Existing law establishes the California Debt Limit Allocation Committee for the purpose of implementing the volume limit for the state on private activity bonds established pursuant to federal law. The committees duties include annually determining a state ceiling on the aggregate amount of private activity bonds that may be issued, and allocating that amount among state and local agencies. Existing law defines the terms private activity bond and state ceiling for those purposes with regard to an amount specified in federal law.

This bill would revise the findings and declarations with regard to, and the purpose for, the provisions relating to the California Debt Limit Allocation Committee to reflect the American Recovery and Reinvestment Act of 2009. The bill would revise the definition of private activity bond and state ceiling to also include certain amounts reserved to the state for qualified educational facilities bonds and would make conforming changes with regard to those bonds.

Existing law establishes the California Debt Limit Allocation Committee for the purpose of implementing the volume limit for the state on private activity bonds established pursuant to federal law. The committees duties include annually determining a state ceiling on the aggregate amount of private activity bonds that may be issued, and allocating that amount among state and local agencies. Existing law defines the terms private activity bond and state ceiling for those purposes with regard to an amount specified in federal law.

This bill would revise the findings and declarations with regard to, and the purpose for, the provisions relating to the California Debt Limit Allocation Committee to reflect the American Recovery and Reinvestment Act of 2009. The bill would revise the definition of private activity bond and state ceiling to also include certain amounts reserved to the state for qualified educational facilities bonds and would make conforming changes with regard to those bonds.

Existing law establishes the California Debt Limit Allocation Committee for the purpose of implementing the volume limit for the state on private activity bonds established pursuant to federal law. The committees duties include annually determining a state ceiling on the aggregate amount of private activity bonds that may be issued, and allocating that amount among state and local agencies. Existing law defines the terms private activity bond and state ceiling for those purposes with regard to an amount specified in federal law.

This bill would revise the findings and declarations with regard to, and the purpose for, the provisions relating to the California Debt Limit Allocation Committee to reflect the American Recovery and Reinvestment Act of 2009. The bill would revise the definition of private activity bond and state ceiling to also include certain amounts reserved to the state for qualified educational facilities bonds and would make conforming changes with regard to those bonds.

 CONSENT  

Bill No: AB 1195

Author: Ridley-Thomas (D)

Introduced: 2/27/15

Vote: 21

SENATE GOVERNANCE & FIN. COMMITTEE: 7-0, 6/17/15

AYES: Hertzberg, Nguyen, Beall, Hernandez, Lara, Moorlach, Pavley

SENATE EDUCATION COMMITTEE: 9-0, 7/15/15

AYES: Liu, Runner, Block, Hancock, Leyva, Mendoza, Monning, Pan, Vidak

ASSEMBLY FLOOR: 77-0, 5/7/15 - See last page for vote

SUBJECT: California Debt Limit Allocation Committee: American Recovery and Reinvestment Act of 2009

SOURCE: State Treasurer John Chiang

DIGEST: This bill allows the California Debt Limit Allocation Commission (CDLAC) to allocate private activity bond ceiling to applicants seeking to issue qualified public education facility bonds.

ANALYSIS:

Existing law:

1) Excludes interest income from municipal bonds for state tax purposes.

2) Establishes CDLAC as a three-member body comprised of the State Treasurer as Chair, the Governor, and the State Controller, housed in the Office of the State Treasurer.

3) Charges CDLAC with annually determining the total statewide volume cap, or ceiling, for tax-exempt private activity bonds, including any carry forward, and allocating amounts to individual applicants, including state and local agencies, joint powers agencies, special districts, nonprofit public benefit corporations that only issues student loan bonds, and any other public agency legally empowered to issue debt.

4) Prohibits public agencies from issuing tax-exempt private activity bonds without CDLAC approval.

This bill:

1. Allows for the issuance of “qualified public education facility bonds” (QPEFBs), by adding references to Internal Revenue Code (IRC) sections authorizing them to CDLAC’s organizing statutes which guide approval of all other private activity bonds, including:

   1. The definition of “state ceiling” and “private activity bond,” to allow CDLAC to approve applications from school districts seeking to issue QPEFBs.

   2. The requirement that the CDLAC allocation for QPEFBs becomes irrevocable upon issuance of the bonds.

   3. The requirement on a state or local agency to notify CDLAC in writing after any election to carry forward an allocation.

   4. The prohibition against an applicant issuing QPEFBs using a carry forward allocation without CDLAC approval.

5. The designation of the Treasurer as the state official charged with ensuring that QPEFBs meet IRC requirements.

1. Makes technical and conforming changes.

3. States legislative findings and declarations supporting its provisions.

Background

Generally, when borrowers repay lenders, the loan principal is neither taxable income to the borrower, nor deductible to the lender; no one is better off because the loan must be repaid. However, lenders must generally include any interest payments as taxable income, while borrowers can usually deduct any interest expense, but federal law has exempted interest payments from income on municipal bonds issued by state and local agencies for federal tax purposes since the inception of the federal income tax.

State and local agencies generally use proceeds from municipal bond sales for a wide variety of public purposes; however, public agencies sometime loan bond proceeds to non-government entities for many of the same uses, like airports, transit, school facilities, and housing, among others. In such a case, federal law defines a bond as “public purpose,” and therefore tax-exempt, if either:

• Less than 10% of the proceeds are used directly or indirectly by a non-governmental agency, or

• Less than 10% of the proceeds are secured directly or indirectly by property used in a trade or business.

Bonds meeting either part of the test are considered government bonds, so interest payments are excluded from income for tax purposes. Bonds that don’t are considered private activity bonds. However, federal law allows states to issue tax-exempt qualified private activity bonds up to a certain amount, known as the volume cap or ceiling, currently set at $75 per person, or $250 million, whichever is more, indexed annually for inflation. While the interest paid on qualified private activity bonds is generally excluded from income, the federal Alternative Minimum Tax may apply. When a state or local agency issues a tax-exempt private activity bond, but the Internal Revenue Service subsequently finds that the project did not comply with federal law’s requirements, the bond changes from tax-exempt to taxable, thereby making interest payments includible in the bondholder’s income for tax purposes.

Federal law allows states to issue tax-exempt qualified private activity bonds up to the cap for exempt facilities, mortgage revenue, qualified 501(c)(3)s, qualified student loans, qualified small-issues, and qualified redevelopment, as defined. Federal law excludes from the ceiling bonds for certain governmentally owned facilities and bonds issued to finance the activities of certain charitable organizations. If a state’s ceiling for a calendar year is more than the total amount of tax-exempt private activity bonds issued during the year, the difference is carried forward for up to the next three years, but can only be used to issue bonds for exempt facilities, qualified mortgages or mortgage credit certificates, qualified student loans or qualified redevelopment.

