BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 1760 HEARING: 6/18/14
AUTHOR: Chau FISCAL: Yes
VERSION: 6/11/14 TAX LEVY: No
CONSULTANT: Grinnell
PROPERTY TAXES: PAYMENT IN LIEU OF TAXES AGREEMENTS
Prohibits local agencies from imposing PILOTs; Presumes
PILOTs don't affect a low-income housing project's welfare
exemption.
Background and Existing Law
I. Welfare Exemption. The California Constitution
provides that all property is taxable unless explicitly
exempted by the Constitution or federal law, but also
allows the Legislature to exempt property used for
charitable purposes owned by nonprofit entities organized
and operated for charitable purposes, such as universities,
hospitals, and libraries. The Legislature enacted this
exemption, commonly known as the "welfare exemption." The
welfare exemption has a similar policy genesis as corporate
tax exemptions for charitable groups: revenues paid in tax
to the government divert needed resources away from the
organization's good works. According to the Legislative
Analyst's Office, local agencies statewide forego $3
billion annually in revenues from welfare exempt
properties.
The welfare exemption includes property used exclusively
for rental housing, if:
Tax-exempt mortgage revenue bonds; general
obligation bonds; federal, state, or local grants; or
federal low-income housing tax credits finance the
housing,
The property is enforceably restricted for
low-income housing, and rents do not exceed those
prescribed in deed restrictions, and
The property owner certifies that funds that would
have been used to pay property taxes are used to
maintain the affordability of the units or reduce
rents (AB 2144, Filante, 1987).
AB 1760 - 6/11/14 -- Page 2
II. Local Fees. Local agencies can impose dedications or
fees under their general police power; however, two U.S.
Supreme Court cases require local agencies to meet "nexus"
( Nollan v. Coastal Commission , 1987) and "rough
proportionality" tests ( Dolan v. City of Tigard , 1994).
The "nexus" test requires a government to establish the
link between the exaction and the interest being advanced
by that exaction, while "rough proportionality" requires a
connection between proposed exactions and the projected
impacts that the exactions are intended to allay. State
law allows local agencies to impose fees in accordance with
the two cases under the Mitigation Fee Act, Subdivision Map
Act, and Quimby Act, among others. State law also allows
local officials and project applicants to sign development
agreements that spell out their mutual duties. Development
agreements are popular among land developers with large
projects that take many years to complete. Development
agreements give developers more certainty about their
ability to complete their projects even if local politics
change in the future. Development agreements allow local
officials to negotiate with developers for more public
facilities and other exactions, avoiding the nexus test.
The detailed accounting requirements for developer fees do
not apply to fees collected under development agreements.
Some local agencies impose "payment in lieu of tax"
agreements, or PILOTs, to compensate them services the
agency provides the property, but isn't paid for in taxes
due to the exemption. Local agencies generally calculate
PILOTs to equal the share of countywide property tax
revenues that agency would have received from the property.
While no general authority for local agencies to impose
PILOTs exists, specific statutes allow:
City or county housing authorities, or tribes or
tribally designated housing authorities, to make
payments to local agencies for services, improvements,
or facilities the local agency provides the housing
project owned by the authority,
The state to pay counties amounts equal to county
property taxes for state wildlife management areas,
including benefit assessments. However, the state
hasn't paid these amounts in more than a decade.
III. Ventura County. In June, 2012, Ventura County
Assessor Dan Goodwin revoked the welfare exemption, and
AB 1760 - 6/11/14 -- Page 3
issued escape assessments for penalty, interest, and taxes
for four previous years, for affordable housing projects
with PILOT agreements with cities. Goodwin argues that
because the property owner pays PILOT fees, he or she
cannot demonstrate that the property tax savings maintains
the affordability of the project or reduces rents, a
necessary condition for the exemption. Given that the
project owners and developers don't have sufficient cash to
pay the assessments, they want the Legislature to erase the
taxes, and provide guidance regarding what kind of
agreements municipalities can charge low-income housing
developments.
Proposed Law
Assembly Bill 1760 prohibits a local government, as
defined, from entering into a PILOT agreement with a
property owner of a low-income housing project eligible for
the welfare exemption from property tax on or after January
1, 2015. The measure provides that any such agreement
entered into in violation of the bill is void and
unenforceable.
AB 1760 defines a PILOT as "any agreement entered into
between a local government and a property owner of a
low-income housing project that requires the owner of the
low-income housing project to pay the local government a
charge, including, but not limited to, any charge designed
to compensate the local government for lost property tax
revenues resulting from the low-income housing project
receiving an exemption pursuant to this subdivision."
