BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 2493 HEARING: 6/25/14
AUTHOR: Bloom FISCAL: Yes
VERSION: 6/10/14 TAX LEVY: No
CONSULTANT: Weinberger
REDEVELOPMENT SUCCESSOR AGENCIES
Allows redevelopment successor agencies to spend proceeds
from bonds issued by former redevelopment agencies in 2011.
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. 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. The RDA kept the property tax increment
revenues generated from increases in property values within
a redevelopment project area.
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. The California Supreme Court's 2011
ruling in California Redevelopment Association v.
Matosantos upheld AB X1 26, but invalidated AB X1 27
(Blumenfield, 2011), which would have allowed most RDAs to
avoid dissolution.
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
for supervising it and approving its actions. The
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Department of Finance (DOF) 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. The statutory definition of an
"enforceable obligation" includes bonds, specified
bond-related payments, some loans, payments required by the
federal government, obligations to the state, obligations
imposed by state law, legally required payments related to
RDA employees, judgments or settlements, and other legally
binding and enforceable agreements or contracts.
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 DOF. 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.
If a successor agency complies with state laws that require
it to remit specified RDA property tax allocations and cash
assets identified through a "due diligence review" process,
it receives a "finding of completion" from DOF (AB 1484,
Assembly Budget Committee, 2012). Approximately 300
successor agencies have received a finding of completion.
State law allows a successor agency that receives a finding
of completion to use bond proceeds derived from bonds
issued on or before December 31, 2010, for the purposes for
which the bonds were sold. Bond proceeds in excess of the
amounts needed to satisfy approved enforceable obligations
must be expended in a manner consistent with the original
bond covenants. If remaining bond proceeds cannot be spent
in a manner consistent with the bond covenants, the
proceeds must be used to defease the bonds or to purchase
those same outstanding bonds on the open market for
cancellation. 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.
Citing the costs associated with retiring proceeds from
bonds issued by RDAs in 2011 and the potential benefits of
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investing those proceeds in development projects, some
local officials want the Legislature to allow successor
agencies to spend 2011 bond proceeds under specified
conditions.
Proposed Law
Assembly Bill 2493 allows a successor agency to use bond
proceeds derived from bonds issued between January 1, 2011,
and June 28, 2011, only for projects which meet the
following criteria, as determined by a resolution issued by
the oversight board:
The project must be consistent with the applicable
regional sustainable communities strategy or
alternative planning strategy adopted pursuant to
state law that the State Air Resources Board has
determined would, if implemented, achieve the
greenhouse gas emission reduction targets established
by the board or, if a sustainable communities strategy
is not required for a region by law, a regional
transportation plan that includes programs and
policies to reduce greenhouse gas emissions.
Two or more of the following significant planning
or implementation actions must have occurred on or
before December 31, 2010:
o An action approved by the governing body
of the city, county, city and county, the board
of the former redevelopment agency, or the
planning commission directly related to the
planning or implementation of the project.
o The project is included within an
approved city, county, city and county, or
redevelopment agency planning document,
including, but not limited to, a redevelopment
agency five-year implementation plan, capital
improvement plan, master plan, or other planning
document.
o The expenditure by the city, county, city
and county, or project sponsor, of more than
$25,000 on planning related activities for the
project within one fiscal year, or $50,000 in
total, over multiple fiscal years.
The successor agency must provide documentation,
dated on or before December 31, 2010, indicating the
intention to finance all or a portion of the project
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with the future issuance of long-term debt, or
documentation showing that the issuance of long-term
redevelopment agency debt was being planned on or
before December 31, 2010.
Each construction contract over $100,000 must
include a provision that prevailing wage will be paid
by the contractor and all of that contractor's
subcontractors.
For each construction contract over $250,000, the
successor agency must require prospective contractors
to submit a standardized questionnaire and financial
statements as part of their bid package, to establish
the contractor's financial ability and experience in
performing large construction projects.
AB 2493 allows a successor agency to use 2011 bond proceeds
to reimburse a city, county, or city and county that funded
an eligible project that meets specified criteria with
funds other than redevelopment funds between June 28, 2011
and the bill's effective date.
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 money on the
transaction. As a result, successor agencies may choose to
retain hundreds of millions of dollars of bond proceeds for
extended periods of time, while paying debt service,
without producing any new infrastructure or economic
development. Even if an agency wants to defease the 2011
bonds, much of the debt that was issued in 2011 can't be
retired for at least 10 years after it was issued. In the
meantime, that debt continues to generate interest costs
while producing no offsetting economic benefits. By
contrast, AB 2493 will support the completion of
infrastructure projects that have already received millions
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of dollars of public investments, support state policy
goals, and generate billions of dollars of economic
activity that will benefit residents throughout California.
