Existing law dissolved redevelopment agencies on February 1, 2012, and provides for the designation of successor agencies to, among other things, wind down the affairs of the dissolved redevelopment agencies and make payments due for enforceable obligations. Existing law authorizes the legislative body of a city or county to establish an enhanced infrastructure financing district to finance public capital facilities or other specified projects of communitywide significance that provide significant benefits to the district or the surrounding community. Existing law prohibits a city or county that created a redevelopment agency from initiating the creation of an enhanced infrastructure financing district or participating in the governance or financing of an enhanced infrastructure financing district until certain specified events occur, including that the successor agency for the former redevelopment agency created by the city or county has received a finding of completion, as specified.

This bill would, notwithstanding those provisions, authorize the City of Merced to initiate, participate in, finance, or govern an enhanced infrastructure financing district if those specified events have occurred, except the requirement to have received a finding of completion, and if the City of Merced, and the Merced Designated Local Authority acting as the successor agency to the former Redevelopment Agency of the City of Merced, have paid in full the amounts outstanding demanded by the county auditor-controller from the funds of the successor agency for subsequent distribution to taxing entities, as specified, including amounts remaining due under any applicable installment payment plan entered into with the Department of Finance.

This bill would make legislative findings and declarations as to the necessity of a special statute for the City of Merced.

Existing law dissolved redevelopment agencies on February 1, 2012, and provides for the designation of successor agencies to, among other things, wind down the affairs of the dissolved redevelopment agencies and make payments due for enforceable obligations. Existing law authorizes the legislative body of a city or county to establish an enhanced infrastructure financing district to finance public capital facilities or other specified projects of communitywide significance that provide significant benefits to the district or the surrounding community. Existing law prohibits a city or county that created a redevelopment agency from initiating the creation of an enhanced infrastructure financing district or participating in the governance or financing of an enhanced infrastructure financing district until certain specified events occur, including that the successor agency for the former redevelopment agency created by the city or county has received a finding of completion, as specified.

This bill would, notwithstanding those provisions, authorize the City of Merced to initiate, participate in, finance, or govern an enhanced infrastructure financing district if those specified events have occurred, except the requirement to have received a finding of completion, and if the City of Merced, and the Merced Designated Local Authority acting as the successor agency to the former Redevelopment Agency of the City of Merced, have paid in full the amounts outstanding demanded by the county auditor-controller from the funds of the successor agency for subsequent distribution to taxing entities, as specified, including amounts remaining due under any applicable installment payment plan entered into with the Department of Finance.

This bill would make legislative findings and declarations as to the necessity of a special statute for the City of Merced.

Existing law dissolved redevelopment agencies on February 1, 2012, and provides for the designation of successor agencies to, among other things, wind down the affairs of the dissolved redevelopment agencies and make payments due for enforceable obligations. Existing law authorizes the legislative body of a city or county to establish an enhanced infrastructure financing district to finance public capital facilities or other specified projects of communitywide significance that provide significant benefits to the district or the surrounding community. Existing law prohibits a city or county that created a redevelopment agency from initiating the creation of an enhanced infrastructure financing district or participating in the governance or financing of an enhanced infrastructure financing district until certain specified events occur, including that the successor agency for the former redevelopment agency created by the city or county has received a finding of completion, as specified.

This bill would, notwithstanding those provisions, authorize the City of Merced to initiate, participate in, finance, or govern an enhanced infrastructure financing district if those specified events have occurred, except the requirement to have received a finding of completion, and if the City of Merced, and the Merced Designated Local Authority acting as the successor agency to the former Redevelopment Agency of the City of Merced, have paid in full the amount amounts outstanding demanded by the county auditor-controller from the funds of the successor agency for subsequent distribution to taxing entities, as specified. specified, including amounts remaining due under any applicable installment payment plan entered into with the Department of Finance.

This bill would make legislative findings and declarations as to the necessity of a special statute for the City of Merced.

