BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 986 HEARING: 4/18/12
AUTHOR: Dutton FISCAL: Yes
VERSION: 4/11/12 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 bond 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 imposes requirements on a successor
agency's use of the unencumbered balance of funds derived
from tax exempt bond proceeds.
SB 986 requires successor agencies to use bond proceeds
derived from bonds sold on or before December 31, 2010 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 the successor
agency entered into on or before December 31, 2014, to
fulfill the purposes for which the bonds were sold by
the dissolved redevelopment agency.
SB 986 prohibits a specified statute from being interpreted
to grant the power of eminent domain to a successor agency.
With respect to bond proceeds from bonds sold on or before
December 31, 2010, if the purposes for which bonds that
were sold by a former redevelopment agency cannot be
achieved, SB 986 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 that a successor agency must use any amount
of bond proceeds from bonds sold after December 31, 2010
that are not subject to an enforceable obligation to either
defease the bonds or purchase outstanding bonds on the open
market for cancellation.
SB 986 requires a successor agency's oversight board, on or
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before December 31, 2014, to approve the agency's
establishment of an enforceable obligation with respect to
bond proceeds from bonds sold on or before December 31,
2010, to fulfill the purposes for which bonds were sold by
a dissolved redevelopment agency. The bill allows an
oversight board to approve an enforceable obligation with
respect to bond proceeds from bonds sold by a former RDA on
or before December 31, 2010 if:
The obligation is reasonably in furtherance of the
purposes for which the bonds were sold; and
The obligation is consistent with one or more of
the following:
o The obligation is required in order to
meet a federal or state matching funds
requirement in which federal or state funds have
already been committed and is specific to the
project requiring the obligation; or
o The obligation is required in order to
meet the requirements for the expenditure of a
local general obligation bond approved by the
voters; or
o The obligation is required to complete a
project specific to critical public
infrastructure that is in, or provides benefit
to, the project area of the former redevelopment
agency and the evidence of the benefit to the
community in proceeding with the obligation
substantially outweighs the resulting delay in
the distribution of tax increment to the impacted
taxing entities.
SB 986 specifies that critical public infrastructure does
not include:
An automobile dealership which will be or is on a
parcel of land which has not previously been developed
for urban use.
A development or business that, either directly or
indirectly, acquires, constructs, improves,
rehabilitates, or replaces property that is or would
be used for a golf course or for a racetrack, speedway
or other racing venue.
A development or business that acquires,
constructs, improves, rehabilitates, or replaces
property that is or would be used for a stadium,
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coliseum, arena, ballpark or other sports facility
that is intended for use by a professional sports
franchise.
A development or business that, either directly or
indirectly, acquires, constructs, improves,
rehabilitates, or replaces property that is or would
be used for gambling or gaming of any kind, including
casinos, gaming clubs, bingo operations, or any
facility wherein banked or percentage games, any form
of gambling device, or lotteries, other than the
California State Lottery, are or will be played.
A development or business that, either directly or
indirectly, acquires, constructs, improves,
rehabilitates, or replaces property that is or would
be used for retail, entertainment or other private
purpose unrelated to public works such as bridges,
parks, roads, municipal buildings, dams, railroads,
schools, hospitals, and other, long-term, public
physical assets and facilities.
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 proceeds derived from
tax exempt bonds 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
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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. 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
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.
3. 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.
4. Taxable vs. tax-exempt . SB 986's provisions govern a
successor agency's use of unencumbered proceeds from former
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RDAs' tax-exempt bonds. However, not all bonds issued by
former RDAs were tax-exempt. It is not clear what
proportion of former RDAs' unencumbered bond proceeds come
from taxable bonds. However, based on data from earlier
this year, taxable bonds accounted for approximately 17% of
RDAs' total outstanding bond indebtedness. Under SB 986,
unencumbered proceeds from taxable bonds could be
reallocated to taxing entities by a county
auditor-controller. Some stakeholders remain concerned
that reallocating bond proceeds to taxing entities may
violate the terms of specific bond agreements. The
Committee may wish to consider whether SB 986's
requirements should also apply to successor agencies' use
of unencumbered bond proceeds from taxable bonds.
5. Technical amendment . To clarify SB 986's provisions,
the Committee may wish to consider making the following
technical amendment:
On page 8, line 33, strike out "business," and
insert: "business that,"
6. 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
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, SB 986 makes
a distinction between unspent proceeds from RDA bonds sold
before December 31, 2010 and unspent proceeds from bonds
sold after that date.
7. Urgency . Regular statutes take effect on the January 1
following their enactment; bills passed in 2012 take effect
on January 1, 2013. The California Constitution allows
bills with urgency clauses to take effect immediately if
they're needed for the public peace, health, and safety.
SB 986 contains an urgency clause declaring the need for
the bill to take effect immediately.
8. Related bills . At its April 18 hearing, the Committee
also will hear:
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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.
SB 1151 (Steinberg), which creates an alternative
process by which communities can use their former
redevelopment agencies' assets for economic
development and housing purposes.
SB 1156 (Steinberg), which allows a Community
Development and Housing Joint Powers Authority, and
some counties, to use tax increment financing and
other local revenues to finance specified local
economic development activities.
Other bills that amend the statutes governing the
disposition and use of former RDAs' assets include:
SB 1337 (Pavley), which allows a successor agency
to retain former RDA land that is a brownfield site
for the purpose of hazardous substance remediation or
removal.
AB 1585 (Perez), which makes numerous amendments to
the statutes governing the redevelopment dissolution
process.
Support and Opposition (4/12/12)
Support : Counties of Riverside and San Bernardino, Cities
of Adelanto, Atascadero, Bellflower, Blythe, Brea, Buena
Park, Camarillo, Cerritos, Colton, Fairfield, Folsom,
Glendora, Grand Terrace, La Mirada, La Quinta, Lakewood,
Lawndale, Lynnwood, Moorpark, Norwalk, Ontario, Palm
Desert, Paramount, Placentia, Pomona, Rancho Cucamonga,
Rialto, Rosemead, Santa Cruz, Signal Hill, Simi Valley,
South El Monte, Temecula, Thousand Oaks, Victorville,
Vista, and Whittier, California Contract Cities
Association, California Redevelopment Association, League
of California Cities.
Opposition : California Alliance to Protect Private
Property Rights, Counties of Los Angeles and Santa Clara.