BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 2046 HEARING: 6/25/14
AUTHOR: Gomez FISCAL: Yes
VERSION: 6/19/14 TAX LEVY: No
CONSULTANT: Weinberger
CONDUIT REVENUE BONDS (URGENCY)
Authorizes California joint powers authorities (JPAs) to
issue bonds and enter into loan agreements to finance or
refinance private projects that are located outside of
California.
Background and Existing Law
The Joint Exercise of Powers Act allows two or more public
agencies to exercise their common powers by signing joint
powers agreements. Sometimes an agreement creates a joint
powers authority (JPA).
Public agencies use the JPA law and the related Marks-Roos
Local Bond Pooling Act to form bond pools to finance public
works, working capital, insurance needs, and other public
benefit projects. JPAs can issue one large Marks-Roos Act
bond and then loan the capital to local agencies, thus
creating a "bond pool." Bond pooling saves money on
interest rates and finance charges. It also lets smaller
local agencies enter the bond market.
The California Constitution exempts interest on bonds
issued by the state, or a local government in the state,
from taxes on income. Federal tax law exempts interest on
state and local bonds as well, but California does not
exempt interest on bonds issued by other states or local
governments located in other states.
Certain types of non-governmental borrowers can take
advantage of tax-exempt financing through "conduit revenue
bonds," which are issued by many types of governmental
agencies, including state financing authorities, chartered
cities, counties, joint powers authorities, redevelopment
agencies, and local housing and industrial development
authorities. These bonds may be issued for various
AB 2046 -- 6/19/14 -- Page 2
purposes including economic development, educational and
health facilities, and multi-family housing. The issuing
agency loans the funds obtained from the financing to a
non-governmental borrower who builds and operates the
project. A conduit revenue bond is payable solely from the
loan payments received from the non-governmental party, so
the governmental issuer normally has no liability for debt
service on the bonds. A private firm's use of a
governmental agency's authority to issue tax-exempt debt is
conditioned on public benefit being provided by the project
that is financed.
A JPA can issue tax-exempt revenue bonds to finance
projects that provide a public benefit and are located
within the geographic boundaries of its member agencies.
State law requires local approval of the construction,
acquisition, and financing of public benefit projects. The
local agency with approval power must be the city, county,
or city and county within whose boundaries the public
benefit project is to be located; the law also specifies
that the local agency with approval power must have land
use jurisdiction over the project (SB 147, Kopp, 1998; AB
457, Canciamilla, 2001).
Other states, including Wisconsin, Colorado, and Arizona,
allow public entities formed under their laws to issue
conduit financing bonds for projects located outside of
those states' boundaries. Some California JPAs want the
Legislature to grant them similar authority to issue
conduit financing bonds for projects that are not located
in California.
Proposed Law
Assembly Bill 2046 allows a joint powers authority,
notwithstanding any other law, to issue bonds and enter
into a loan agreement to finance or refinance a project
that is situated in another state, including working
capital related to that project, if all of the following
apply:
The project is owned, developed, or operated by a
private entity.
The city, county, or other public body with land
use planning authority over the project, or the state
in which the project is situated, approves, by
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resolution, order, or other official action, the
authority's bond issuance and the project's financing.
This approval requirement does not apply to the
issuance of refunding bonds if the city, county,
public body, or state approved a prior financing or
refinancing of the project.
The joint powers authority finds, based on the
facts and circumstances attendant to the project or
the financing or refinancing of the project, that the
issuance of the bonds or the financing or refinancing
of the project will result in a substantial public
benefit to, and are for a public purpose of, the
citizens of California.
As of July 1, 2014, the authority had at least 70
local agency members and the authority had issued
bonds and entered into loan agreements to finance at
least 25 separate projects.
Assembly Bill 2046 prohibits the interest on bonds issued
pursuant to its provision from being exempt from tax, and
requires it to be included in gross income as defined in
state law, unless one or more of the following is
satisfied:
At least 20% of the net proceeds of the issue are
allocated to the financing of one or more projects,
including related working capital, located in
California.