Existing law dissolved redevelopment agencies on February 1, 2012, and provides for the designation of successor agencies to, among other things, wind down the affairs of the dissolved redevelopment agencies and make payments due for enforceable obligations. Existing law authorizes the legislative body of a city or county to establish an enhanced infrastructure financing district to finance public capital facilities or other specified projects of communitywide significance that provide significant benefits to the district or the surrounding community. Existing law prohibits a city or county that created a redevelopment agency from initiating the creation of an enhanced infrastructure financing district or participating in the governance or financing of an enhanced infrastructure financing district until certain specified events occur, including that the successor agency for the former redevelopment agency created by the city or county has received a finding of completion, as specified.

This bill would, notwithstanding those provisions, authorize the City of Merced to initiate, participate in, govern, finance, or finance govern an enhanced infrastructure financing district if those specified events have occurred, except the requirement to have received a finding of completion, and if the City of Merced, and the Merced Designated Local Authority acting as the successor agency to the former Redevelopment Agency of the City of Merced, have paid in full the amount outstanding demanded by the county auditor-controller from the funds of the successor agency for subsequent distribution to taxing entities, as specified.

This bill would make legislative findings and declarations as to the necessity of a special statute for the City of Merced.

Existing law dissolved redevelopment agencies on February 1, 2012, and provides for the designation of successor agencies to, among other things, wind down the affairs of the dissolved redevelopment agencies and make payments due for enforceable obligations. Existing law authorizes the legislative body of a city or county to establish an enhanced infrastructure financing district to finance public capital facilities or other specified projects of communitywide significance that provide significant benefits to the district or the surrounding community. Existing law prohibits a city or county that created a redevelopment agency from initiating the creation of an enhanced infrastructure financing district or participating in the governance or financing of an enhanced infrastructure financing district until certain specified events occur, including that the successor agency for the former redevelopment agency created by the city or county has received a finding of completion, as specified.

This bill would, notwithstanding those provisions, authorize the City of Merced to initiate, participate in, govern, or finance an enhanced infrastructure financing district if those specified events have occurred, except the requirement to have received a finding of completion, and if the City of Merced, and the Merced Designated Local Authority acting as the successor agency to the former Merced County Redevelopment Agency, has Redevelopment Agency of the City of Merced, have paid in full the amount outstanding demanded by the county auditor-controller from the funds of the successor agency for subsequent distribution to taxing entities, as specified.

This bill would make legislative findings and declarations as to the necessity of a special statute for the City of Merced.

Existing law designates the first day of spring in each year as California Agriculture Day, and encourages schools throughout the state to provide education that instructs students on the history and importance of agriculture in California.

This bill would make nonsubstantive changes in those provisions.

CONCURRENCE IN SENATE AMENDMENTS

CSA1 Bill Id:AB 1259

Author:(Soria)

As Amended Ver:September 6, 2023

Majority vote

SUMMARY

Allows the City of Merced to initiate, participate in, finance, or govern an enhanced infrastructure financing district (EIFD) if it meets specified conditions.

Senate Amendments

1. Added a coauthor.
2. Specify that prior to initiating, participating in, financing, or governing and EIFD, the City of Merced shall have paid in full amounts remaining due under any applicable installment payment plan entered into with the Department of Finance (DOF).
3. Make other technical amendments.

COMMENTS

Redevelopment. California Constitution Article XVI, Section 16, authorizes the Legislature to provide for the formation of redevelopment agencies (RDAs) to eliminate blight in an area by means of a self-financing schedule that pays for the redevelopment project with tax increment derived from any increase in the assessed value of property within the redevelopment project area (or tax increment). Generally, property tax increment financing involves a local government forming a tax increment financing district to issue bonds and use the bond proceeds to pay project costs within the boundaries of a specified project area. To repay the bonds, the district captures increased property tax revenues that are generated when projects financed by the bonds increase assessed property values within the project area.

To calculate the increased property tax revenues captured by the district, the amount of property tax revenues received by any local government participating in the district is "frozen" at the amount it received from property within a project area prior to the project area's formation. In future years, as the project area's assessed valuation grows above the frozen base, the resulting additional property tax revenues – the so-called property tax "increment" revenues – flow to the tax increment financing district instead of other local governments. After the bonds have been fully repaid using the incremental property tax revenues, the district is dissolved, ending the diversion of tax increment revenues from participating local governments.