In recent years, Congress has subsequently created new forms of private activity bonds, and excluded them from the ceiling set by the Tax Reform Act of 1986, instead enacting separate ceilings for each specific bond. The Economic Growth and Tax Reconciliation Act of 2001 added QPEFBs to the list of exempt facility bonds. Qualified public education facilities include elementary and secondary public school facilities which are owned by private, for-profit corporations pursuant to public-private partnership agreements with a state or local educational agency. Issuance of these bonds is subject to a separate annual per-state ceiling equal to $10 per person (or $5 million, if greater) in lieu of the general state volume cap ceiling. No state or local agency has issued a QPEFB to date.

Comments

A recent survey completed by the National Charter School Resource agency indicates that in California, 8.7 percent of charter schools own their buildings, 43.6 percent are housed in district facilities, 41.5 percent are located in private facilities, and 6.2 percent have other facilities arrangements. While some charter schools can construct facilities from average daily attendance revenues, others must rely on funding from school districts, which is generally financed by a combination of tax-exempt state and local general obligation bonds, and developer fees imposed by school districts. Schools can also apply to the California School Finance Authority in the State Treasurer’s Office, which almost exclusively provides financial assistance to charter schools by administering state bond funds, federal and state grants, a revolving loan fund, a credit enhancement grant program, and conduit bond financing.

AB 1195 authorizes a new form of school facility finance, the QPEFB, which relies on an unusual model of public private partnership, initially proposed by the Heritage Foundation. After the issuer sells the bond, the proceeds are loaned to a private, for-profit developer, who then uses the proceeds to construct the school. The developer leases the school to the school district on a long-term basis at a cost less than the amount necessary to repay the bonds. The developer attempts to make up the difference by leasing out the school building during off-hours, and applying any depreciation deduction from the school to reduce taxable income from other sources. The school’s ownership is transferred from the developer to the school district when the lease ends. In a QPEFB, the repayment obligation is on the developer, not the school district, so the market will likely price the bond according to its assessment of the developer’s creditworthiness.

FISCAL EFFECT: Appropriation: No Fiscal Com.: No Local: No

SUPPORT: (Verified 8/11/15)

State Treasurer John Chiang (source)

OPPOSITION: (Verified 8/11/15)

None received

ARGUMENTS IN SUPPORT: According to the author, “Public elementary and secondary schools have limited financing options for the construction or improvement of their facilities. In contrast, private developers have more flexibility in their ability to finance transaction and access to resources. In acknowledgement of these differences, Section 142 (k) of the federal IRC created a type of tax-exempt private activity bond that can be used to finance school facilities called QPEFB. These bonds are designed to provide tax-exempt conduit financing for turnkey private development of public elementary and secondary school facilities. The tax-exempt private activity bond proceeds can be used to fund the following project: school buildings, any functionally related and subordinate facility and land with respect to a school building, including any stadium or other facility primarily used for school events, and any property subject to accelerated depreciation under Section 168 of the IRC for use in a school facility. QPEFBs are apportioned to the states but fall outside the current limits the federal government places on private activity bond authority. Federal law requires that each state designate an entity to administer QPEFBs in order to allocate the bonds.”

ASSEMBLY FLOOR: 77-0, 5/7/15

AYES: Achadjian, Alejo, Travis Allen, Baker, Bigelow, Bloom, Bonilla, Bonta, Brough, Brown, Burke, Calderon, Chang, Chau, Chávez, Chiu, Chu, Cooley, Cooper, Dababneh, Dahle, Daly, Dodd, Eggman, Frazier, Beth Gaines, Gallagher, Cristina Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez, Gordon, Gray, Grove, Hadley, Harper, Holden, Irwin, Jones, Jones-Sawyer, Kim, Lackey, Levine, Linder, Lopez, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Nazarian, Obernolte, O'Donnell, Olsen, Patterson, Perea, Quirk, Rendon, Ridley-Thomas, Rodriguez, Salas, Santiago, Mark Stone, Thurmond, Ting, Wagner, Waldron, Weber, Wilk, Williams, Wood, Atkins

NO VOTE RECORDED: Campos, Roger Hernández, Steinorth

Prepared by: Colin Grinnell / GOV. & F. / (916) 651-4119

8/20/15 17:02:06

**** END ****

 CONSENT  

Bill No: AB 1195

Author: Ridley-Thomas (D)

Introduced: 2/27/15

Vote: 21

SENATE GOVERNANCE & FIN. COMMITTEE: 7-0, 6/17/15

AYES: Hertzberg, Nguyen, Beall, Hernandez, Lara, Moorlach, Pavley

SENATE EDUCATION COMMITTEE: 9-0, 7/15/15

AYES: Liu, Runner, Block, Hancock, Leyva, Mendoza, Monning, Pan, Vidak

ASSEMBLY FLOOR: 77-0, 5/7/15 - See last page for vote

SUBJECT: California Debt Limit Allocation Committee: American Recovery and Reinvestment Act of 2009

SOURCE: State Treasurer John Chiang

DIGEST: This bill allows the California Debt Limit Allocation Commission (CDLAC) to allocate private activity bond ceiling to applicants seeking to issue qualified public education facility bonds.

ANALYSIS:

Existing law:

1) Excludes interest income from municipal bonds for state tax purposes.

2) Establishes CDLAC as a three-member body comprised of the State Treasurer as Chair, the Governor, and the State Controller, housed in the Office of the State Treasurer.

3) Charges CDLAC with annually determining the total statewide volume cap, or ceiling, for tax-exempt private activity bonds, including any carry forward, and allocating amounts to individual applicants, including state and local agencies, joint powers agencies, special districts, nonprofit public benefit corporations that only issues student loan bonds, and any other public agency legally empowered to issue debt.

4) Prohibits public agencies from issuing tax-exempt private activity bonds without CDLAC approval.

This bill:

1. Allows for the issuance of “qualified public education facility bonds” (QPEFBs), by adding references to Internal Revenue Code (IRC) sections authorizing them to CDLAC’s organizing statutes which guide approval of all other private activity bonds, including:

   1. The definition of “state ceiling” and “private activity bond,” to allow CDLAC to approve applications from school districts seeking to issue QPEFBs.

   2. The requirement that the CDLAC allocation for QPEFBs becomes irrevocable upon issuance of the bonds.

   3. The requirement on a state or local agency to notify CDLAC in writing after any election to carry forward an allocation.

