BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 986 HEARING: 3/21/12
AUTHOR: Dutton FISCAL: Yes
VERSION: 1/31/12 TAX LEVY: No
CONSULTANT: Weinberger
SUCCESSOR AGENCIES AND BOND PROCEEDS (URGENCY)
Allows successor agencies to keep former redevelopment
agencies' bond proceeds and enter into new enforceable
obligations funded by bond proceeds.
Background and Existing Law
Until 2011, the Community Redevelopment Law allowed local
officials to set up redevelopment agencies (RDAs), prepare
and adopt redevelopment plans, and finance redevelopment
activities.
A redevelopment agency kept the property tax increment
revenues generated from increases in property values within
a redevelopment project area. As a redevelopment project
area's assessed valuation grew above its base-year value,
the resulting property tax revenues - the property tax
increment - went to the RDA instead of going to the
underlying local governments. When a redevelopment agency
diverted property tax revenues from a school district, the
State General Fund paid the difference.
Citing a significant State General Fund deficit, Governor
Brown's 2011-12 budget proposed eliminating RDAs and
returning billions of dollars of property tax revenues to
schools, cities, and counties to fund core services. Among
the statutory changes that the Legislature adopted to
implement the 2011-12 budget, AB X1 26 (Blumenfield, 2011)
dissolved all RDAs.
AB X1 26 established successor agencies to manage the
process of unwinding former RDAs' affairs. With the
exception of seven cities that chose not to serve as
successor agencies, the city or county that created each
former RDA now serves as that RDA's successor agency. Each
successor agency has an oversight board that is responsible
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for supervising it and approving its actions. Oversight
boards are comprised of seven members, including city,
county, special district, and school district
representatives, appointed by local governments that serve
the area. The Department of Finance can review and request
reconsideration of an oversight board's decisions.
One of the successor agencies' primary responsibilities is
to make payments for enforceable obligations entered into
by former RDAs. Each successor agency must, every six
months, draft a list of enforceable obligations that are
payable during a subsequent six month period. This
"Recognized Obligation Payment Schedule" (ROPS) must be
adopted by the oversight board and is subject to review by
the county auditor-controller and the Department of
Finance. Obligations listed on a ROPS are payable from a
Redevelopment Property Tax Trust Fund, which contains the
revenues that would have been allocated as tax increment to
a former RDA. Successor agencies cannot enter into new
enforceable obligations.
RDAs issued bonds to pay for acquiring and developing
property and building public infrastructure to redevelop
blighted areas. Former RDAs' long-term debt is mostly in
the form of tax allocation bonds, which are payable from
property tax increment revenues. Many former RDAs held
balances of unencumbered bonds proceeds that were intended
to fund future redevelopment activities, but were not
needed to meet those RDAs' existing obligations.
Successor agencies must dispose of former RDAs' assets, at
an oversight board's direction, pursuant to specific
statutory requirements. Successor agencies must remit
unencumbered balances of RDA funds to the county
auditor-controller for distribution to local taxing
entities in the county. Agencies must use bond proceeds
for the purposes for which the bonds were sold, unless
those purposes cannot be achieved, in which case the
proceeds can be used to defease the bonds. Defeasing bonds
is a method of retiring bond debt by buying and holding
risk-free U.S. Treasury securities in an amount that is
sufficient to cover all principal and interest payments on
the outstanding bonds.
Local government officials worry that remitting
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unencumbered bond proceeds to county auditor-controllers
for allocation to local taxing entities may violate federal
tax-exempt bond requirements and restrictions on the use of
bond proceeds imposed by the terms of individual bond
agreements. They also argue that low interest rates make
defeasing former RDAs' bonds prohibitively expensive. They
want legislators to give successor agencies more
flexibility in disposing of former RDAs' unencumbered bond
proceeds.
Proposed Law
Senate Bill 986 deems the proceeds of redevelopment
agencies' bonds to be encumbered and prohibits a successor
agency from remitting those funds to the county
auditor-controller.
SB 986 requires successor agencies to use bond proceeds for
the purposes for which the bonds were sold if the successor
agency is either :
Performing an obligation required pursuant to any
enforceable obligation entered into by the former
redevelopment agency, or
Performing an enforceable obligation it entered
into on or before December 31, 2014, to fulfill the
purposes for which the bonds were sold by the
dissolved redevelopment agency.
If the purposes for which bonds were sold by a former
redevelopment agency cannot be achieved, the bill requires
a successor agency to use the bond proceeds to either
defease the bonds or purchase outstanding bonds on the open
market for cancellation.
SB 986 requires a successor agency to use any amount of
bond proceeds not subject to an enforceable obligation as
of January 1, 2015 to either defease the bonds or purchase
outstanding bonds on the open market for cancellation.
SB 986 requires a successor agency's oversight board to
approve the agency's establishment of any enforceable
obligation, on or before December 31, 2014, with respect to
bond proceeds to fulfill the purposes for which bonds were
sold by a dissolved redevelopment agency. The bill
prohibits an oversight board from disapproving an
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enforceable obligation with respect to bond proceeds if the
obligation is reasonably in furtherance of the purposes for
which the bonds were sold.
State Revenue Impact
No estimate.