The borrower of the proceeds has its principal
place of business in California and, if that borrower
is subject to income or franchise tax in California or
any other state, that borrower has paid to California
for the most recent tax year income or franchise tax
of at least $50,000, or half of its total income or
franchise tax liability to all states, whichever is
less.
If the borrower has little or no assets other than
the project to be financed and is owned by another
company or companies, then the company or companies
that own a majority of interest in the borrower must
have its or their principal place of business in
California.
In the case of the financing of one or more
multifamily rental family projects, the developer of
the project or projects has its principal place of
business in California. Any such developer subject to
personal or corporate income tax in California or any
AB 2046 -- 6/19/14 -- Page 4
other state has paid to California for the most recent
tax year income or franchise tax of at least $50,000,
or half of its total income or franchise tax liability
to all states, whichever is less.
AB 2046 defines the term "developer" as a corporation,
partnership, limited liability company, or other person
that is the initial controlling party within the legal
entity that owns the multifamily rental housing project to
be financed with proceeds of the bonds and that is expected
to be the primary economic beneficiary of, and to take the
primary economic risks related to, development and
performance of the project.
The bill defines "financing" as including the refinancing
of bonds of the authority or of bonds issued by any other
state or local entity located within this state.
AB 2046 defines "issue" as having the same meaning as in a
specified federal regulation.
The bill defines "net proceeds of an issue" as the
aggregate principal amount of such issue, less the amount
of such issue allocated to original issue discount,
issuance costs, reserve funds, and credit enhancement
costs.
State Revenue Impact
No estimate.
Comments
1. Purpose of the bill . Activities financed with tax
exempt bonds increasingly transcend state boundaries and
the practice of issuing municipal debt for multi-state and
out-of-state projects is becoming more widespread.
Multi-state financing provides cost and time savings to
borrowers through economies of scale. In recent years,
municipal issuers located in Arizona, Colorado, Florida,
Illinois, Texas and Wisconsin, among other states, have
issued bonds to finance multi-state and out-of-state
projects. Although some of those projects are located in
California, companies and non-profit organizations seeking
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to develop their multi-state projects must look beyond
California for cost effective bond financings. For example,
one private firm that operates the California Statewide
Communities Development Authority (CSCDA), a JPA that
provides conduit financing in California, also operates the
Wisconsin-based Public Finance Authority, which issues
conduit bonds for projects nationwide. Allowing
California JPAs to assist in financing multi-state and
out-of-state projects can generate time, efficiency and
transaction cost benefits to enterprises with substantial
operations, employment or headquarters in California.
Other public benefits associated with these financings can
include enhancing California's business climate and putting
California-based public finance professionals on an even
footing with their competitors in other states. AB 2046
helps California-based conduit bond issuers maintain their
leadership position in a rapidly-evolving municipal finance
industry.
2. Members only . AB 2046 grants its out-of-state
financing powers to only those JPAs that, as of the end of
this month, have 70 local members and have provided conduit
financing for at least 25 projects. This fixes the number
of JPAs that are eligible to use the bill's provisions at
around 5 and prevents other California JPAs from entering
the marketplace in the future. It is understandable that
California might want to limit multi-state conduit
financing authority only to JPAs with an established track
record of issuing conduit bonds for project within
California. However, it is unclear why state law should
permanently guarantee that only a small, fixed group of
JPAs and the consultants, financial advisers, and other
professionals who provide services to those JPAs can
participate in, and profit from, out-of-state conduit
financing transactions. As with many businesses,
competition among conduit issuers, including the prospect
of competition from new entrants to the market, should
serve to benefit borrowers and the public-benefit projects
they are financing. To reduce these barriers to
competition, while still requiring JPAs to establish a
track record of successful conduit financing, the Committee
may wish to consider amending AB 2046 to delete the July 1,
2014 date by which JPAs must have 70 local agency members
and, instead, limit the bill's provisions only to those
JPAs that have provided conduit financing for 25 projects.
AB 2046 -- 6/19/14 -- Page 6
3. Definition . Among the conditions that AB 2046
establishes for a bond issuance to be exempt from
California income tax is that the borrower must have its
principal place of business in California. However, the
bill does not define "principal place of business" or
identify who is responsible for determining whether a
borrower's principal place of business is in California.