   4. The prohibition against an applicant issuing QPEFBs using a carry forward allocation without CDLAC approval.

5. The designation of the Treasurer as the state official charged with ensuring that QPEFBs meet IRC requirements.

1. Makes technical and conforming changes.

3. States legislative findings and declarations supporting its provisions.

Background

Generally, when borrowers repay lenders, the loan principal is neither taxable income to the borrower, nor deductible to the lender; no one is better off because the loan must be repaid. However, lenders must generally include any interest payments as taxable income, while borrowers can usually deduct any interest expense, but federal law has exempted interest payments from income on municipal bonds issued by state and local agencies for federal tax purposes since the inception of the federal income tax.

State and local agencies generally use proceeds from municipal bond sales for a wide variety of public purposes; however, public agencies sometime loan bond proceeds to non-government entities for many of the same uses, like airports, transit, school facilities, and housing, among others. In such a case, federal law defines a bond as “public purpose,” and therefore tax-exempt, if either:

• Less than 10% of the proceeds are used directly or indirectly by a non-governmental agency, or

• Less than 10% of the proceeds are secured directly or indirectly by property used in a trade or business.

Bonds meeting either part of the test are considered government bonds, so interest payments are excluded from income for tax purposes. Bonds that don’t are considered private activity bonds. However, federal law allows states to issue tax-exempt qualified private activity bonds up to a certain amount, known as the volume cap or ceiling, currently set at $75 per person, or $250 million, whichever is more, indexed annually for inflation. While the interest paid on qualified private activity bonds is generally excluded from income, the federal Alternative Minimum Tax may apply. When a state or local agency issues a tax-exempt private activity bond, but the Internal Revenue Service subsequently finds that the project did not comply with federal law’s requirements, the bond changes from tax-exempt to taxable, thereby making interest payments includible in the bondholder’s income for tax purposes.

Federal law allows states to issue tax-exempt qualified private activity bonds up to the cap for exempt facilities, mortgage revenue, qualified 501(c)(3)s, qualified student loans, qualified small-issues, and qualified redevelopment, as defined. Federal law excludes from the ceiling bonds for certain governmentally owned facilities and bonds issued to finance the activities of certain charitable organizations. If a state’s ceiling for a calendar year is more than the total amount of tax-exempt private activity bonds issued during the year, the difference is carried forward for up to the next three years, but can only be used to issue bonds for exempt facilities, qualified mortgages or mortgage credit certificates, qualified student loans or qualified redevelopment.

In recent years, Congress has subsequently created new forms of private activity bonds, and excluded them from the ceiling set by the Tax Reform Act of 1986, instead enacting separate ceilings for each specific bond. The Economic Growth and Tax Reconciliation Act of 2001 added QPEFBs to the list of exempt facility bonds. Qualified public education facilities include elementary and secondary public school facilities which are owned by private, for-profit corporations pursuant to public-private partnership agreements with a state or local educational agency. Issuance of these bonds is subject to a separate annual per-state ceiling equal to $10 per person (or $5 million, if greater) in lieu of the general state volume cap ceiling. No state or local agency has issued a QPEFB to date.

Comments

A recent survey completed by the National Charter School Resource agency indicates that in California, 8.7 percent of charter schools own their buildings, 43.6 percent are housed in district facilities, 41.5 percent are located in private facilities, and 6.2 percent have other facilities arrangements. While some charter schools can construct facilities from average daily attendance revenues, others must rely on funding from school districts, which is generally financed by a combination of tax-exempt state and local general obligation bonds, and developer fees imposed by school districts. Schools can also apply to the California School Finance Authority in the State Treasurer’s Office, which almost exclusively provides financial assistance to charter schools by administering state bond funds, federal and state grants, a revolving loan fund, a credit enhancement grant program, and conduit bond financing.

AB 1195 authorizes a new form of school facility finance, the QPEFB, which relies on an unusual model of public private partnership, initially proposed by the Heritage Foundation. After the issuer sells the bond, the proceeds are loaned to a private, for-profit developer, who then uses the proceeds to construct the school. The developer leases the school to the school district on a long-term basis at a cost less than the amount necessary to repay the bonds. The developer attempts to make up the difference by leasing out the school building during off-hours, and applying any depreciation deduction from the school to reduce taxable income from other sources. The school’s ownership is transferred from the developer to the school district when the lease ends. In a QPEFB, the repayment obligation is on the developer, not the school district, so the market will likely price the bond according to its assessment of the developer’s creditworthiness.

FISCAL EFFECT: Appropriation: No Fiscal Com.: No Local: No

SUPPORT: (Verified 8/11/15)

State Treasurer John Chiang (source)

OPPOSITION: (Verified 8/11/15)

None received

According to the author, “Public elementary and secondary schools have limited financing options for the construction or improvement of their facilities. In contrast, private developers have more flexibility in their ability to finance transaction and access to resources. In acknowledgement of these differences, Section 142 (k) of the federal IRC created a type of tax-exempt private activity bond that can be used to finance school facilities called QPEFB. These bonds are designed to provide tax-exempt conduit financing for turnkey private development of public elementary and secondary school facilities. The tax-exempt private activity bond proceeds can be used to fund the following project: school buildings, any functionally related and subordinate facility and land with respect to a school building, including any stadium or other facility primarily used for school events, and any property subject to accelerated depreciation under Section 168 of the IRC for use in a school facility. QPEFBs are apportioned to the states but fall outside the current limits the federal government places on private activity bond authority. Federal law requires that each state designate an entity to administer QPEFBs in order to allocate the bonds.”

ASSEMBLY FLOOR: 77-0, 5/7/15

AYES: Achadjian, Alejo, Travis Allen, Baker, Bigelow, Bloom, Bonilla, Bonta, Brough, Brown, Burke, Calderon, Chang, Chau, Chávez, Chiu, Chu, Cooley, Cooper, Dababneh, Dahle, Daly, Dodd, Eggman, Frazier, Beth Gaines, Gallagher, Cristina Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez, Gordon, Gray, Grove, Hadley, Harper, Holden, Irwin, Jones, Jones-Sawyer, Kim, Lackey, Levine, Linder, Lopez, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Nazarian, Obernolte, O'Donnell, Olsen, Patterson, Perea, Quirk, Rendon, Ridley-Thomas, Rodriguez, Salas, Santiago, Mark Stone, Thurmond, Ting, Wagner, Waldron, Weber, Wilk, Williams, Wood, Atkins

NO VOTE RECORDED: Campos, Roger Hernández, Steinorth

Prepared by: Colin Grinnell / GOV. & F. / (916) 651-4119

8/13/15 13:10:09

**** END ****

SENATE COMMITTEE ON EDUCATION

Senator Carol Liu, Chair

2015 - 2016 Regular

Bill No: AB 1195

Subject: California Debt Limit Allocation Committee: American Recovery and Reinvestment Act of 2009

SUMMARY

This bill allows the California Debt Limit Allocation Committee (CDLAC) to administer the federal private activity bond authority and issue federal tax-exempt bond funds to finance public school facilities.