Prior to Proposition 13 very few RDAs existed; however, after its passage, RDAs became a source of funding for a variety of local infrastructure activities. Eventually, RDAs were required to set-aside 20% of funding generated in a project area to increase the supply of low and moderate income housing in the project areas. At the time RDAs were dissolved, the Controller estimated that statewide, RDAs were obligated to spend $1 billion on affordable housing. At the time of dissolution, over 400 RDAs statewide were diverting 12% of property taxes, over $5.6 billion yearly.

In 2011, facing a severe budget shortfall, the Governor proposed eliminating RDAs in order to deliver more property taxes to other local agencies. Ultimately, the Legislature approved and the Governor signed two measures, AB 26 X1 (Blumenfield), Chapter 5, and AB 27 X1 (Blumenfield), Chapter 6, that together dissolved RDAs as they existed at the time and created a voluntary redevelopment program on a smaller scale. In response, the California Redevelopment Association (CRA) and the League of California Cities, along with other parties, filed suit challenging the two measures. The Supreme Court denied the petition for peremptory writ of mandate with respect to AB 26 X1. However, the Court did grant CRA's petition with respect to AB 27 X1. As a result, all RDAs were required to dissolve as of February 1, 2012.

RDA Dissolution. AB X1 26 (2011) established successor agencies to manage the process of unwinding former RDA affairs. With the exception of seven cities, the city or county that created each former RDA now serves as that RDA's successor agency. One of a successor agency's primary responsibilities is to make payments for the enforceable obligations RDAs entered into. These payments are supported by property tax revenues that would have gone to RDAs, but are instead deposited in a Redevelopment Property Tax Trust Fund (RPTTF). Enforceable obligations include bonds, bond-related payments, some loans, payments required by the federal government, obligations to the state or imposed by state law, payments to RDA employees, judgements or settlements, and other legally binding and enforceable agreements or contracts. Any remaining property tax revenues that exceed these enforceable obligations return to cities, counties, special districts, and school and community college districts to support core services.

Each successor agency has an oversight board responsible for supervising and approving its actions. DOF can review and request reconsideration of an oversight board's decision. Once a successor agency takes over for an RDA, it reviews the RDA's outstanding assets and obligations, and develops a plan to resolve those obligations, also known as a Recognized Obligation Payment Schedule (ROPS). To obtain required DOF approval, a successor agency submits a series of ROPS to DOF. If DOF agrees with the plan, it issues a Finding of Completion acknowledging their progress towards paying off their obligations. Successor agencies issued a Finding of Completion can submit a Last and Final ROPS, meaning that (1) the remaining debt is limited to administrative costs and payments pursuant to enforceable obligations with defined payment schedules, (2) all remaining obligations have been previously listed on the ROPS and approved by DOF, and (3) the agency is not a party to outstanding or unresolved litigation. Successor agencies had until December 31, 2015 to receive their Finding of Completion from DOF. RDA dissolution law states that successor agencies that did not receive their Finding of Completion by this date, or did not enter into a written installment payment plan with DOF, were to never receive a Finding of Completion. Approximately nine successor agencies did not receive a Finding of Completion by the deadline.

If a successor agency receives a Finding of Completion, loan agreements made between the RDA and the local agency that created it can become enforceable obligations. Without a Finding of Completion, these loans cannot become enforceable obligations and the successor agency cannot repay the loans with property tax revenue. Additionally, successor agencies with a Finding of Completion can spend a greater portion of bond proceeds in excess of what is necessary to pay off enforceable obligations provided they remain consistent with bond covenants, not just to cancel or defease the bonds. When bond proceeds are defeased or cancelled, property tax revenue used to pay off bonds returns to the local agencies that generated the property tax revenue, not the RPTTF. Due to outstanding disputed funds, the City of Merced did not receive a Finding of Completion by the December 21, 2015, deadline.

City of Merced. The City of Merced is located in the Central Valley of California, approximately 110 miles southeast of San Francisco and 310 miles northwest of Los Angeles. The City has a population of about 87,000, according to the most recent census, and serves as the county seat. Merced was incorporated in 1889 and operates under the Council-Manager form of government. Merced was one of the few cities that chose not to serve as the successor agency to its former Merced RDA. Instead, the Merced Designated Local Authority (DLA) serves as the successor agency for the City's former RDA.

