The 2014-15 Budget: Changes to a Local Infrastructure Financing Tool

The 2014-15 Budget: Changes to a Local Infrastructure Financing Tool MAC TAYLOR • L E G I S L A T I V E A N A L Y S T • MARCH 11, 2014 SUMMARY In 1990, the Legislature authorized cities and counties to form infrastructure financing districts (IFDs) to fund local infrastructure projects. Since then, cities and counties rarely have used IFDs. Instead, they have opted to use alternative methods to fund infrastructure, including redevelopment agency (RDA) funds. The dissolution of RDAs in 2011 has prompted calls for a review of the financing tools available to local governments to fund infrastructure and local economic development. The Governor’s 2014-15 budget proposes several changes to IFDs which are intended to provide local governments with enhanced options to fund infrastructure and local economic development, as well as various other types of initiatives, such as urban infill, transit-oriented development, and affordable housing. Some components of the Governor’s proposal merit consideration. Particularly, the proposed expansion of IFD activities could further some state and local objectives, such as reducing greenhouse gas (GHG) emissions, increasing the supply of affordable housing, and mitigating environmental pollution. Thus, with one exception which we discuss in the report, we recommend the Legislature adopt the Governor’s proposed expansion of IFD activities. Other components of the Governor’s proposal raise concerns. Most notably, the Governor’s proposal to lower the voter-approval threshold for IFD debt may conflict with provisions of the State Constitution requiring voter approval of city and county debt. In addition, the Governor proposes to maintain somewhat problematic rules related to voter approval of IFDs. Therefore, we recommend the Legislature reject the Governor’s proposed changes to the voter-approval requirements for IFDs. Instead, we suggest the Legislature consider two alternatives: (1) restructure IFDs to resemble similar types of local entities that do not have voter-approval requirements or (2) expand voter- approval requirements to allow all residents of the communities affected by an IFD to vote. 2014-15 BUDGET INTRODUCTION The Governor’s budget proposes several other types of initiatives, such as urban infill, changes to a seldom used infrastructure financing transit-oriented development, and affordable tool for local governments, known as IFDs. These housing. This report (1) describes the Governor’s changes are intended to provide local governments proposal, (2) comments on various aspects of the with enhanced options to fund infrastructure and proposal, and (3) offers recommendations for the local economic development, as well as various Legislature to consider. BACKGROUND Local Government Finance resources alone exceed the per-pupil rates, the district does not receive general purpose state aid. Property Taxes Are Allocated to Local State Constitution Limits Local Government Governments. Californians pay around $50 billion Debt. The State Constitution prohibits cities, in property taxes annually. County auditors counties, and schools from issuing new long-term distribute these revenues to local governments— debt without obtaining approval from two-thirds schools, community colleges, counties, cities, and of local voters. It is important to note, however, that special districts—pursuant to state law. The share various types of long-term obligations commonly of property tax revenues allocated to each type of incurred by local governments—such as lease- local government varies from location to location. revenue bonds, certificates of participation, pension Each local government’s share of property tax obligation bonds, and pension liabilities and other revenue reflects, in part, the share it received in the retiree benefits—have not been held to be subject to mid-1970s. these requirements. Property Taxes Contribute Toward Meeting the State’s Education Funding Obligation. School Infrastructure Financing Districts and community college districts receive a certain Use Tax Increment Financing to Fund level of general purpose per-pupil funding, as Infrastructure Projects. In 1990, the Legislature specified in the annual budget act. School districts authorized cities and counties to form IFDs to receive this funding from a combination of local fund infrastructure projects. Once formed, an IFD property tax revenues and state General Fund receives a portion of property tax growth within revenues, while community college districts receive the district—known as “tax increment”—to fund funding from local property taxes, student fees, specified infrastructure projects. IFDs may pay and state General Fund revenues. If a school or the cost of infrastructure projects directly with tax community college district’s local property tax increment or may issue bonds that are repaid with revenue (and student fee revenue in the case of the tax increment. State law does not authorize community colleges) is insufficient to fund the IFDs to levy new taxes. Local government use authorized per-pupil rates, the state provides of IFDs has been uncommon, with only a small General Fund revenues to meet the statutory number of districts formed since 1990. requirements. Conversely, if a district’s nonstate 2 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET Fund Infrastructure of Communitywide May Be Subject to Constitutional Vote Significance. IFDs may finance the construction, Requirements. In addition to statutory voter- improvement, or rehabilitation of various types of approval requirements, IFD debt may be subject to public facilities of “communitywide significance,” provisions of the State Constitution requiring voter including: highways, streets, roads, sewage and approval of local government debt. As mentioned water treatment facilities, flood control, child above, the State Constitution requires cities and care facilities, libraries, parks, and