BACKGROUND

Existing law:

1. Establishes the CDLAC as the state's allocating agency for the award and administration of the limited federal private activity bond authority, called the Private Activity Volume Ceiling. (Government Code § 8869.80)

2. Provides for a separate volume ceiling for qualified public education facilities bonds (QPEFBs), which are designed to provide tax-exempt conduit financing for turnkey private development of public elementary and secondary school facilities. The federal Internal Revenue Code (IRC) requires CDLAC to be authorized by the Governor's proclamation or state legislation to administer and allocate the volume ceiling for QPEFBs. (IRC § 142(k))

3. Provides for the establishment of charter schools in California for the purpose, among other things, to improve student learning and expand learning experiences for pupils who are identified as academically low achieving. A charter school may be authorized by a school district, a county board of education, or the State Board of Education, as specified. A charter school is typically created or organized by a group of teachers, parents and community leaders, community-based organizations, or an education management organization. (Education Code § 47605, et seq.)

4. Establishes the Charter School Facility Grant Program which is intended to provide assistance with facilities rent and lease costs for pupils in charter schools.

(EC § 47614.5)

ANALYSIS

This bill permits the California Debt Limit Allocation Commission (CDLAC) to allocate federal tax-exempt qualified public education facilities bonds (QPEFBs) for the development of public education schools and related improvements by adding references to its authorizing statute in federal law—Internal Revenue Code (IRC) 142(k), including the following:

1. The definition of "private activity bond" to include IRC § 142(k).

2. The definition of "state ceiling" to include the amount specified by IRC § 142(k).

3. The requirement that any allocation of ceiling is irrevocable upon issuance of bonds, and prohibiting any allocation carry forward without the California Debt Limit Allocation Commission’s (CDLAC) approval.

4. The requirement on a state or local agency to notify the CDLAC in writing after any election to carry forward an allocation.

5. Designation of the Treasurer as the State official to certify that the QPEFBs meets the IRCs requirements.

The bill also makes conforming changes to legislative findings and declarations stating CDLACs purposes.

STAFF COMMENTS

1. Need for the bill. According to the author’s office, “public elementary and secondary schools have limited financing options for the construction or improvement of their facilities. In contrast, private developers have more flexibility in their ability to finance transactions and access to resources. In acknowledgement of these differences, Section 142(k) of the federal IRC created a type of tax-exempt private activity bond that can be used to finance school facilities called QPEFB. These bonds are designed to provide tax-exempt conduit financing for turnkey private development of public elementary and secondary school facilities. The tax-exempt private activity bond proceeds can be used to fund the following project: school buildings, any functionally related and subordinate facility and land with respect to a school building, including any stadium or other facility primarily used for school events, and any property subject to accelerated depreciation under Section 168 of the IRC for use in a school facility. QPEFBs are apportioned to the states but fall outside the current limits the federal government places on private activity bond authority. Federal law requires that each state designate an entity to administer QPEFBs in order to allocate the bonds."

2. Charter school facilities. Unlike traditional public school districts, charter schools are unable to fund facilities with general obligation bonds approved by local voters. A majority of charter schools lease their facilities and pay the associated costs from their operating budgets, with roughly half of them receiving grants from the Charter School Facility Grant Program. This program provides funding for charter schools in non-district facilities that have a specified percentage of students qualifying for free or reduced-price meals at their school or in the surrounding school attendance area. Eligible schools receive funding for lease payments, building improvements, and maintenance.

A majority of the remaining charter schools that do not lease private facilities occupy space provided by school districts. Proposition 39, approved by voters in November 2000, requires a school district to provide a charter school having a projected daily attendance of at least 80 or more students from that district with “reasonably equivalent” facilities to accommodate the charter school’s needs. A school district can provide a charter school with existing facilities or use discretionary funds or other revenues, such as local school bond funds, to meet this requirement. A small percentage of charter schools have constructed their own facilities. Given the continuing growth in charter school enrollment combined with limited options to finance facilities, this bill could provide an additional means for charter schools to address their facility needs.

3. Will it work? This bill authorizes a new form of school facility finance, which relies on a public-private partnership agreement. After the issuer sells the bond, the proceeds are loaned to a private for-profit developer, who then uses the proceeds to build the school facility. The facility is then leased to the school on a long-term basis at a cost less than the amount necessary to repay the bonds. The developer attempts to make up the difference by leasing the school facility during off-hours and applying any depreciation deduction from the school to reduce taxable income from other sources. The school’s ownership is transferred from the developer to the school when the lease ends.

While qualified public education facility bonds (QPEFBs) were added to the Internal Revenue Code (IRC) as tax exempt facility bonds in 2001, none have yet to be issued. A qualified public educational facility is any school facility which is part of a public elementary school or a public secondary school that is owned by a private for-profit corporation pursuant to a public-private partnership agreement with a State or local education agency. A public-private partnership agreement is required under the IRC for each QPEFB issuance. The IRC defines this as an agreement under which the corporation agree to construct, rehabilitate, refurbish, or equip a school facility, and at the end of the term of the agreement, to transfer the school facility to such agency for no additional consideration, and the term of which does not exceed the term of the issue to be used to provide the school facility. The Treasurer’s Office indicates that only Florida and New York have enacted the necessary statutory and regulatory changes, and that the reason for lack of use can be associated with several factors, one of which has to do with the requirement for private ownership and that it is inconsistent with the way in which the current public school system is structured.

4. CDLAC. According to the Senate Governance and Finance Committee, the California Debt Limit Allocation Committee (CDLAC) was created by the Legislature in 1987 to implement the federal Tax Reform Act of 1986. The CDLAC is a three-member body comprised of the State Treasurer as Chair, the Governor, and the State Controller, housed in the Office of the State Treasurer. CDLAC annually determines the ceiling amount under federal law, including any carried forward, and then allocates the annual ceiling to applicants, which include state and local agencies, joint powers agencies, special districts, nonprofit public benefit corporations that only issues student loan bonds, and any other public agency legally empowered to issue debt. No agency can issue tax-exempt private activity bonds without the California Debt Limit Allocation Committee’s approval.

