and insert: ,
AB 1718 (Blumenfield), Page 12
regulation, rule, or program
Page 32, strike lines 7 through 17 and insert: A
mortgagee, trustee, or other person authorized to take
sale shall not file a notice of default based solely
on a mortgagor's or trustor's failure to pay property
taxes, until at least five years has elapsed from the
date on which the property taxes became delinquent, if
the mortgagor or trustor provides the mortgagee,
trustee, or other person authorized to take sale
evidence of his or her participation in the Senior
Citizens and Disabled Citizens Property Tax
Postponement Program during the 2008-2009 fiscal year.
Page 32, line 19, after "program" insert: during the
2008-2009 fiscal year
Page 32, lines 22 and 23, strike "2008 or 2009" and
insert: the 2008-2009 fiscal year
e. As discussed above in the section describing
opposition to this bill by the California Land Title
Association, the bill is internally inconsistent in
the lien priority it assigns to loans made under its
provisions. In some cases, the bill assigns superlien
status, and in other cases it assigns judgment lien
status. CLTA strongly prefers judgment lien status,
but has offered amendments for use by the author in
correcting technical issues posed by the bill, if the
author continues to prefer granting superlien status
to new postponement loans made under the county-funded
program.
If the author is willing to give the same judgment lien
status to loans made under the new program that prior
law gave to loans made under the old program, the
following single amendment would accomplish that
purpose: Page 6, strike lines 26 through 28, and
insert: parcel.
In the alternative, if the author prefers to give
superlien status to loans made under the new program,
all of the following amendments are recommended, to
address the technical concerns raised by CLTA in its
letter of opposition:
AB 1718 (Blumenfield), Page 13
Page 6, strike lines 26 through 28, and insert: parcel.
Page 7, line 15, after the period, insert: This notice
shall be prominently titled "Controller's Tax Lien."
Page 7, strike lines 26 through 32 and insert: therein
and shall have the same priority as a county property
tax lien, as described in Section 2192.1 of the
Revenue and Taxation Code. This lien shall remain in
effect until it is released by the Controller in the
manner prescribed by Section 16186.
(8) In the event a bona fide purchaser purchases the
real property or a bona fide encumbrancer records a
lien on the real property during the time period
between payment of outstanding property taxes by the
Controller and the recordation of the Controller's
notice of lien, the bona fide purchaser or bona fide
encumbrancer shall not be subject to the Controller's
lien.
Page 9, between lines 2 and 3, insert:
(f) The changes made to this section by this Act shall
apply to loans made under to the Senior Citizens and
Disabled Citizens Property Tax Postponement Program
after the effective date of this Act, and shall not
apply to property tax postponement loans made prior to
that date.
f. The following technical amendments are
intended to fix the bill's timing issues, and to
correct other inconsistencies in its language:
Page 5, line 21, insert a correct reference in place of
the reference to subdivision (d). (Staff defers to
the Controller's Office regarding the reference that
is intended. The current language of the bill is
unclear in this regard).
Page 9, reinsert the language on lines 10 through 23,
insert "For the period beginning July 1, 1984 and
ending December 31, 2010," at the beginning of the
newly restored line 10, insert "For the period
beginning January 1, 2011" at the beginning of line
24, strike lines 33 through 37, and replace "2010"
AB 1718 (Blumenfield), Page 14
with "2012" on line 38.
Page 12, line 18, strike "20" and insert: 30
Page 12, line 20, strike "(b)" and insert: (e)
Page 13, line 7, strike "20" and insert: 30
Page 13, line 21, strike "January 1, 2010" and insert:
February 20, 2009
Page 13, line 26, strike "December 31, 2009" and
insert: February 20, 2009
Page 25, line 27, strike "2009" and insert: 2010
Page 25, line 34, strike "2010" and insert: 2011
7. Prior Legislation
a. SB 8 (Ducheny), Chapter 4, 2009-2010 Third
Extraordinary Session: Suspended the Senior Citizens
and Disabled Citizens Property Tax Postponement
Program indefinitely, with a resulting estimated
annual savings to the state General Fund of $32
million in 2009-2010 and ongoing.
AB 1718 (Blumenfield), Page 15
POSITIONS
Support
California State Association of Counties
Howard Jarvis Taxpayers Association
Urban Counties Caucus
Oppose
California Land Title Association
Consultant: Eileen Newhall (916) 651-4102