BILL ANALYSIS �
SENATE TRANSPORTATION & HOUSING COMMITTEE BILL NO: sB 867
SENATOR MARK DESAULNIER, CHAIRMAN AUTHOR: padilla
VERSION: 2/18/11
Analysis by: Art Bauer FISCAL: yes
Hearing date: January 10, 2012
SUBJECT:
Build California Bonds
DESCRIPTION:
This bill permits the California Transportation Financing
Authority to issue nonrefundable tax credit bonds, which would
be available to California income taxpayers, to fund the
construction of local transportation projects.
ANALYSIS:
AB 798 (Nava), Chapter 474, Statutes of 2009, established the
California Transportation Financing Authority within the State
Treasurer's office to assist local agencies finance
transportation projects. AB 798:
1. Specifies the revenue sources that may be pledged as
security for revenue bonds the Authority issues to include
local transportation funds, fuel taxes, local
transportation sales taxes, state revenues approved for
this purpose by the Legislature or by initiative, developer
fees, and tolls.
2. Specifies the requirements that a project must meet in
order to be financed or refinanced by the authority to
include:
The project complies with all relevant statutes
applicable to the planning, programming, and construction
of transportation projects.
The project is contained in the constrained portion
of a conforming regional transportation plan that is
consistent with the greenhouse gas reduction targets
assigned by the Air Resources Board.
For highway projects, the project sponsor has
secured the support of the Department of Transportation
(Caltrans) and the project is consistent with the needs
and requirements of the state's highway system.
The project is financially and technically feasible.
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The project meets or exceeds environmental
requirements and has all necessary permits approved.
The project sponsor has developed performance
measures for the project to monitor its progress.
That a project has community support, which shall be
demonstrated through a public review and comment process.
For toll financed highway projects, the project
sponsor submits to the California Transportation
Commission (CTC) a plan that demonstrates how transit
service or alternative modes of transportation will be
enhanced in the corridor concurrent with the operation of
a toll facility.
This bill :
1. Makes findings and declarations that it is in the public
interest to implement the Build California Bonds as soon as
possible to ensure the funding of high priority public
transportation projects.
2. Defines "transportation project" as all or a part of the
planning, design, development, financing, construction,
reconstruction, rehabilitation, improvement, or acquisition
of a highway, street, rail line, bus line, or related
facilities supplemental to or improvements upon existing
facilities currently owned and operated by a transportation
agency, so long as the project life is at least as long as
the term of the bonds financing it.
3. Authorizes the Authority to enter into financing
agreements with local transportation agencies to finance or
refinance transportation projects. At least 95 percent of
the financing proceeds from the Build California Bonds must
be for the financing or re-financing of transportation
capital expenditures. No outstanding bonds previously
issued may be re-financed with the proceeds of Build
California Bonds.
4. Authorizes the State Treasurer through the Authority to
issue up to $5 billion of Build California Bonds, with a
maturity not to exceed thirty years, for the purpose of
financing and re-financing the cost of transportation
projects.
5. Defines the Build California Bonds as "tax credit" bonds
and allows a bond holder to claim a nonrefundable tax
SB 867 (PADILLA) Page 3
credit at the time the individual or the corporation files
a state tax return. The tax credit is in lieu of interest
payments, and the state is not obligated to make any cash
payments with respect to the tax credit.
6. Limits the total amount of bonds issued to $5 billion,
provided that no more than $1 billion may be issued in one
year and any unused proportion of the annual authorization
may be rolled over to be issued in a subsequent year. In
addition, the bill requires the Authority to determine
prior to the issuance of any Build California Bonds that
the aggregate amount of state tax credits granted to all
taxpayers holding bonds previously issued and new bonds
being issued does not exceed $250 million for any fiscal
year.
7. Establishes two tests for capping the amount of state
tax credit associated with any issuance of the bonds:
Limits the amount of state tax credit associated
with any issuance of Build California Bonds to not exceed
the greater of (1) five percent of the face amount of
bonds outstanding or (2) the yield required to market the
bonds to investors at a price or par.
Limits the amount of tax credit in any calendar year
with respect to any Build California Bond to an amount
that is equal to the principal amount of the bonds times
the percentage rate specified in the above.
1. Provides that Build California Bonds are not a debt or
liability of the state.
COMMENTS:
1. Purpose . The purpose of this bill is to add a state
component to Metro's debt financing strategy. According to
the author, if a local transportation agency desires to
accelerate the construction of projects, the cost of
accelerating financing, however, would be a substantial
cost to the agency. By creating a state tax credit bond,
the cost to the local agency is reduced. This, the author
argues, will accelerate construction of transportation
projects, and provide the economic benefits forecasted by
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the LAEDC. While the author emphasizes the advantage of
this bill for developing transit projects in Los Angeles
County, the tax credit bonds may be used to assist in the
financing of highway projects as well in all eligible
counties.
2. Background . The sponsor of this bill is the Los Angeles
County Metropolitan Transportation Authority (Metro).
Metro has adopted a transportation financing strategy for
constructing twelve mass transportation projects throughout
Los Angeles County in ten years rather than the usual
thirty years when relying upon the conventional grant
funding approach.