solid waste counties to obtain approval from two-thirds of disposal facilities. The public facilities must provide their voters prior to issuing long-term debt. Because significant benefits to an area larger than the existing state law does not distinguish IFDs as district’s boundaries. IFDs may not pay the cost of a legal entity separate from their sponsoring maintenance or operation of public facilities. cities or counties, the two-thirds voter-approval Receive Tax Increment Only From Consenting requirement of a city and county may extend to its Local Governments. A city or county that forms IFD. an IFD may dedicate to the IFD all or some of Other Local Government Financing Tools the property tax increment it would receive from properties within the district. Other noneducation While local governments have used IFDs local governments whose jurisdictions overlap with infrequently, they historically have used two similar the IFD also may elect to dedicate all or some of methods of funding infrastructure and economic their property tax increment to the IFD. However, development more regularly. tax increment may not be shifted from other local • Redevelopment Agencies. For several governments without their approval. In addition, decades, state law authorized cities and tax increment may not be shifted from school or counties to form RDAs to address urban community college districts to an IFD. As a result, blight and affordable housing needs. the formation of an IFD has no fiscal effect on the As discussed in more detail in the next state. IFDs may receive property tax increment for section, legislation was enacted in 2011 up to 30 years. dissolving RDAs. Similar to IFDs, RDA Do Not Have a Separate Governing Body. activities were funded primarily from IFDs do not have separate governing bodies. property tax increment. Rather, the governing body of the city or county that forms an IFD governs the district’s activities, • Joint Powers Authorities. State law including the issuance of debt. authorizes local governments to form Require Voter Approval. State statute separate legal entities called joint powers requires the formation of an IFD to be approved authorities (JPAs) to facilitate the pooling by two-thirds of voters living within the district. of resources—including tax revenues— Additionally, two-thirds of voters living within the from multiple governments to address district must approve the issuance of long-term a common concern or fund projects or debt by the IFD. If fewer than 12 registered services. JPAs may finance projects by voters live within the district, then two-thirds of issuing long-term debt that is repaid landowners within the district must approve these from payments from constituent local actions. governments. www.lao.ca.gov Legislative Analyst’s Office 3 2014-15 BUDGET Over the last few decades, JPAs and RDAs payments to local governments, (2) unencumbered issued tens of billions of dollars of long-term debt RDA cash and other liquid assets, and (3) proceeds to fund infrastructure and economic development. from the sale of some former RDA real estate Unlike IFDs, JPA governing bodies can issue holdings. long-term debt without obtaining voter approval. State Controller Tasked With Recovering Similarly, state law did not require RDA governing Assets Transferred to Other Entities. Prior to bodies to obtain voter approval prior to issuing dissolution, many RDAs took actions to transfer long-term debt. The governing bodies of JPAs redevelopment assets—land, buildings, parking and RDAs are (or were) legally separate from facilities—to other local agencies, typically the the governing bodies of their sponsoring local city or county that created the RDA. Assembly governments. Bill X1 26 assigns the State Controller (SCO) responsibility for recouping redevelopment assets Elimination of Redevelopment inappropriately transferred during the first half Legislation Enacted Ending Redevelopment. of 2011. Specifically, SCO is directed to determine Chapter 5, Statutes of 2011 (ABX1 26, Blumenfield), whether the RDA transferred an asset to the city or enacted in June 2011, dissolved RDAs, effective county that created it (or to another public agency). October 1, 2011, and created a process for winding If the asset has not been contractually committed down redevelopment financial affairs and to a third party, “the Controller shall order the distributing any net funds from assets or property available asset to be returned” to the successor taxes to other local taxing agencies. (Court actions agency. changed the date of RDA dissolution to February 1, Dissolution Prompted a Significant Amount 2012.) of Litigation. Over 180 lawsuits have been filed Former RDA Resources Are Distributed to against the state regarding various aspects of the Affected Local Governments. As the operations redevelopment dissolution process. Most of these of former RDAs wind down, their resources are lawsuits concern whether or not certain former being redistributed to other local governments. RDA obligations are eligible to be repaid from These resources include (1) property tax revenue former RDA property tax revenue. not needed to pay RDA debts and pass-through GOVERNOR’S PROPOSAL The Governor’s budget proposes to make are limited to 60,000 square feet); (2) property several statutory changes related to IFDs. We development designed to meet sustainable describe these changes below. communities goals established in Chapter 728, Expands the Scope of IFDs. The Governor Statutes of 2008 (SB 375, Steinberg), such as transit proposes to expand the scope of projects IFDs may priority projects; (3) restoration of brownfields— fund. Specifically, the Governor proposes to allow underused or abandoned sites contaminated by IFDs to fund: (1) housing, retail, and manufacturing hazardous materials—and other environmental facilities (retail facilities, however, generally are mitigation; (4) military bases reuse projects; and limited to 30,000 