BILL ANALYSIS
SENATE COMMITTEE ON BANKING, FINANCE,
AND INSURANCE
Senator Ronald Calderon, Chair
AB 1718 (Blumenfield) Hearing Date: August 26, 2010
As Amended: August 19, 2010
Fiscal: Yes
Urgency: Yes
VOTES: Assembly: Not Relevant
Sen. R. & T. (06/23/10):3-0/Pass
Sen. B., F., & I. (06/30/10):10-0/Pass
Sen. R. & T. (08/25/10): 3-2/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 counties
that voluntarily opt-in, 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
that voluntarily opt in, through adoption of a resolution
indicating their intention to participate in and
AB 1718 (Blumenfield), Page 2
administer the program. Prospective claimants in a
participating county would have apply to their county on
an annual basis, in order to participate. Persons who
otherwise meet the qualification criteria, but who live
in a county that does not decide to opt in, would be
ineligible to apply.
b. Counties are given discretion in how they fund their
Property Tax Deferral Funds. If a county approves a
claimant's application for a given fiscal year, and if
there are sufficient funds within the county's Property
Tax Deferral Fund that fiscal year, the bill would
authorize the county to defer the claimant's property
taxes for that fiscal year, and to attach a lien to the
claimant's property, equal to the amount of deferred
property taxes, plus interest. The claimant would be
charged an interest rate equal to the greater of 7% per
year, or the effective annual yield of the Pooled Money
Investment Account, plus two percentage points. This
lien would have the priority of a county property tax
lien (i.e., it would have superpriority lien status, and
would take priority over all other liens recorded before
it, other than IRS or other tax liens).
Any county that defers property taxes pursuant to the
newly-reauthorized program would be responsible for
issuing subvention payments to those entities that
receive property taxes in that county, in the amounts
equivalent to the amounts these entities would have
received, if the claimant had actually paid his or her
property taxes. Counties would be authorized to charge
an administrative fee to applicants, to help defray costs
to administer the program. Counties would be paid back
the amount of property taxes deferred, plus accrued
interest, at the end of the fiscal year in which a
claimant dies, unless another eligible claimant for the
same property successfully applies to the county for
further deferment. Deferment loans would also become
immediately due and payable under any of the following
circumstances: i) the claimant ceases to own the
property or to permanently reside in the property, ii)
the claimants' equity falls below 20%, iii) the claimant
refinances an existing loan on the property, or iv) the
claimant is found to have been accepted into the program
erroneously.
AB 1718 (Blumenfield), Page 3
c. Eligibility for the program would be limited to
seniors old enough to claim full Social Security benefits
(between 65 and 67 years of age, depending on year of
birth), or persons deemed blind or disabled pursuant to a
specified section of the Welfare and Institutions Code.
These seniors and blind/disabled persons would have to
have household incomes no greater than $35,500 (an amount
that would be adjusted annually for inflation), use the
property for which they are seeking property tax relief
as their principal residence, and have at least 20%
equity in that home. The bill also contains a mechanism
by which counties may retroactively defer a claimant's
property taxes for any fiscal year during which the
Senior Citizens and Disabled Citizens Property Tax
Postponement program was suspended.
d. The bill would prohibit financial institutions from
foreclosing on properties owned by program participants,
due to the participants' failure to pay property taxes.
(Financial institutions would not be prevented from
foreclosing, if the persons failed to pay their
mortgages). Financial institutions would also be
prohibited from requiring program participants to
maintain impound or trust accounts for payment of
property taxes, as specified.
AB 1718 (Blumenfield), Page 4
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.
There are many differences between the former, state-run program
and the county-run program proposed by this bill, the most
significant of which is the lien priority given to property
tax postponement loans. Under the former, state-run
program, property tax postponement loans were assigned
"judgment lien" status, which placed them in line to be paid
off relative to other liens on the property, based on the
date they were recorded relative to the other liens. In
other words, they were in line to be paid off after the
AB 1718 (Blumenfield), Page 5
liens recorded before them, but before the liens recorded
after them.