5. California School Finance Authority. Schools can apply to the California School Finance Authority (CSFA) in the State Treasurer’s Office, which almost exclusively provides financial assistance to charter schools by administering state bond funds, federal and state grants, a revolving loan fund, a credit enhancement grant program, and conduit bond financing. The CSFA was established as a conduit to secure financing for working capital and facilities projects for school districts, charter schools and community college districts. The CSFA operates under the Treasurer's Office. According to the Treasurer's Office, because school districts and community colleges are able to issue general obligation bonds on their own, the CSFA has provided financing mostly to charter schools. Over the last four years, CSFA has issued $279.6 million bonds for 120 charter school facilities. Charter schools are the obligor and make bond payments through an intercept process whereby the State Controller intercepts or redirects state funds allocated to charter schools to make bond payments. According to the CSFA, bonds are typically sold to large institutional investors, with interest rates ranging between 4.19% to 7.58% over the last four years.

SUPPORT

State Treasurer (sponsor)

OPPOSITION

None received.

-- END --

SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Robert M. Hertzberg, Chair

2015 - 2016 Regular

California Debt Limit Allocation Committee: American Recovery and Reinvestment Act of 2009

Allows CDLAC to allocate private activity bond ceiling to applicants seeking to issue qualified public education facility bonds.

Background and Existing Law

Generally, when borrowers repay lenders, the loan principal is neither taxable income to the borrower, nor deductible to the lender; no one is better off because the loan must be repaid. However, the lender must generally include any interest payments as taxable income, while the borrower can usually deduct any interest expense, but federal law has exempted interest payments from income on municipal bonds issued by state and local agencies for federal tax purposes since the inception of the federal income tax. The California Constitution and state law similarly excludes income from municipal bonds for state tax purposes (Article XIIIA, Section 26). This interest exclusion increases an investor’s rate of return when purchasing a municipal bond, which leads to lower interest rates. This subsidy is very powerful: public agencies have an interest cost 3.5% lower than comparable taxable bonds at the current 35% federal income tax rate.

I. Bonds. State and local agencies generally use proceeds from municipal bond sales for a wide variety of public purposes; however, public agencies sometime loan bond proceeds to non-government entities for many of the same uses, like airports, transit, school facilities, and housing, among others. Beginning in the 1930s, state and local governments began to issue tax-exempt Industrial Development Revenue bonds (IDBs) to support private investment. Unlike general obligation bonds, the payment of IDB interest and principal is paid out of the profits or proceeds of the project being financed, and the debt is secured by the subsidized project rather than by the tax revenues of the jurisdiction. Congress limited the tax exemption for IDBs several times to respond to increases in issuance by restricting the interest exclusion to bonds meeting the definition of “public purpose.” Despite the limitation, issuance increased to $62.4 billion in 1983, representing 68 percent of total state and local borrowings, resulting in a significant revenue loss for the federal government. In response, Congress enacted the Tax Reform Act of 1986, which among other reforms, tightened federal law’s definition of “public purpose,” and instituted a state-by-state ceiling to limit the volume of bonds issued by public agencies for the benefit of private parties. Under the Act, a bond is “public purpose,” and therefore qualified for the interest exclusion, if either:

• Less than 10% of the proceeds are used directly or indirectly by a non-governmental agency, or

• Less than 10% of the proceeds are secured directly or indirectly by property used in a trade or business.

Federal law determines whether bond interest is taxable or tax-exempt. Bonds meeting either part of the test are considered government bonds, so interest payments are excluded from income for tax purposes. Bonds that don’t are considered private activity bonds. However, the Act allows states to issue tax-exempt qualified private activity bonds up to a certain amount, known as the volume cap or ceiling, currently set at $75 per person, or $250 million, whichever is more, indexed annually for inflation. While the interest paid on qualified private activity bonds is generally excluded from income, the federal Alternative Minimum Tax may apply. When a state or local agency issues a tax-exempt private activity bond, but the Internal Revenue Service subsequently finds that the project did not comply with federal law’s requirements, the bond changes from tax-exempt to taxable, thereby making interest payments includible in income for tax purposes

Federal law allows states to issue tax-exempt qualified private activity bonds up to the cap for exempt facilities, mortgage revenue, qualified 501(c) (3)s, qualified student loans, qualified small-issues, and qualified redevelopment, as defined. Federal law excludes from the ceiling bonds for certain governmentally owned facilities and bonds issued to finance the activities of certain charitable organizations. If a state’s ceiling for a calendar year is more than the total amount of tax-exempt private activity bonds issued during the year, the difference is carried forward for up to the next three years, but can only be used to issue bonds for exempt facilities, qualified mortgages or mortgage credit certificates, qualified student loans or qualified redevelopment.

In recent years, Congress has subsequently created new forms of private activity bonds, and excluded them from the ceiling set by the 1986 Act, instead enacting separate ceilings for each specific bond. The Economic Growth and Tax Reconciliation Act of 2001 added qualified public education facilities bonds (QPEFBs) to the list of exempt facility bonds. Qualified public education facilities include elementary and secondary public school facilities which are owned by private, for-profit corporations pursuant to public-private partnership agreements with a State or local educational agency. Issuance of these bonds is subject to a separate annual per-State ceiling equal to $10 per person (or $5 million, if greater) in lieu of the general State volume cap ceiling. No state or local agency has issued a QPEFB to date.

II. CDLAC. Created by the Legislature in 1987 to implement the Act, the California Debt Limit Allocation Commission (CDLAC) is a three-member body comprised of the State Treasurer as Chair, the Governor, and the State Controller, housed in the Office of the State Treasurer. CDLAC annually determines the ceiling amount under federal law, including any carry forward, and then allocates the annual ceiling to applicants, which include state and local agencies, joint powers agencies, special districts, nonprofit public benefit corporations that only issues student loan bonds, and any other public agency legally empowered to issue debt. No agency can issue tax-exempt private activity bonds without CDLAC approval.

III. Charter School Facility Construction Finance. A recent survey completed by the National Charter School Resource agency indicates that in California, 8.7 percent of charter schools own their buildings, 43.6 percent are housed in district facilities, 41.5 percent are located in private facilities, and 6.2 percent have other facilities arrangements. While some charter schools can construct facilities from average daily attendance revenues, others must rely on funding from school districts, which is generally financed by a combination of tax-exempt state and local general obligation bonds, and developer fees imposed by school districts. Schools can also apply to the California School Finance Authority (CSFA) in the State Treasurer’s Office, which almost exclusively provides financial assistance to charter schools by administering state bond funds, federal and state grants, a revolving loan fund, a credit enhancement grant program, and conduit bond financing.

Proposed Law

Assembly Bill 1195 makes several changes to CDLAC’s authorizing statutes to allow the Commission to approve applications for agencies to issue tax-exempt qualified public education facilities bonds (QPEFBs) by adding references to its authorizing federal law, Internal Revenue Code 142(k), including:

• The definition of “state ceiling,” and “private activity bond.”

• The requirement that any allocation of ceiling is irrevocable upon issuance of bonds, and prohibiting any allocation carry forward without CDLAC approval.