square feet and grocers generally (5) telecommunications infrastructure. Under the 4 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET Governor’s proposal, these projects would not need Allows Local Governments to Loan Funds to be publicly owned or operated. to IFDs. The Governor proposes to allow cities, Lowers IFD Voter-Approval Threshold. The counties, and special districts whose jurisdictions Governor proposes to lower the voter-approval overlap with an IFD to loan funds to the IFD. The threshold for a city or county to form an IFD and interest rate on these loans may not exceed the issue IFD debt from two-thirds to 55 percent. rate earned by investment in the Local Agency Creates New Stipulations for Creation of Investment Fund—a pooled investment fund IFDs. Under the Governor’s proposal, a city or administered by the State Treasurer. county that formerly sponsored an RDA must Extends Timeline for IFDs. The Governor meet certain conditions related to redevelopment proposes to extend the amount of time property dissolution prior to forming an IFD. Specifically, taxes may be diverted to IFDs to 45 years from the a city or county must (1) resolve all outstanding date of (1) issuance of IFD debt or (2) initiation of a RDA-related litigation against the state, (2) receive loan between the IFD and a local government. a “finding of completion” from the Department of Requires IFD Audits. Under the Governor’s Finance (DOF) signifying that all of their former proposal, IFDs that issue bonds must conduct a RDA’s cash and liquid assets have been distributed financial and performance audit every two years. to local governments, and (3) comply with any asset The audits would be required to meet guidelines transfers ordered by the SCO. developed by the SCO. In addition, the DOF could conduct financial and performance audits of IFDs. ANALYSIS Some Proposed Changes Have Merit communities where these establishments otherwise could have been located. As a result, the collective Proposed Expansion of IFD Activities Could benefit to local governments of subsidizing the Further Some State Policy Goals. . . The proposed creation of new retail establishments typically expansion of IFD activities could further some is limited. Facilitating the development of retail state and local objectives, such as reducing GHG facilities may be more likely to result in collective emissions, increasing the supply of affordable benefits in some cases. In particular, facilitating housing, and mitigating environmental pollution. development of retail establishments as part This is because cities and counties would have an of a targeted effort to promote dense, transit- additional tool to finance projects consistent with oriented development could promote sustainable these objectives. communities goals. The Governor’s proposal, . . .But Scope of Activities Is Too Broad. The however, would not limit IFD funding of retail benefit to local governments taken together of facilities to these situations. Instead, the Governor’s funding development and expansion of retail proposal would allow IFDs to fund any moderately facilities is less clear. New retail establishments can sized retail facility virtually anywhere in the state. provide benefits—such as increased employment Permitting Loans From Affected Local or local tax revenues—to the local governments Governments Could Be Helpful. Allowing affected in which they are located. These benefits, local governments to loan funds to an IFD could however, often are offset by losses to neighboring facilitate local government use of IFDs. Doing so www.lao.ca.gov Legislative Analyst’s Office 5 2014-15 BUDGET might mitigate some barriers to forming an IFD, otherwise could be used to fund services for all such as funding IFD startup costs. of the local governments’ residents. In addition, Requiring Independent Audits of IFD state law allows IFDs to fund projects that benefit Finances Seems Reasonable. The Governor’s residents living outside of district boundaries, proposal to require IFDs that have issued bonds to including projects located outside of the district. obtain an independent financial and performance Ensure Increased Public Scrutiny. Voter- audits every two years seems reasonable. State approval requirements also could ensure that the law requires most special districts to obtain long-term commitment of a community’s resources independent financial reports each year. In to an IFD is subject to heightened public scrutiny. addition, state law requires school districts that It is unclear, however, why decisions related to IFDs have issued facilities bonds to obtain an annual necessitate increased public scrutiny while local performance audit in most cases. governing bodies make similar decisions—such as forming a JPA and issuing JPA debt—without voter Changes to Voter-Approval approval. Requirements Raise Issues Is the Governor’s Proposal Constitutional? What Is the Purpose of Voter-Approval As discussed previously, the State Constitution Requirements for IFDs? In considering the requires cities and counties to obtain approval from Governor’s proposed changes to voter-approval two-thirds of their voters prior to issuing long-term requirements for IFDs, it may be helpful to first debt. Because the Governor’s proposal would not consider a broader question: What is the purpose amend existing law in order to clearly distinguish of these voter-approval requirements? In our IFDs as a legal entity separate from their view, requiring voter approval of IFDs could sponsoring cities or counties, the constitution’s serve two purposes. Specifically, voter-approval two-thirds voter-approval requirement of a city and requirements could ensure that local government county may extend to its IFD. If so, implementing decisions regarding IFDs are (1) aligned with their the Governor’s proposal would require a communities’ interests and (2) subject to increased constitutional amendment. public scrutiny. Other Proposed Changes