AB 1718 would assign these loans superpriority lien status,
which would move them to the front of the line, regardless
of when they were recorded, relative to other liens.
Because county property taxes currently have such
superpriority lien status, the author and this bill's
supporters believe that it is appropriate to give loans
which correspond to deferred property taxes the same
superpriority lien status as the taxes. Others (see
opposition arguments below) disagree, and argue in favor of
giving these loans judgment lien status, as was the case
under the prior, now-discontinued program.
3. Changes to the bill since its last hearing before this
Committee: The Senate Banking, Finance & Insurance
Committee heard and passed AB 1718 by a vote of 10-0 on June
30, 2010. The author significantly amended his bill on
August 9th, and took additional clarifying and corrective
amendments on August 19th. The August 9, 2010 amendments
shifted the program authorized by the bill from one run by
the State Controller, using moneys put up by counties for a
ten year period, into a county-run program with a less
prescriptive county funding source. The August 9th
amendments also altered eligibility requirements for the
program, county obligations under the program, lenders'
ability to foreclose on and to establish impound accounts
for program participants, and the way in which property
liens are established to ensure payment of property taxes
deferred under the program. The August 19th amendments
attempted to correct errors introduced by the August 9th
amendments, corrected internal inconsistencies created by
the August 9th amendments, and clarified the ways in which
the author intends the county-run property tax deferment
program to work. As described below, additional amendments
will be necessary to ensure that the bill can be
implemented, as desired by the author.
4. Support The California State Association of Counties (CSAC)
supports AB 1718, as the product of considerable discussion
among county assessors, auditor-controllers, and
treasurer-tax collectors, the bill's author, the State
Controller's Office, and the State Treasurer's Office.
These groups worked together to identify program
improvements and a new financing mechanism for the former
AB 1718 (Blumenfield), Page 6
Senior Citizen's Property Tax Postponement Program, to
ensure that the new program is fully self-funded, while
continuing to allow eligible Californians to utilize its
benefits. "It became clear that individual counties could
implement the program locally with statewide criteria and
provide the relief that qualified seniors and people with
disabilities need to enable them to stay in their
homes?.Since the state lacks the resources to sustain the
program on a statewide basis, we encourage you to authorize
counties to continue the program locally, resulting in a
cost-effective means of continuing an important service."
In its support letter, CSAC specifically says that it
believes superpriority lien status is appropriate for the
loans that would be extended under the program proposed by
the bill.
The Urban Counties Caucus and Black Los Angeles County Client
Coalition also sent letters of support. Both groups would
like to see low-income seniors and disabled persons be
allowed to remain in their homes, even if they cannot afford
their annual property tax payments.
5. Opposition The California Bankers Association (CBA),
California Financial Services Association (CFSA), California
Taxpayers Association (Cal-Tax) are opposed to the bill,
based on the provision that grants superpriority lien status
to the amounts that counties are owed, in repayment of
deferred property taxes. Both lender trade groups believe
that the granting of superpriority lien status is
unnecessary, because of the bill's requirement that program
claimants maintain a minimum of 20% equity in their
properties, and the measure's 7% interest rate on deferred
amounts. They assert that superpriority lien status is
problematic, because it will force a violation of many
mortgage contracts, pose constitutional contract impairment
issues, and negatively impact the ability of program
participants to obtain future mortgage financing. Each of
these concerns is described briefly below.
Violation of the mortgage contract: Standard mortgage contracts
require the borrower to promptly discharge any lien that has
priority over the mortgage. Uniform mortgage instruments
used by Fannie Mae and Freddie Mac specifically require the
borrower to pay all taxes, assessments, charges, fines, and
impositions attributable to the property, which can attain
priority over the mortgage. By creating a superpriority
AB 1718 (Blumenfield), Page 7
lien that is statutorily assigned priority over a
homeowner's primary mortgage or deed of trust, this bill
would place borrowers in violation of their mortgage
contracts.