Following the dissolution of the Merced RDA, the Merced DLA submitted its Due Diligence Review (DDR) for other funds and accounts on January 15, 2015, and its DDR for the Low and Moderate Income Housing Fund on May 15, 2015. According to the settlement agreement between the City of Merced and DOF, "Finance issued letters dated December 4, 2015, identifying a balance of over $13,158,141 in the two DDRs combined. After a meet and confer about the determinations, Finance issued letters dated January 8, 2016, revising but largely upholding the determinations, and calculating a new balance of $13,035,007 for the two DDRs. The City of Merced DLA subsequently remitted $3,014,796.17 to the Auditor-Controller [of Merced County] leaving a $10,020,210.83 balance.

"After an extensive meet and confer about Finance's determinations, Finance issued a letter dated August 25, 2016, requiring the City and Merced DLA to either remit the full $10,020,210.83 balance or agree to a payment plan with Finance by October 24, 2016. Neither the City nor Merced DLA remitted the DDR balance or reached agreement with Finance on a payment plan. Finance filed a Petition for Writ of Mandate on November 15, 2016, entitled California Department of Finance v. City of Merced, et al., Sacramento County Superior Court Case No. 34-2016-80002485 ("Action"), alleging that the City and Merced DLA had a clear, present, and ministerial duty to remit the $10,020,210.83 balance in accordance with California Health and Safety Code sections 34179.6 and 34179.9.

"The superior court granted the petition, and on September 15, 2017, Finance filed notice of entry of the superior court's order, the peremptory writ of mandate, and the judgement. In the course of this litigation, the Parties agreed that the $10,020,210.83 balance should be reduced to reflect that the City had remitted $491,815 in unencumbered bond proceeds. The remaining balance is $9,528,395.83. The City appealed the judgment on October 12, 2017. The Third Appellate District of the Court of Appeal issued an opinion on March 22, 2019, directing the superior court to recall the writ and modify the judgement to specify the exact dollar amount of the unencumbered bond proceeds within the DDR balance. The Third Appellate District affirmed the judgement as modified. The California Supreme Court denied the City's petition for review on June 19, 2019, and the Third Appellate District issued a remittitur to the superior court on June 27, 2019. On July 15, 2019, the superior court directed the parties to prepare a modified proposed judgement."

After the Court's determinations, the City and DOF entered into a settlement agreement where the City of Merced will pay more than $9 million dollars in accordance with a specified schedule.

According to the Author

According to the author, "The City of Merced has made great strides since 2015 and is on track to receive its Pro-Housing Designation from the State and is a considered a good actor in increasing the supply of housing.

"The City is working to establish an Enhanced Infrastructure Financing District (EIFD) to fund projects which will further the City's affordable housing goals and is in alignment with the State's priorities such as transit oriented development and respective local rail projects as well as High Speed Rail.

"Additionally, establishing an EIFD will support efforts to fund necessary infrastructure improvements to support a growing UC Merced campus."

Arguments in Support

According to the city of Merced, "Successor agencies had until December 31, 2015, to receive their Finding of Completion from DOF. RDA dissolution law states that successor agencies that did not receive their Finding of Completion by this date or that did not enter into a written installment payment plan with DOF were to never receive a Finding of Completion. Due to outstanding disputed funds, the City of Merced did not receive a Finding of Completion by the December 21, 2015, deadline. However, (1) the City has been in good faith negotiations with DOF and has a settled defined payment plan with the last payment due to DOF on July 1, 2025, (2) remaining obligations have been approved by DOF, (3) the City is not a party to any outstanding litigation.

"The City is looking to form an EIFD to fund projects that will further the City's affordable housing goals and align with the State's priorities, such as transit-oriented development and respective rail projects. The EIFD will also fund necessary infrastructure improvements around a growing UC Merced campus. Without this funding, these projects will not come to fruition. The City of Merced is on track to receive its Pro-Housing Designation from the State and is a good actor. Limiting local ability to create an EIFD has a chilling effect on the community and the City's ability to address its residents' needs. AB 1259 will allow the City of Merced to form or participate in an enhanced infrastructure financing district if it meets specified conditions, just as AB 2780 did for the City of Selma."