Comments
1. Purpose of the bill . State law offers successor
agencies no good options for disposing of billions of
dollars of unspent RDA bond proceeds. If the interest
rates that a successor agency earns on securities it buys
to defease bonds are significantly lower than the interest
payments on the bonds, the agency will lose a large amount
of money on the transaction. If a successor agency cannot
spend unencumbered bond proceeds and chooses not to use the
funds to defease bonds, it must remit the proceeds to the
county auditor-controller for distribution to other taxing
entities. Redistributing bond proceeds to other local
governments would likely violate federal law governing
tax-exempt bonds and the terms of many specific bond
agreements. SB 986 prohibits unspent bond proceeds from
being redistributed and provides successor agencies with
alternative ways to use the funds. By letting successor
agencies enter into new enforceable obligations through
2014, SB 986 allows bond proceeds to finance former RDA
projects that would not otherwise be completed. By letting
successor agencies use bond proceeds to purchase
outstanding bonds on the open market, SB 986 offers them a
potentially less costly method to retire bonds issued by
former RDAs. SB 986 eliminates the cloud of uncertainty
that hangs over former RDAs' unspent bond proceeds, avoids
costly litigation over reallocated bond proceeds, reduces
the cost of retiring former RDA bonds, and provides
financing for projects that were stranded by RDAs'
dissolution.
2. Before and after . After Governor Brown proposed ending
redevelopment, some RDA officials tried to encumber as much
future tax increment revenue as possible before any changes
to redevelopment law took effect. During the first six
months of 2011, RDAs issued about $1.5 billion in tax
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allocation bonds, a level of debt issuance greater than the
$1.3 billion that they issued during all 12 months of 2010.
Many bonds issued in 2011 required RDAs to pay interest
rates than were significantly higher than those on bonds
issued in previous years. To avoid rewarding some RDAs'
rush to issue unnecessary and expensive debt, the Committee
may wish to consider whether state law should distinguish
between unspent proceeds from RDA bonds sold before January
1, 2011 and unspent proceeds from bonds sold after that
date. For example, SB 986 could restrict an oversight
board's discretion over successor agencies' new enforceable
obligations to spend pre-2011 bond proceeds, but allow
oversight boards to disapprove any new enforceable
obligations for 2011 bond proceeds. Alternatively, the
Committee may wish to consider amending SB 986 to prohibit
successor agencies from entering into any new enforceable
obligations to spend proceeds from bonds issued in 2011.
3. Undermining oversight . State law generally grants
oversight boards broad discretion to approve or disapprove
successor agencies' actions. Under SB 986, by contrast, a
board can only disapprove a new enforceable obligation that
doesn't further the purposes for which bonds were sold.
Because many bond documents broadly describe the purposes
for which bonds can be used, SB 986 establishes a
relatively easy standard for successor agencies to meet and
provides limited opportunities for oversight boards to
disapprove new enforceable obligations. The Committee may
wish to consider whether SB 986 undermines the oversight
board process by a substituting an unrestrictive
one-size-fits-all rule for local officials' case-by-case
consideration of successor agencies' enforceable
obligations.
4. Zero-sum game . Allocating former RDAs' assets is a
zero-sum game; every reallocation creates winners and
losers. By allowing successor agencies to spend additional
bond proceeds on projects rather than on retiring
outstanding debts, SB 986 grants a larger share of former
RDA assets to successor agencies and a smaller share to
other local governments - including school districts - than
they would receive under current law. One fiscal loser
will be the State General Fund, which must backfill the
revenues that the schools won't get. School districts in
which local property taxes equal or exceed the districts'
revenue limits (the so-called "basic aid" districts) also
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could be fiscal losers because the State General Fund won't
fully backfill their lower allocations. Other local taxing
entities that will receive smaller allocations under SB 986
include counties and special districts that include former
RDA project areas within their jurisdictions.
5. Retirement incentives . To make it easier for successor
agencies to retire former RDAs' bonds, SB 986 lets
successor agencies use unencumbered bond proceeds to buy
bonds on the open market. Allowing successor agencies to
explore a wider range of options for retiring RDA bonds
could benefit local taxing entities and the State General
Fund by expediting the debt retirement process. For
example, refunding former RDA bonds could make sense if the
refunding doesn't extend the term of the debt, saves debt
service in each payment year, and allocates the savings to
local taxing entities. The Committee may wish to consider
amending SB 986 to allow successor agencies to use
additional methods for retiring RDA bonds, subject to
oversight boards' approval.
6. Let's be clear . To clarify the bill's language, by
eliminating a double-negative, the Committee may wish to
consider amending SB 986 by striking out "not disapprove"
on page 7, line 17 and inserting "approve."
7. Related bills . At its March 21 hearing the Committee
will also hear SB 1056 (Hancock), which expands the
definition of "enforceable obligation" to include financial
obligations related to a project funded with both tax
increment and federal school construction bonds. Other
bills relating to the redevelopment dissolution process
include:
SB 1151 (Steinberg), which requires a successor
agency to prepare a long-range asset management plan
that outlines a strategy for maximizing the long-term
value of a former RDA's real property and assets.
AB 1585 (Perez), which makes numerous amendments to
the statutes governing the redevelopment dissolution
process.
Support and Opposition (3/15/12)
Support : Cities of Atascadero, Bellflower, Blythe, Brea,
Buena Park, Camarillo, Colton, Folsom, Glendora, La Mirada,
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Lakewood, Norwalk, Ontario, Paramount, Placentia, Rancho
Cucamonga, Rosemead, Santa Cruz, Simi Valley, South El
Monte, Thousand Oaks, Victorville, Vista, and Whittier.
Opposition : California Professional Firefighters and
County of Los Angeles.