Constitutional concerns: Article 1, Section 9 of the California
Constitution and Article 1, Section 10 of the United States
Constitution prohibit the enactment of laws that impair the
obligation of contracts. AB 1718 would create a violation
of the terms of the mortgage or deed of trust (see
immediately above), but would prohibit financial
institutions from recording a notice of default, due solely
to a borrower's failure to pay property taxes. Because the
bill would prohibit financial institutions from enforcing
the mortgage contracts they hold, CBA, CFSA, and Cal-Tax
believe that it would violate the California and U.S.
Constitutions.
Future financing: Lenders are unlikely to extend credit to
homeowners who have superpriority property tax postponement
liens recorded against their property, because (as noted
above) most mortgage contracts do not allow for the
existence of liens that take priority over the primary
mortgage or deed of trust. For this reason, program
participants may be unable to refinance their mortgage or
obtain a home equity line of credit, even in an emergency.
CBA, CFSA, and Cal-Tax are also concerned that the bill does
not require counties to notify applicants to the program
about this potential consequence of participating.
The Howard Jarvis Taxpayers Association (HJTA) changed its
position on AB 1718 from support to oppose, based on the
August 9th and 19th amendments. HJTA's concerns center
around the administrative fee that claimants to the program
will be required to pay, to help defray counties'
administrative costs. The fee is not a set amount and will
ultimately be determined by County Boards of Supervisors.
While HJTA acknowledges that counties must justify the size
of the fee, the taxpayer organization believes that the
safeguards in place are insufficient to ensure that the fees
are set at reasonable levels.
HJTA also notes that the bill provides for a very short filing
period (between October 1st and December 10th, annually),
yet the bill fails to require counties to provide notice of
this deadline to potential claimants.
AB 1718 (Blumenfield), Page 8
The California Land Title Association (CLTA) and California
Escrow Association (CEA) are concerned about the bill's
retroactive deferment provision and about issues created by
assigning superpriority lien status to property tax
deferment loans. CLTA and CEA believe that granting
counties the ability to retroactively accept claimants into
the program for fiscal years during which the state program
was suspended will create contract impairment issues.
Mortgage loans made prior to the enactment of the bill would
be affected, a factor that would be exacerbated by granting
superpriority lien status to the tax deferment loans.
CLTA and CEA also believe that granting superpriority lien
status to property tax deferment loans may create a chilling
effect on the ability of seniors and disabled person to
withdraw equity from their homes and may create a
disincentive for lenders to loan to people who are seniors
or disabled.
Furthermore, noting that child support liens are not given
superpriority status, these organizations ask whether
counties who extend property tax relief to seniors and
disabled persons should have a priority senior to custodial
parents who are owed child support. The organizations are
not convinced that the language of AB 1718 eliminates the
potential for fraud and abuse by persons who can afford
their property taxes, but who choose to avoid paying them.
Because the bill does not cap the value of a home's worth,
the bill could shelter multi-million dollar homes from
property taxes.
Finally, CLTA and CEA are concerned about the possibility that
bonafide purchasers of properties on which property taxes
have been deferred may be stuck with debt about whose
existence they were unaware, if they purchase the property
before the county records a lien corresponding to deferred
property taxes.
6. Suggested Amendments Because this bill is being heard by
the Senate Banking, Finance & Insurance Committee pursuant
to Senate Rule 29.10, after the deadline to amend bills on
the Senate Floor, the Committee may not amend AB 1718; we
must either vote to hold the bill in Committee or return it
to the Senate Floor. However, the Committee may ask the
author to seek a waiver of the Floor amendment deadline
AB 1718 (Blumenfield), Page 9
(Joint Rule 61(b)(16)) and commit to taking amendments on
the Senate Floor, if he is successful in obtaining the
2/3rds vote rule waiver to amend past the amendment
deadline.
