BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 1203 HEARING: 4/24/14
AUTHOR: Jackson FISCAL: Yes
VERSION: 4/21/14 TAX LEVY: No
CONSULTANT: Grinnell
PROPERTY TAXES: PAYMENT IN LIEU OF TAXES AGREEMENTS
Cancels assessments on low-income housing excluded from the
welfare exemption; adopts new rules for cities imposing
fees on low-income housing.
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 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).
SB 1203 (Jackson) - 4/21/14 -- 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.
Some local agencies impose "payment in lieu of tax"
agreements, or PILOTs, to compensate them for the services
it 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
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 which fees
municipalities can charge low-income housing developments.
SB 1203 (Jackson) - 4/21/14 -- Page 3
Proposed Law
Senate Bill 1203 bars local agencies from imposing a charge
or fee on a low-income housing project eligible for the
welfare exemption from property tax unless the fee or
charge is:
Imposed pursuant to the Mitigation Fee Act, and is
consistent with fees paid by all other residential
developments, and
For a specific service provided directly to the
housing development project, the service is not
provided to those not charged, and the fee does not
exceed the actual cost of providing the service.
SB 1203 adopts legislative findings applying its provisions
to charter cities.
The measure deletes the requirement that the property owner
must certify that the funds that would have been used to
pay property taxes are used to maintain the affordability
of the units or reduce rents to be eligible for the
exemption. The bill also bars assessors from levying
future escape or supplemental assessments resulting from
the requirement, and cancels any outstanding tax, interest,
or penalty levied between January 1, 2012 and January 1,
2015 resulting from the requirement. However, the measure
does not provide for any refunds of taxes.
SB 1203 adds a definition of "related facilities" into the
welfare exemption. The measure makes legislative findings
and declarations supporting its purposes, including "no
inference" language to ensure that any authority
adjudicating a challenge to the legality of current PILOTs
does not consider the bill to ensure these disputes are
determined using the law in place at the time the local
agency imposed the PILOT. The measure also makes
conforming changes.
State Revenue Impact
According to BOE, "Information on the number of PILOT
agreements has proven difficult to obtain and is unknown,
making it impossible to assess the full fiscal impact of
this proposal."
SB 1203 (Jackson) - 4/21/14 -- Page 4
Comments
1. Purpose of the bill . According to the author, "As a
condition of project approval, some local governments have
required affordable housing developers to agree to annual
PILOT payments, often equal to the share of the
jurisdiction's share of the property tax. Most recently,
some county assessors are threatening certain affordable
housing projects that make PILOT payments with the
cancellation of their welfare exemption and the imposition
of back taxes for past years when PILOT payments were made.
Back taxes on PILOT agreements are often in the hundreds
of thousands of dollars. These assessments threaten to
bankrupt the affordable housing developments, which would
result in the loss of precious affordable housing.
Affordable housing developments provide critical
opportunities for our low-income residents. Often, these
units can be their last resort before becoming homeless.
As confirmed by Legislative Counsel in 2012, there is no
legal authority to charge these PILOT fees. Affordable
housing developments should be protected by the welfare
exemption, not burdened by local governments requiring
PILOT fees."
2. What's different ? As introduced, SB 1203 amended the
welfare exemption section in the Revenue and Taxation Code
to void existing PILOT fees, provide that a PILOT agreement
didn't make a low-income housing project ineligible for the
welfare exemption, and set new rules for local agencies to
use when imposing fees on these projects, in addition to
definitions of some terms. The introduced version left
intact the property owner's certification requirement. As
amended, the measure amends the welfare exemption section
of the Revenue and Taxation Code to delete the
certification requirement, erase any assessment or taxes
due in connection with failing to meet the certification
requirement, define "related facilities," and state
legislative intent that no inference be drawn in connection
with the bill's changes. Additionally, the measure now
adds a section to the Mitigation Fee Act in the Government
Code that imports the introduced version's new rules for
local agency fees on affordable housing developments, plus
more legislative intent that applies SB 1203's changes to
charter cities. As amended, SB 1203 provides that:
SB 1203 (Jackson) - 4/21/14 -- Page 5
Existing PILOT agreements stay in place, and
authorities adjudicating any challenges to their
legality must disregard SB 1203,
Any past or future assessments for tax, penalties,
and interest resulting from a failure of the property
owner to make the required certification with regard
to property tax savings are cancelled, but previous
taxes property owners pay aren't refunded, and
New rules apply for cities, including charter
cities, seeking to impose fees on low-income housing
projects eligible for the welfare exemption.
3. Too restrictive ? SB 1203's new rules for cities,
including charter cities, seeking to impose fees on
low-income housing projects eligible for the welfare
exemption largely reflect Proposition 26's (2010) changes
to the California Constitution's sections on local fees.
Cities state that these terms are too restrictive; instead,
they should be able to impose fees in accordance with the
state's Mitigation Fee Act. For example, cities argue that
a senior housing project imposes specific costs for medical
care and fire services, and requiring that a fee on senior
housing be "consistent with" fees charged to other
residential developments prevents a city from assigning its
specific costs to the projects that give rise to them. The
Committee may wish to consider whether SB 1203's
requirement that fees charged to affordable housing be
consistent with fees charged to other residential housing
is too restrictive.
4. Martin Helmke's wisdom . Capitol legend Martin Helmke
served as Chief Consultant to the Revenue and Taxation
Committee from 1984 to 2006, winning widespread acclaim for
his wit, intellect, patience, and humility. In his
analysis of AB 2144, which added the requirement that the
property owner must certify that the funds that would have
been used to pay property taxes are used to maintain the
affordability of the units or reduce rents, Helmke
presciently wrote:
"In order to claim the exemption the operator must
demonstrate that the property tax saved goes toward
furthering the low-income aspects of the project. It
will be impossible, operationally, to make an
unambiguous demonstration, or for the assessor, in
most cases, to effectively challenge the
SB 1203 (Jackson) - 4/21/14 -- Page 6
demonstration. Enforcing this requirement will prove
very difficult, and will cause much administrative
difficulty both for the assessors and the assesse."
More than 25 years later, Assessor Goodwin determined that
property owners couldn't possible comply with the
requirement, as property owners paying PILOTs couldn't
demonstrate that they're simultaneously using the same
money to maintain affordability as the law required, and
therefore must pay property tax. The requirement is
duplicative due to low-income housing projects being
subject to deed restrictions, regulatory agreements with
local agencies, and Internal Revenue Service oversight if
the project uses Low-Income Housing Tax Credits. SB 1203
sensibly deletes a requirement that was essentially
unenforceable from inception.
Support and Opposition (4/21/14)
Support : BRIDGE Housing Corporation; Cabrillo Economic
Development Corporation; California Housing Consortium;
California Infill Builders Federation; LeadingAge
California; The Arc of Ventura County; Ventura County
Assessor; Western Center on Law & Poverty
Opposition : None received.