Arguments in Opposition

According to the Howard Jarvis Taxpayers Association, "EIFD's represent a far broader redevelopment scope than traditional IFDs, a scope we believe to be overly expansive. EIFDs also do not require voter approval to form, and AB 116 (2019) eliminated any voter approval requirement for EIFD bonds. Further, EIFD bonds are not the same as local General Obligation bonds. GO bonds are backed by the full faith and credit of a municipality's General Fund. EIFD bonds have no such assurances. This creates a much greater risk for the bond holders and taxpayers, resulting in higher interest rates and thus less money for projects.

"Last year, we warned that if the City of Selma was allowed to reopen negotiations to create an EIFD (AB 2780), other local jurisdictions would surely follow and more EIFDs would be created. And here we are."

FISCAL COMMENTS

None.

VOTES:

ASM LOCAL GOVERNMENT: 7-1-0

YES: Aguiar-Curry, Boerner, Pacheco, Ramos, Robert Rivas, Waldron, Wilson

NO: Dixon

ASSEMBLY FLOOR: 63-11-6

YES: Addis, Aguiar-Curry, Alanis, Alvarez, Arambula, Bains, Bauer-Kahan, Bennett, Berman, Boerner, Bonta, Bryan, Calderon, Juan Carrillo, Wendy Carrillo, Cervantes, Connolly, Megan Dahle, Mike Fong, Friedman, Gabriel, Garcia, Gipson, Grayson, Haney, Hart, Holden, Irwin, Jackson, Jones-Sawyer, Kalra, Lee, Low, Lowenthal, Maienschein, McCarty, McKinnor, Muratsuchi, Stephanie Nguyen, Ortega, Pacheco, Papan, Pellerin, Ramos, Reyes, Luz Rivas, Robert Rivas, Rodriguez, Blanca Rubio, Santiago, Schiavo, Soria, Ting, Valencia, Villapudua, Waldron, Ward, Weber, Wicks, Wilson, Wood, Zbur, Rendon

NO: Chen, Davies, Dixon, Essayli, Flora, Vince Fong, Gallagher, Mathis, Jim Patterson, Joe Patterson, Wallis

ABS, ABST OR NV: Hoover, Lackey, Petrie-Norris, Quirk-Silva, Sanchez, Ta

SENATE FLOOR: 30-8-2

YES: Allen, Alvarado-Gil, Archuleta, Ashby, Atkins, Becker, Blakespear, Bradford, Cortese, Dodd, Durazo, Eggman, Glazer, Gonzalez, Hurtado, Laird, Limón, McGuire, Menjivar, Newman, Padilla, Portantino, Roth, Rubio, Skinner, Smallwood-Cuevas, Stern, Umberg, Wahab, Wiener

NO: Dahle, Grove, Jones, Min, Nguyen, Niello, Ochoa Bogh, Seyarto

ABS, ABST OR NV: Caballero, Wilk

UPDATED

VERSION: September 6, 2023

CONSULTANT: Jimmy MacDonald / L. GOV. / (916) 319-3958 FN: 0001939

 THIRD READING  

Bill No: AB 1259

Author: Soria (D), et al.

Amended: 9/6/23 in Senate

Vote: 21

SENATE GOVERNANCE & FIN. COMMITTEE: 6-1, 6/21/23

AYES: Caballero, Blakespear, Durazo, Glazer, Skinner, Wiener

NOES: Seyarto

NO VOTE RECORDED: Dahle

ASSEMBLY FLOOR: 63-11, 5/31/23 - See last page for vote

SUBJECT: Dissolution of redevelopment agencies: enhanced infrastructure financing districts: City of Merced

SOURCE: City of Merced

DIGEST:

This bill allows the City of Merced to form or participate in an enhanced infrastructure financing district (EIFD) if it meets specified conditions.

Senate Floor Amendments of 9/6/23 clarify required payments the City of Merced must make before forming or participating in an EIFD.

Senate Floor Amendments of 7/6/23 add coauthors and make technical changes.