• The requirement on a state or local agency to notify CDLAC in writing after any election to carry forward an allocation.

• Designation of the Treasurer as the state official to certify that the QPEFB meets the Internal Revenue Code’s requirements.

AB 1195 also makes conforming changes to legislative findings and declarations stating CDLAC’s purposes, and by adding references to a section of state law stating the purpose of the chapter authorizing CDLAC.

State Revenue Impact

No estimate.

Comments

1. Purpose of the bill. According to the author, “Public elementary and secondary schools have limited financing options for the construction or improvement of their facilities. In contrast, private developers have more flexibility in their ability to finance transaction and access to resources. In acknowledgement of these differences, Section 142 (k) of the federal IRC created a type of tax-exempt private activity bond that can be used to finance school facilities called QPEFB. These bonds are designed to provide tax-exempt conduit financing for turnkey private development of public elementary and secondary school facilities. The tax-exempt private activity bond proceeds can be used to fund the following project: school buildings, any functionally related and subordinate facility and land with respect to a school building, including any stadium or other facility primarily used for school events, and any property subject to accelerated depreciation under Section 168 of the IRC for use in a school facility. QPEFBs are apportioned to the states but fall outside the current limits the federal government places on private activity bond authority. Federal law requires that each state designate an entity to administer QPEFBs in order to allocate the bonds."

2. Wait and see? Congress added QPEFBs into the IRC in 2001, but none have yet been issued. The State Treasurer states that Florida and New York have enacted the necessary statutory and regulatory changes, and additionally identifies three reasons to explain the lack of issuance: First, the IRC requires the school be privately owned under a QPEFB, which is inconsistent with the current model, and charter schools aren’t sufficiently sophisticated about bond resources to issue them on their own. Second, current law may be unclear regarding whether the private, for-profit corporation can claim the depreciation deduction for the school, a vital economic component to induce participation from developers. Lastly, differences in interest rates on tax-exempt and taxable bonds are currently low, so charter schools don’t have a strong incentive in the form of interest rate savings to seek tax-exempt financing. While California continues to add charter schools, many of them do not have sufficient facilities. The Committee may wish to consider whether to wait and see whether this model works in other states before authorizing this untried form of charter school debt issuance.

3. Public Private Partnerships. AB 1195 authorizes a new form of school facility finance, the Qualified Public Education Facilities Bond, which relies on an unusual model of public private partnership, initially proposed by the Heritage Foundation. After the issuer sells the bond, the proceeds are loaned to a private, for-profit developer, who then uses the proceeds to construct the school. The developer leases the school to the school district on a long-term basis at a cost less than the amount necessary to repay the bonds. The developer attempts to make up the difference by leasing out the school building during off-hours, and applying any depreciation deduction from the school to reduce taxable income from other sources. The school’s ownership is transferred from the developer to the school district when the lease ends. In a QPEFB, the repayment obligation is on the developer, not the school district, so the market will likely price the bond according to its assessment of the developer’s creditworthiness.

Assembly Actions

Assembly Banking and Finance Committee: 12-0

Assembly Floor: 77-0

Support and Opposition

(6/11/15)

Support: State Treasurer John Chiang.

Opposition: Unknown

-- END --

ASSEMBLY THIRD READING

ATR Bill Id:AB 1195

Author:(Ridley-Thomas)

As Introduced Ver:February 27, 2015

Majority vote

SUMMARY: Makes changes to the California Debt Limit Allocation Committee (CDLAC) to reflect the American Recovery and Reinvestment Act (ARRA) of 2009. Specifically, this bill:

1. Revises the definition of "private activity bond" to include Internal Revenue Code (IRC) Section 142(k). (Refer to existing federal law below.)

2. Revises the definition of "state ceiling" to include the amount specified by IRC Section 142(k). (Refer to existing federal law.)

3. Amends the findings and declarations to include:

   1. Sections 1112 and 1401 of the ARRA establish an aggregate amount of bond authority that can be issued in each state. Said amount may be determined from time to time by federal law, federal notice, or both federal law and notice;

   2. IRC Section 142(k) establishes a volume ceiling on the aggregate amount of qualified education facility bonds that can be issued in each state. The qualified educational facilities volume ceiling is the product of $10 multiplied by the state population in each calendar year;

   3. IRC Section 142(k)(5)(B)(i) authorizes each state to allocate the qualified educational facilities volume ceiling in the manner the state determines appropriate; and,

   4. A substantial public benefit is served by constructing educational facilities for the state's children.

EXISTING STATE LAW establishes the CDLAC which states in the findings and declarations:

1. The Tax Reform Act of 1986 (Public Law 99-514) establishes a unified volume ceiling on the aggregate amount of private activity bonds that can be issued in each state. The unified volume ceiling is the product of $75 multiplied by the state population in 1987 and $50 multiplied by the state population in each succeeding calendar year.

2. The federal act requires each state to allocate its volume ceiling according to a specified formula unless a different procedure is established by Governor's proclamation or state legislation.

3. Therefore, it is necessary to designate a state agency and create an allocation system to administer the state unified volume ceiling.

4. A substantial public benefit is served by promoting housing for lower income families and individuals.

5. A substantial public benefit is served by preserving and rehabilitating existing governmental assisted housing for lower income families and individuals.

6. A substantial public benefit is served by providing federal tax credits or reduced interest rate mortgages to assist teachers, principals, vice principals, assistant principals, and classified employees who are willing to serve in high priority schools to purchase a home. (Government Code Section 8869.90 et seq.)

EXISTING FEDERAL LAW:

1. Establishes IRC Section 142(k) which provides for a separate volume ceiling, also apportioned to the states, for Qualified Public Education Facility Bonds (QPEFB). QPEFBs are designed to provide tax-exempt conduit financing for turnkey private development of public elementary and secondary school facilities. (26 United States Code Section 42(k).)

   1. Defines "qualified public educational facility" as any school facility which is:

      1. part of a public elementary school or a public secondary school, and

      2. owned by a private, for-profit corporation pursuant to a public-private partnership agreement with a State or local educational agency.

2. Created, on February 13, 2009, in direct response to the economic crisis and at the urging of President Obama, Congress passed the ARRA of 2009. The three immediate goals of the ARRA were: create new jobs and save existing ones, spur economic activity and invest in long-term growth, foster unprecedented levels of accountability and transparency in government spending. In 2011, the original expenditure estimate of $787 billion was increased to $840 billion to be in line with the President's 2012 budget and with scoring changes made by the Congressional Budget Office since the enactment of the ARRA. In addition to offering financial aid directly to local school districts, expanding the Child Tax Credit, and underwriting the computerization of health records, the ARRA was targeted at infrastructure development and enhancement. (26 United States Code Sections 54a and 1400U-1.)