For PILOTS entered into before January 1, 2015, the bill
presumes that payments made were used to maintain the
affordability, or reduce rents for, units occupied by
low-income persons. The bill cancels any tax, interest, or
penalty levied between January 1, 2012 and January 1, 2015
due to a PILOT, and requires counties to refund any such
amounts.
The measure additionally provides that local governments
can charge property owners of low-income housing projects
fee pursuant to development agreements, so long as the
charge isn't based in whole or in part on the fact that the
development is subsidized, financed, insured, or otherwise
AB 1760 - 6/11/14 -- Page 4
assisted.
State Revenue Impact
According to BOE, AB 1760 results in cancelling $5.65
million in property tax assessments, and refunds of
$450,000 of previous taxes paid.
Comments
1. Purpose of the bill . According to the author,
"Beginning in 1987, low-income housing developers were
authorized to claim a property tax welfare exemption.
Low-income housing developers have come to rely upon the
welfare exemption as a way to build housing that is
affordable to low-income tenants. At the same time, some
low-income housing developers have entered into PILOTs, to
pay cities and counties all or a portion of the property
taxes they would have received, but for the exemption.
These agreements are now jeopardizing the developers'
welfare exemption and threatening the future of the
projects. More importantly, they are threatening the
tenants that live in the developments and rely upon the
housing. AB 1760 protects those tenants by preserving the
welfare exemption of low-income housing developments with
PILOTs, grandfathers in existing PILOT agreements, and
outlaws new PILOT agreements going forward."
2. Differences, part one . On April 24th, the Committee
approved SB 1203 (Jackson), which also addressed the issue
of PILOTS and the welfare exemption from property tax for
low-income housing projects. As approved by the Senate on
May 28th, the measure has several key differences with AB
1760. The most important difference is that SB 1203
removes the requirement for property owners to certify that
funds that would have been used to pay property taxes are
used to maintain the affordability of the units or reduce
rents; property owners can never demonstrate where the
specific amount not paid in property tax shows up in an
affordable housing project. The amount could be lower
rents, more units, less subsidy, or increased returns for
the owner; affordable housing projects don't make a
separate account showing what happens to the dollars they
don't pay in property tax. The certification requirement
AB 1760 - 6/11/14 -- Page 5
caused the revocation of the welfare exemption in Ventura
County, when the assessor noticed that it's impossible to
simultaneously pay a local agency a PILOT with the same
dollar that must be used to maintain affordability and
reduce rents. Instead, AB 1760 presumes that payments made
under PILOTs were used to maintain the affordability, or
re-duce rents for units occupied by low-income persons.
However, the presumption likely isn't true. Local agencies
may have used the fund proceeds to maintain the
affordability of, or reduce rents for, units occupied by
low-income persons, but they may not have. SB 1203's
cleaner, simpler approach ensures that property owners
won't ever have to worry about losing their exemption, and
end up paying property taxes. The Committee may wish to
consider replacing AB 1760's presumptions with SB 1203's
removal of the certification.
3. Differences, part two . AB 1760 cancels current
assessments, penalties, and interest, as well as providing
refunds for past amounts paid. SB 1203 does the same,
except it precludes refunds. Generally, when the
Legislature changes property tax law retroactively in a way
that alters past liabilities, counties provide refunds
automatically.
4. Differences, part three . SB 1203 and AB 1760 also
differ in other key respects:
AB 1760 allows local governments to charge a
low-income housing project eligible for the welfare
exemption pursuant to a development agreement, so long
as it the fee doesn't discriminate on the project
because it's assisted. SB 1203 instead enacts new
rules for cities seeking to impose fees on low-income
developments.
AB 1760's fee requirements on local agency
agreements are part of the Revenue and Taxation Code's
requirement for the welfare exemption, whereas SB 1203
placed them in the Government Code's Mitigation Fee
Act.
SB 1203 contained "no inference" language, which
directs authorities that adjudicate whether current
PILOT agreements are legal to disregard the bill,
thereby ensuring that any disputes are decided using
the rules in place at the time the local agency
imposes the fee. AB 1760 doesn't speak to past fees,
except to presume that they don't affect the welfare
AB 1760 - 6/11/14 -- Page 6
exemption.
SB 1203 also applied its provisions to charter
cities by making the issue one of statewide concern,
whereas AB 1760 doesn't because it's limitations on
local agency agreements is in the Revenue and Taxation
code.
Assembly Actions
Assembly Floor 55-20
Assembly Revenue and Taxation 6-1
Support and Opposition (06/12/14)
Support : BRIDGE Housing; California Coalition for Rural
Housing; California Housing Consortium; California Infill
Builders Federation; LeadingAge California.
Opposition : None received.