The following amendments are suggested for consideration, to
help achieve the author's intent. The first eleven
amendments were recommended by the Senate Revenue and
Taxation Committee, and agreed to by the author in that
committee. The remaining amendments were worked out by
Senate Banking, Finance, and Insurance Committee staff with
the author's office, to address banking-related issues not
covered by the revenue and taxation-related amendments. In
addition to the amendments suggested by the Committees, the
author wishes to make additional corrective amendments,
which have been shared with and refined by staff of both
Committees. A mock-up of the bill, reflecting all of the
amendments the author is willing to take, will be
distributed in Committee.
Amendments recommended by, and accepted by the author in the
Senate Revenue and Taxation Committee, subject to the
author's ability to obtain a waiver of the deadline to amend
bills on the Senate Floor:
a. Page 6, line 37: revise to allow the Tax
Collector to require the claimant to furnish evidence.
b. Page 7, line 4: replace the "county
obligation" with "the claimant's application."
c. Page 11, line 7: delete "time period since the
suspension of the Senior Citizens and Disabled
Citizens Property Tax Postponement Law" and replace
with "for taxes due on or before February 20, 2010,"
the enactment date of SBx3 8.
d. Page 11, line 9: define "vested right," and
clarify whether this provision's prospective
application supersedes or accedes to other parts of
the bill that preclude lenders from requiring impound
accounts and foreclosing for non-payment of property
taxes for new claimants or claimants under the state
program in 2008-09.
e. Page 11, line 12: revise to state that the
AB 1718 (Blumenfield), Page 10
claimant may submit his or her application in a
participating county.
f. Page 11, line 28: change "shall" to "may" to
avoid a situation where more claims have to be paid
because at the time eligibility the fund shows a
balance, because it has not yet paid pending claims.
g. Page 11, line 35: add "direct the County
Auditor" to apportion the subvention payment because
in many counties, the auditor apportions revenues.
h. Delete lines 8 through 17 on Page 17, because
a county cannot easily appropriately rate the risk of
future foreclosures and calculate the appropriate
foreclosure costs into a fee for applicants. If fee
revenues are short, the County general fund would have
to pay the costs in order for the investment to be
repaid out of tax sale proceeds. If fee revenues are
too much, it would be cost prohibitive for genuinely
poor people to apply, or the fee could be thrown out
on Government Code 54985 for exceeding actual costs.
i. Add a provision on Page 18, after line 23
stating that written confirmation from the tax
collector shall be considered evidence of
participation for purpose of this section, and require
the tax collector to provide the evidence to
individuals participating in the program.
j. Delete lines 25 through 30 on page 18 because
it duplicates lines 16 through 23.
aa. On Page 19, line 14, replace "department" with
"deferment."
Additional amendments recommended by Senate Banking, Finance
& Insurance Committee staff:
bb. Page 7, strike the sentence that runs from
lines 14 through 17, on the basis that there should be
no nonresident claimants to the new program. All
claimants must occupy the property on which they are
seeking property tax deferment as their principal
residence.
AB 1718 (Blumenfield), Page 11
cc. Page 11: Add an explicit requirement that
counties provide claimants whose applications are
approved a letter or other form of written
confirmation of their acceptance into the program.
Both the current version of the bill and the bill, as
proposed to be amended by the author, require
claimants to provide financial institutions with
evidence of their participation in the program, but
the bill currently lacks any explicit requirement that
counties issue written proof of acceptance into the
program.
dd. Page 13, strike lines 28 through 31 as
unnecessary and problematic.
ee. Page 17, line 6, after "and" and insert:
offsetting the county's
ff. Page 17, line 37, strike "has first submitted"
and insert: submits
gg. Page 18, strike lines 25 through 40, and Page
19, strike lines 1 and 2. This language is
inconsistent with language contained elsewhere in the
bill, and unnecessary to achieve the author's intent.
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.
POSITIONS
Support
Black Los Angeles County Client Coalition
California State Association of Counties
Urban Counties Caucus
Oppose
AB 1718 (Blumenfield), Page 12
California Bankers Association
California Escrow Association
California Financial Services Association
California Land Title Association
California Taxpayers Association
Howard Jarvis Taxpayers Association
Consultant: Eileen Newhall (916) 651-4102