FISCAL EFFECT: None

COMMENTS:

This bill designates the CDLAC as the state agency authorized to administer the QPEFBs and authorizes the CDLAC to allocate federal bond funds to finance public school facilities. Government Code Section 8869.80 establishes that CDLAC will be the state's allocating agency for the award and administration of the limited federal private activity bond authority, called the Private Activity Volume Ceiling. IRC Section 142(k) provides for a separate volume ceiling, also apportioned to the states, for QPEFB. As with the Private Activity Volume Ceiling, the federal IRC requires CDLAC to be authorized by Governor's proclamation or state legislation to administer and allocate the QPEFB Volume Ceiling. This bill will permit CDLAC to allocate this federal resource for the development of public education schools and related improvements.

QPEDB:

A qualified public educational facility is any school facility which is part of a public elementary school or a public secondary school that is owned by a private, for-profit corporation pursuant to a public-private partnership agreement with a State or local education agency. A public-private partnership agreement is required under the IRC for each QPEFB issuance. The IRC defines this as an agreement under which the corporation agree to construct, rehabilitate, refurbish, or equip a school facility, and at the end of the term of the agreement, to transfer the school facility to such agency for no additional consideration, and the term of which does not exceed the term of the issue to be used to provide the school facility. Essentially, the bond proceeds are loaned to a private for-profit developer, who builds the school and/or provides the depreciable assets. The school is then leased to the school district on a long-term basis. At or before the maturity date of the bonds, the developer must transfer the assets to the public school agency at no cost.

QPEFBs do not fall under the private activity volume cap that the CDLAC administers. These bonds have their own federally-determined allocation which is the great of $10 per capita or $5 million for each state. California is eligible to receive approximately $380 million per year. States may further allocate the amounts provided in the manner that the state deems appropriate.

Purpose:

The purpose of CDLAC is to implement Section 1301 of the Federal Tax Reform Act of 1986 and IRC Section 146 which impose a limit on the amount of tax-exempt private activity bonds which a state may issue in a calendar year (i.e. the annual state ceiling). IRC Section 146(d), as amended by the Community Renewal Tax Relief Act of 2000, permits a state to set its annual ceiling at $187.5 million or an amount equal to $62.50 per capita of its population, whichever is higher, in calendar year 2001. In calendar year 2002 and thereafter, the ceiling will rise to $225 million or an amount equal to $75 per capita, whichever is higher. Beginning in calendar year 2003, the ceiling will be adjusted annually for inflation.

The actions of CDLAC are fundamentally defined and limited by federal tax law. Federal tax law defines the term "private activity bond"; limits the volume of private activity bonds which a state may issue in a calendar year; defines the types of programs and projects which qualify for tax-exempt bond financing under the volume cap; and specifies recordkeeping requirements.

CDLAC responsibilities include:

1. To set the annual state ceiling: CDLAC is required to establish the state ceiling as soon as practical after the start of each calendar year.

2. Allocate the State Ceiling: CDLAC is granted the sole authority for allocating the annual ceiling.

3. Other Administrative Functions: CDLAC is authorized to prepare forms, establish procedures, set priorities, require a performance deposit, assess fees, and perform other administrative functions as necessary.

Analysis Prepared by: Kathleen O'Malley / B. & F. / (916) 319-3081 FN: 0000274

Date of Hearing: May 4, 2015

ASSEMBLY COMMITTEE ON BANKING AND FINANCE

Matthew Dababneh, Chair

ABPCA Bill Id:AB 1195

Author:(Ridley-Thomas) – As Introduced Ver:February 27, 2015

SUBJECT: California Debt Limit Allocation Committee: American Recovery and Reinvestment Act of 2009

SUMMARY: Makes changes to the California Debt Limit Allocation Committee (CDLAC) to reflect the American Recovery and Reinvestment Act (ARRA) of 2009. Specifically, this bill:

1. Revises the definition of "private activity bond" to include Section 142 (k) of the Internal Revenue Code (IRC). (refer to existing federal law below)

2. Revises the definition of "state ceiling" to include the amount specified by Section 142 (k) of the IRC. (refer to existing federal law)

3. Amends the findings and declarations to include:

   1. Sections 1112 and 1401 of the ARRA establish an aggregate amount of bond authority that can be issued in each state. Said amount may be determined from time to time by federal law, federal notice, or both federal law and notice;

   2. Section 142(k) of the IRC establishes a volume ceiling on the aggregate amount of qualified education facility bonds that can be issued in each state. The qualified educational facilities volume ceiling is the product of ten dollars ($10) multiplied by the state population in each calendar year;

   3. Section 142(k)(5)(B)(i) of the IRC authorizes each state to allocate the qualified educational facilities volume ceiling in the manner the state determines appropriate; and,

   4. A substantial public benefit is served by constructing educational facilities for the state’s children.

EXISTING STATE LAW establishes the CDLAC which states in the findings and declarations:

1. The Tax Reform Act of 1986 (Public Law 99-514) establishes a unified volume ceiling on the aggregate amount of private activity bonds that can be issued in each state. The unified volume ceiling is the product of seventy-five dollars ($75) multiplied by the state population in 1987 and fifty dollars ($50) multiplied by the state population in each succeeding calendar year.

2.  The federal act requires each state to allocate its volume ceiling according to a specified formula unless a different procedure is established by Governor’s proclamation or state legislation.

3. Therefore, it is necessary to designate a state agency and create an allocation system to administer the state unified volume ceiling.

4. A substantial public benefit is served by promoting housing for lower income families and individuals.

5. A substantial public benefit is served by preserving and rehabilitating existing governmental assisted housing for lower income families and individuals.

6. A substantial public benefit is served by providing federal tax credits or reduced interest rate mortgages to assist teachers, principals, vice principals, assistant principals, and classified employees who are willing to serve in high priority schools to purchase a home. (Government Code, Section 8869.90 et seq.)

EXISTING FEDERAL LAW:

1. Establishes Section 142(k) of the IRC which provides for a separate volume ceiling, also apportioned to the states, for Qualified Public Education Facility Bonds (QPEFB). QPEFBs are designed to provide tax-exempt conduit financing for turnkey private development of public elementary and secondary school facilities. (26 U.S.C. Sec. 42 (k))

   1. Defines “qualified public educational facility” as any school facility which is:

      1. part of a public elementary school or a public secondary school, and

      2. owned by a private, for-profit corporation pursuant to a public-private partnership agreement with a State or local educational agency.