Is a principal place of business determined by the location
of a corporation's headquarters, by the number of employees
in California, by the volume of revenues generated in
California, or by other measures? Without a better
definition, it may be difficult for bond counsel to render
a strong legal opinion that bonds issued under AB 2046's
provisions qualify for an exemption from California income
tax. To dispel this uncertainty, the Committee may wish to
consider amending AB 2046 to more specifically define how
to determine a borrower's "principal place of business."
4. Oversight . JPAs and other public entities providing
multi-state conduit bond financing is still a relatively
new phenomenon. To allow for thorough state oversight and
evaluation of these new financing powers, AB 2046's
provisions could be enacted for a limited period of time as
a pilot program, with a requirement that a third-party must
evaluate and report on the bill's implementation. To
ensure oversight of AB 2046's implementation, the Committee
may wish to consider amending AB 2046 to:
Allow JPAs to issue new bonds and enter into new
loan agreements pursuant to the bill's provisions only
until January 1, 2021, and
Require JPAs that issue debt for out-of-state
projects to provide information requested by the
Legislative Analyst's Office, by January 1, 2019, and
to require the Legislative Analyst's Office to produce
a report by January 1, 2020 documenting the public
benefits generated for California communities by
conduit financing bonds issued pursuant to AB 2046's
provisions.
5. Public benefit . AB 2046 may benefit some
California-based conduit borrowers through lower financing
costs and generate other public benefits associated with
the development of multi-state projects that include a
California component. However, some conduit financing
authorized by the bill may benefit out-of-state communities
significantly more than our own. For example, it is
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unclear whether the public benefits generated by a project
located entirely out of state that is developed by a
California-based borrower will produce sufficient public
benefits to justify the state income tax exemption on the
bonds' interest. The Committee may wish to consider
whether the criteria specified in the bill for granting a
state income tax exemption to the interest on conduit bonds
are sufficient to ensure that bonds issued pursuant to the
bill's provisions produce generate public benefits.
It is also unclear why state law should allow California
public agencies to provide financing for out-of-state
projects that generate no public benefits within California
at all. Other states already allow public entities to
engage in conduit transactions which have no nexus within
those states' borders, but which generate fees for both the
public entities and private contractors. Allowing
California JPAs to engage in similar transaction may simply
provide an opportunity for those JPAs and their private
partners to profit from the financing revenues associated
with the transactions. The Committee may wish to consider
amending AB 2046 to allow JPAs to issue conduit bonds only
for projects that meet the bill's criteria to qualify for
state tax exemption on the bonds' interest.
6. Urgency . Regular statutes take effect on January 1
following their enactment; bills passed in 2014 take effect
on January 1, 2015. The California Constitution allows
bills with urgency clauses to take effect immediately if
they're needed for the public peace, health, and safety. AB
2046 contains an urgency clause declaring that it is
necessary for its provisions to go into effect immediately
to provide bonding authority for funding multi-state,
public-private projects that are necessary to ensure
California's national and international competitiveness.
7. Previous legislation . SB 188 (Negrete McCleod, 2007),
would have allowed a single California joint powers
authority, the California Statewide Communities Development
authority (CSCDA), to issue debt for projects located
outside of California. SB 188 died in the Senate
Appropriations Committee. SB 99 (Senate Local Government
Committee, 2009), which was passed by the Legislature and
signed into law, imposed additional transparency and
accountability requirements on conduit financing providers
in California.
AB 2046 -- 6/19/14 -- Page 8
Assembly Actions
Assembly Local Government Committee: 6-0
Assembly Floor: 60-17
Support and Opposition (6/19/14)
Support : Anaergia Inc.; California Municipal Finance
Authority; Goodwill Industries of Sacramento Valley &
Northern Nevada, Inc.; SF Advisors, LLC; The Highland
Companies; The Oscar De La Hoya Foundation; The Rob Dyrdek
Foundation; The Vitus Group; The Wasatch Group.
Opposition : California Taxpayers Association; Howard
Jarvis Taxpayers Association; WCA Services, Inc.