2. Forgiving Mardi Gras sins . In what has been called a
"Mardi Gras" reaction, some redevelopment officials
responded to Governor Brown's January 2011 proposal to
eliminate redevelopment agencies by accelerating their
RDAs' tax allocation bond sales. According to the
Legislative Analyst's Office, in the first six months of
2011, RDAs issued about $1.5 billion in tax allocation
bonds, a level of debt issuance greater than during all 12
months of 2010 ($1.3 billion). About two-thirds of the
bond issuances in 2011 had interest rates greater than 7
percent-compared with less than one-quarter of bond
issuances in 2010. In fact, RDAs issued more tax
allocation bonds with interest rates exceeding 8 percent
during the first six months of 2011 than they had in the
previous ten years. Because some of these atypical bond
sales were efforts to preempt the Governor's proposal by
establishing debt obligations that would tie up property
tax increment revenues well into the future, state law does
not allow successor agencies to use unencumbered proceeds
from bonds sold in 2011. The Committee may wish to
consider whether local officials should now be allowed to
use bond proceeds that were generated in an ill-conceived
rush to confound the Governor's RDA proposal.
3. Picking the right criteria . Not all tax allocation
bonds issued in 2011 were rushed to market to preempt
changes in state law. Before the Governor's budget was
released, some RDAs were preparing, in the course of their
regular activities, to issue debt to finance long-planned
projects. AB 2493 makes an effort to distinguish between
those bonds and the so-called "Mardi-Gras" bonds by
specifying criteria that must be met in order to spend 2011
bonds proceeds. It is unclear, however, whether the bill's
criteria are strict enough to screen out all of the bonds
that were rushed to market. The fact that a project was
listed in a capital improvement plan, for example, is not a
very rigorous standard for determining whether, absent the
Governor's proposal, an RDA would have issued debt to
finance that project in 2011. By contrast, it seems
reasonable to view debt that was issued well after January
2011 less favorably than bonds issued within the first
couple of months of 2011. The Committee may wish to
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consider amending AB 2493 to establish more rigorous
criteria for determining which 2011 bond proceeds may be
spent, including a criterion that would only allow debt
issued before April 1, 2011 to be eligible.
4. Retirement planning . The statutes governing RDAs'
dissolution place a high priority on honoring obligations
associated with bonds issued by former RDAs. Some local
officials worry that some tax allocations bonds' high
interest rates, and the relatively low risk-free rate of
return that those funds would earn if they were dedicated
to retiring the bond debt, will jeopardize the ability to
repay the debt. It is not clear how this problem of
"negative arbitrage" will be resolved when bonds reach the
dates on which they can be retired. If the state
determines that at least some portion of former RDAs' 2011
bond proceeds should be defeased, policymakers will need to
consider clarifying state law to minimize the costs and
risks associated with defeasance.
5. Zero-sum game . Allocating former RDAs' property tax
increment revenues is a zero-sum game; every reallocation
creates winners and losers. A successor agency that, under
AB 2493's provisions, finances projects using proceed from
bonds issued in 2011 will receive larger allocations of
former property tax increment revenues in some fiscal years
than it would under current law. Other local governments -
including school districts - will receive smaller
allocations than they would under current law. One fiscal
loser will be the State General Fund, which must backfill
the revenues that the schools won't get.
6. Technical amendments . On February 18, 2014, Governor
Brown signed Assembly Bill 471 (Atkins), which amended
several statutes that also would be amended if AB 2493 is
enacted. Because AB 471 was an urgency statute, approved
by a two-thirds vote in both houses of the Legislature,
that bill's changes to state law took effect immediately.
Because AB 2493's language does not reflect the changes
that AB 471 made to state law, enacting AB 2493 in its
current form would have the unintended effect of repealing,
or "chaptering out," some of AB 471's provisions. The
Committee may wish to consider amending AB 2493 to include
the changes made to state law by AB 471.
7. Double-referral . Because some of AB 2493's provisions
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fall within the jurisdictions of the Senate Transportation
& Housing Committee and the Senate Governance & Finance
Committee, the Senate Rules Committee ordered a
double-referral. The Senate Transportation & Housing
Committee passed the bill at its June 18 hearing by a 9-1
vote.
Assembly Actions
Assembly Local Government Committee: 8-0
Assembly Housing and Community Development Committee: 7-0
Assembly Appropriations Committee: 16-0
Assembly Floor: 75-1
Support and Opposition (6/19/14)
Support : California Building Industry Association; Cities
of Calexico, Culver City, Folsom , Galt, Glendale, La
Quinta, Lynwood, National City, Oakdale, Riverbank, Santa
Cruz, Santa Monica, Signal Hill, Sonoma, Stanton, Ukiah,
Union City, West Hollywood, and Yorba Lina; Glendale
Successor Agency; Housing California; League of California
Cities; MuniServices; National City Chamber of Commerce;
Northern California Carpenters Regional Council; Southwest
California Legislative Council; Stanton Housing Authority;
West Hollywood Chamber of Commerce.
Opposition : California Special Districts Association;
California State Association of Counties; County of Santa
Clara.