Are Problematic Align With Community Interests. Voter- approval requirements for IFDs could prevent Creation of an IFD Does Not Interfere With local governments from forming an IFD or issuing RDA Dissolution. The Governor’s proposed IFD debt without the support of the community stipulations for the creation of an IFD seem members who would be affected by these actions. inappropriate. The formation of an IFD would Under current law, however, many residents who not interfere with local government efforts to could be affected by IFD formation do not have dissolve former RDAs or with the resolution of the opportunity to vote on them. This is because RDA-related lawsuits against the state. While the the only residents who get to vote on IFDs are administration and some local governments have those living in the district. The decision of a local significant disagreements regarding redevelopment government to dedicate a portion of its revenue dissolution, these disputes are not an appropriate to an IFD affects all residents in the community. reason to deny these local governments access to a IFD projects are likely to be funded, in part, financial tool designed to help them respond to local by redirecting local government revenues that infrastructure and economic development needs. 6 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET DOF Authority to Audit IFDs Not Aligned financial report to the SCO. The SCO is required With State Oversight Practices of Other Local to compile these financial reports in an annual Governments. The Governor’s proposal to allow the publication. In addition, state law authorizes DOF to audit IFDs would create different financial the SCO to initiate an investigation of a local review requirements for IFDs than for most other government’s finances if it believes their reported local governments. Specifically, state law requires financial information is false or incomplete. most local governments to annually submit a LAO RECOMMENDATIONS Adopt Most of the Proposed Expansion of IFD to mitigate some barriers to forming an IFD, such Activities. With one exception, we recommend as funding IFD startup costs. the Legislature adopt the Governor’s proposed Reject Governor’s Changes to Voter-Approval expansion of IFD activities. Specifically, we Requirements, Consider Alternatives. We recommend rejecting the proposal to authorize recommend the Legislature reject the Governor’s IFDs to fund retail facilities, unless they are proposal to maintain existing voter-approval oriented towards fulfilling sustainable communities requirements for IFDs but lower the voter-approval goals, because the collective benefit to local threshold to 55 percent. Instead, we suggest the governments from these activities likely would be Legislature consider two alternatives. limited. • Restructure IFDs to Resemble Similar Adopt Independent Audit Requirements, Local Entities. Under this alternative, the Reject DOF Audit Authority. We recommend Legislature would (1) require IFDs to have the Legislature adopt the Governor’s proposal to their own governing body separate from require financial and performance audits of IFDs the governing bodies of their sponsoring that issue bonds every two years. At the same local governments, (2) clarify that IFDs time, we recommend the Legislature reject the are separate legal entities from their Governor’s proposal to allow DOF to audit IFDs. sponsoring local governments, and (3) align Instead, we recommend the Legislature adopt local government requirements regarding financial review standards for IFDs similar to those IFDs to their requirements for substantially required for other local governments. Specifically, similar actions—such as forming JPAs and we suggest requiring IFDs to submit a report of issuing JPA debt—by removing statutory annual financial transactions to the SCO. The SCO, voter-approval requirements for IFDs. This in turn, would compile the IFD financial reports alternative would make it significantly in an annual publication or include it within easier for local governments to use IFDs. In the financial report of special district financial addition, this approach mitigates potential transactions. conflicts with the Constitution’s voter- Adopt Interagency Loan Provision. We approval requirement for city and county recommend the Legislature adopt the Governor’s debt by clarifying that IFDs are a distinct proposed change that would allow affected local legal entity. governments to loan funds to IFDs. This could help www.lao.ca.gov Legislative Analyst’s Office 7 2014-15 BUDGET • Expand Voter-Approval Requirements. to form an IFD, issue IFD debt, or both. If Under this alternative, the Legislature the Legislature lowered the voter-approval would expand IFD voter-approval threshold for IFD debt, we suggest taking requirements to allow all residents of actions (1) and (2) from the first alternative affected local governments to vote. This to mitigate constitutionality concerns. alternative recognizes that the issuing Reject New Stipulations on Creation of IFDs. of IFD debt establishes a long-term We recommend the Legislature reject the Governor’s commitment of resources that otherwise proposal to require cities and counties to meet would be available to the entire community certain conditions related to RDA dissolution prior (not just the residents of the IFD). We note, to creation of an IFD. In our view, it is inappropriate however, this alternative would make it to deny use of an economic development tool to a more difficult for local governments to local government simply because it is disputing state use IFDs. In response, the Legislature may actions related to RDA dissolution. wish to lower the voter-approval threshold LAO Publications This brief was prepared by Brian Uhler and reviewed by Marianne O’Malley. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This brief and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. 8 Legislative Analyst’s Office www.lao.ca.gov