This strategy referred to as the 30/10 Initiative relies
upon using the revenue from the local, voter-approved
Measure R transportation sales tax as collateral for
long-term bonds and federal loans. Metro believes this
will allow it to achieve its ambitious construction
timeline and will also result in substantial construction
cost savings. Successful implementation of the 30/10
Initiative is expected to deliver immediate economic
benefits. According to the Los Angeles Economic
Development Corporation (LAEDC), the $12.6 billion 30/10
Initiative, which anticipates $10.8 billion in direct
construction expenditures will generate $23.3 billion of
regional economic output, 137,000 jobs, $8.7 billion of
direct income to project workers, and federal, state and
local taxes of $962 million during the ten years of the
program.
3. State assumes new transportation funding responsibility .
This bill involves the state in a new funding scheme for
financing transportation investments, the use of state
income tax credits in lieu of interest payments for local
transportation debt. The tax credit is nonrefundable. (A
nonrefundable tax credit prohibits the taxpayer from
seeking a cash refund in the event there is no tax
obligation from which to deduct the credit.) This bill
allows unused tax credits to be rolled over for up to ten
years. At a minimum, it appears that the tax credit is at
least five percent but may be higher. This bill provides
that the total tax credits for any fiscal year cannot
exceed $250 million. The total amount of bonds issued that
would be entitled to tax credits is $5 billion. No more
than $1 billion of bonds can be issued per fiscal year.
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4. Back to the general fund for transportation funding .
Essentially, after the Legislature extricated
transportation funding from the general fund last year with
the gas tax swap, this bill puts transportation back into
the general fund through the use of tax credits. As a
result of the swap, the debt service on general obligation
bonds financing highway improvements is funded from the gas
tax. State general obligation bonds that fund mass
transportation projects, such as high-speed rail remain an
obligation of the general fund.
Having removed transportation funding from the general
fund, the principle sources of state revenue for
transportation programs include the 35.3 cents per gallon
excise tax on gasoline for highways, a 6.62 percent sales
tax on diesel fuel for mass transportation, and proceeds of
general obligation bonds. At the local level, a percent
of the local sales tax in each county is designated
primarily for public mass transportation. In addition,
eighteen counties have voter approved local transportation
sales taxes. Most of the voter approved sales taxes have a
sunset date. Los Angeles County has two permanent
percent sales taxes, and a third, referred to as Measure R
passed by the voters in 2008, that will sunset in forty
years. In addition, four transit districts have permanent
percent sales taxes.
This bill authorizes the State Treasurer, acting through
the Authority, to issue the debt for local transportation
projects. The principal is the obligation of the borrower,
in this case Metro or another eligible local agency.
Therefore, should a default occur, it is the obligation of
the borrower and not the state. To be sure, the state is
not directly financing a project. The state is, however,
reducing the cost of debt to the local agency by removing
interest costs and substituting a tax credit against state
income tax owed by taxpayers. This is a cost shift to the
state general fund.
The State Treasurer's office, in conversations with the
committee staff, indicated that there are not a sufficient
number of California taxpayers to take advantage of the tax
credit. In addition, high wealth taxpayers typically tax
planning horizon is about five years not the longer time
horizon associated with bonds. Finally, the Treasures
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office indicated that it is unlikely that there would be a
secondary market for the bonds.
5. Tax credits not offset by 30/10 Initiative . This bill
caps the annual tax credit at $250 million per year. Over
thirty years this would be a potential cost of up to $7.5
billons to the general fund. According to the LAEDC's
analysis, the 30/10 Initiative over the ten year
construction period would generate $962 million in total
taxes including, state, local, and federal. This analysis
suggests that the economic activity generated by the 30/10
Initiative will not make the state whole.
6. Modeled on Build America Bonds . Congress included the
Build America Bonds (BABs) in the American Recovery and
Reinvestment Act of 2009. In general, there were two types
of BABs: interest rate subsidy bonds and a tax credit bond
equal to 35 percent of the interest payable by the issuer.
Public agencies preferred the interest rate subsidy option.
Unlike municipal bonds, the interest was taxable and
equivalent to corporate bond interest rates, but the
Federal government paid the issuer 35 percent of the
interest cost when due. For example, California sold $5.2
billion of BABs at 7.4 percent, but with the 35 percent
subsidy the effective interest rate paid by the state is
4.8 percent. The bonds were popular with institutions and
individuals, especially pension funds and foreign
investors, as they do not pay federal taxes. The tax
credit option was not used. BABs sunseted on December 31,
2010.
7. Previous hearing . The committee heard, but did not
vote, on this bill on April 26, 2011. In the interim, the
committee held two informational hearings on the subject
matter of this bill. The first hearing was held in Los
Angeles where the committee learned about the types of
transportation projects that might be financed by the Build
California Bonds. A second hearing was heard on the
financial issues associated with this bill in Sacramento.
8. Doubled Referred . This bill is also referred to the
Governance and Finance Committee because of the tax credit
features of the bill.
POSITIONS: (Communicated to the committee before noon on
Wednesday,
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January 4, 2012)
SUPPORT: Los Angeles County Metropolitan Transportation
Authority (Sponsor)
Associated General Contractors
OPPOSED: None received.