2. Created, on February 13, 2009, in direct response to the economic crisis and at the urging of President Obama, Congress passed the ARRA of 2009. The three immediate goals of the ARRA were: create new jobs and save existing ones, spur economic activity and invest in long-term growth, foster unprecedented levels of accountability and transparency in government spending. In 2011, the original expenditure estimate of $787 billion was increased to $840 billion to be in line with the President's 2012 budget and with scoring changes made by the Congressional Budget Office since the enactment of the ARRA. In addition to offering financial aid directly to local school districts, expanding the Child Tax Credit, and underwriting the computerization of health records, the ARRA was targeted at infrastructure development and enhancement. (26 U.S.C. Secs. 54a and 1400U-1)

FISCAL EFFECT: None.

COMMENTS:

AB 1195 designates the CDLAC as the state agency authorized to administer the QPEFBs and authorizes the CDLAC to allocate federal bond funds to finance public school facilities. Government Code, Section 8869.80 establishes that CDLAC will be the state's allocating agency for the award and administration of the limited federal private activity bond authority, called the Private Activity Volume Ceiling. Section 142 (k) of the federal IRC provides for a separate volume ceiling, also apportioned to the states, for QPEFB. As with the Private Activity Volume Ceiling, the federal IRC requires CDLAC to be authorized by Governor's proclamation or state legislation to administer and allocate the QPEFB Volume Ceiling. AB 1195 will permit CDLAC to allocate this federal resource for the development of public education schools and related improvements.

Need for the bill:

According to the author,

"Public elementary and secondary schools have limited financing options for the construction or improvement of their facilities. In contrast, private developers have more flexibility in their ability to finance transaction and access to resources. In acknowledgement of these differences, Section 142 (k) of the federal IRC created a type of tax-exempt private activity bond that can be used to finance school facilities called QPEFB. These bonds are designed to provide tax-exempt conduit financing for turnkey private development of public elementary and secondary school facilities. The tax-exempt private activity bond proceeds can be used to fund the following project: school buildings, any functionally related and subordinate facility and land with respect to a school building, including any stadium or other facility primarily used for school events, and any property subject to accelerated depreciation under Section 168 of the IRC for use in a school facility. QPEFBs are apportioned to the states but fall outside the current limits the federal government places on private activity bond authority. Federal law requires that each state designate an entity to administer QPEFBs in order to allocate the bonds."

Background:

The CDLAC is a three-member body comprised of the State Treasurer as Chair, the Governor, and the State Controller. CDLAC was created in 1985 by a Governor proclamation in response to the 1984 Tax Reform Act, which imposed an annual limit on the dollar amount of tax-exempt private activity bonds that may be issued in a state. Private activity bonds included student loan bonds and industrial development bonds (including exempt facility bonds, small-issue industrial development bonds, and bonds for industrial parks). The annual limit was derived by multiplying the state's population by $150, resulting in a $3.8 billion ceiling at that time. The Act also required each state to designate an entity to allocate the state's ceiling among various state and local issuers.

The 1986 Tax Reform Act made major changes to the allocation of private activity bond authority. It reduced the annual volume cap to $75 per capita in 1986 and 1987 and $50 per capita thereafter. The Act also brought bonds for single-family and multifamily housing under the state ceiling. As a result, a new Governor's proclamation was issued in 1986 re-affirming CDLAC as the state's sole entity responsible for allocating the annual ceiling, and expressly authorizing CDLAC to establish procedures and reserve amounts of the ceiling for certain purposes or issuers. In 1987, the California State Legislature statutorily established CDLAC by enacting Chapter 943.

The 1998 Omnibus Budget Act raised the volume cap on private activity bonds to $75 per capita or a minimum of $225 million. However, the increase would take place incrementally over the years 2003 through 2007.

The Community Renewal Tax Relief Act of 2000 accelerates the scheduled increase contained in the 1998 Act by raising the volume cap to $62.50 per capita of the state's population or $187.5 million, whichever is higher, for calendar year 2001 and $75 per capita or $225 million, whichever is higher, in calendar year 2002 and thereafter. The 2000 Act also allows for the volume cap to be indexed for inflation starting in calendar year 2003.

QPEDB:

A qualified public educational facility is any school facility which is part of a public elementary school or a public secondary school that is owned by a private, for-profit corporation pursuant to a public-private partnership agreement with a State or local education agency. A public-private partnership agreement is required under the IRC for each QPEFB issuance. The IRC defines this as an agreement under which the corporation agree to construct, rehabilitate, refurbish, or equip a school facility, and at the end of the term of the agreement, to transfer the school facility to such agency for no additional consideration, and the term of which does not exceed the term of the issue to be used to provide the school facility. Essentially, the bond proceeds are loaned to a private for-profit developer, who builds the school and/or provides the depreciable assets. The school is then leased to the school district on a long-term basis. At or before the maturity date of the bonds, the developer must transfer the assets to the public school agency at no cost.

QPEFBs do not fall under the private activity volume cap that the CDLAC administers. These bonds have their own federally-determined allocation which is the great of $10 per capita or $5million dollars for each state. California is eligible to receive approximately $380 million per year. States may further allocate the amounts provided in the manner that the state deems appropriate.

Purpose:

The purpose of CDLAC is to implement Section 1301 of the Federal Tax Reform Act of 1986 and Section 146 of the IRC which impose a limit on the amount of tax-exempt private activity bonds which a state may issue in a calendar year (i.e. the annual state ceiling). Section 146(d), as amended by the Community Renewal Tax Relief Act of 2000, permits a state to set its annual ceiling at $187,500,000 or an amount equal to $62.50 per capita of its population, whichever is higher, in calendar year 2001. In calendar year 2002 and thereafter, the ceiling will rise to $225,000,000 or an amount equal to $75 per capita, whichever is higher. Beginning in calendar year 2003, the ceiling will be adjusted annually for inflation.

The actions of CDLAC are fundamentally defined and limited by federal tax law. Federal tax law defines the term "private activity bond"; limits the volume of private activity bonds which a state may issue in a calendar year; defines the types of programs and projects which qualify for tax-exempt bond financing under the volume cap; and specifies recordkeeping requirements.

CDLAC responsibilities include:

1. To set the annual state ceiling: CDLAC is required to establish the state ceiling as soon as practical after the start of each calendar year.

2. Allocate the State Ceiling: CDLAC is granted the sole authority for allocating the annual ceiling.

3. Other Administrative Functions: CDLAC is authorized to prepare forms, establish procedures, set priorities, require a performance deposit, assess fees, and perform other administrative functions as necessary.

REGISTERED SUPPORT / OPPOSITION:

Support

California State Treasurer (Sponsor)

Opposition

None on file.

Analysis Prepared by: Kathleen O'Malley / B. & F. / (916) 319-3081