ANALYSIS:

Existing law:

1. Establishes successor agencies to manage the process of unwinding former redevelopment agencies’ (RDAs) affairs, and oversight boards to approve successor agency decisions.
2. Allows the Department of Finance (DOF) to review and request reconsideration of an oversight board’s decision.
3. Requires the successor agency to submit specified information on its outstanding assets and obligations, also known as a Recognized Obligation Payment Schedule (ROPS).
4. Allows DOF to issue a finding of completion to a successor agency acknowledging their progress towards paying off their obligations provided that its Final ROPS contains specified information.
5. States that successor agencies that did not receive their finding of completion by December 31, 2015, or did not enter into a written installment payment plan with DOF, were to never receive a finding of completion.
6. Creates EIFDs and allows them to finance public capital facilities or other specified projects of communitywide significance that provide significant benefits to the district or the surrounding community with an estimated useful life of 15 years or more.
7. Allows, in addition to construction costs, EIFDs to finance planning and design work, displacement of affordable housing residents, defending the district against protests over their formation, and the ongoing or capitalized costs to maintain the projects the district finances.
8. Provides that an EIFD is governed by a public financing authority (PFA) with three members of each participating taxing entity’s legislative body and a minimum of two public members. Member agencies can also appoint an alternate member from their legislative body. If at least three taxing entities participate in the district, upon agreement of all taxing entities participating, the district’s governing board can be reduced to one member and one alternate member of each legislative body and a minimum of two public members.
9. Limits a city or county that created an RDA, as defined, from initiating the creation of an EIFD, or participating in the governance or financing of an EIFD, until each of the following has occurred:
   1. The successor agency for the former RDA created by the city or county has received a finding of completion, as specified.
   2. The city or county certifies to DOF and to the PFA that no former RDA assets that are the subject of litigation involving the state, if the city or county, the successor agency, or the designated local authority are a named plaintiff, have been or will be used to benefit any efforts of an EIFD, unless the litigation and all possible appeals have been resolved in a court of law. The city or county shall provide this certification to DOF within 10 days of its legislative body’s action to participate in or form an EIFD, as specified.
   3. The State Controller’s Office (SCO) has completed its review as required by existing law, and the successor agency and entity that created the RDA have complied with all the SCO’s findings and orders stemming from the review.

This bill allows the City of Merced to initiate, participate in, finance, or govern an EIFD, if the City of Merced and the Merced Designated Local Authority (DLA), acting as the successor agency to the former Merced Redevelopment Agency, has:

1. Certified to DOF and the PFA that no former RDA assets are the subject of litigation involving the state (where the city or county, or its successor agency are a named plaintiff) have been or will be used to benefit any efforts of an EIFD, unless the litigation and all possible appeals have been resolved in court. The City must provide this certification to DOF within 10 days of its legislative body’s action to participate in, or initiate formation of an EIFD;
2. Complied with the settlement agreement it has entered into with the state to resolve any RDA dissolution issues, including paying any amounts remaining due under any applicable installment payment plan entered into with DOF; and
3. Complied with all SCO findings and orders stemming from its asset transfer review.

Background

RDA dissolution. One of a successor agency’s primary responsibilities is to make payments for the enforceable obligations RDAs entered into. These payments are supported by property tax revenues that would have gone to RDAs, but are instead deposited in a Redevelopment Property Tax Trust Fund (RPTTF). Enforceable obligations include bonds, bond-related payments, some loans, payments required by the federal government, obligations to the state or imposed by state law, payments to RDA employees, judgements or settlements, and other legally binding and enforceable agreements or contracts. Any remaining property tax revenues that exceed these enforceable obligations return to cities, counties, special districts, and school and community college districts to support core services. The amount that these taxing entities receive increases as the successor agency pays off these enforceable obligations. If a successor agency adds additional enforceable obligations, the slower this stream of property tax revenue returns to these taxing entities.

City of Merced. The City of Merced is the county seat for Merced County. The City of Merced incorporated in 1889, and has a population of approximately 90,000 people. Following the dissolution of the Merced RDA in 2015, the DLA submitted its Due Diligence Reports for both its Low and Moderate Income Housing Fund and its Other Funds and Accounts. DOF identified a $13.2 million outstanding balance the DLA needed to remit to the Merced County Auditor-Controller. DOF and the DLA engaged in a meet and confer process, and DOF revised the outstanding amounts down to $13 million. The DLA remitted $3 million to the Merced County Auditor-Controller. Due to the $10 million outstanding balance, DOF did not issue the City of Merced a Finding of Completion by the December 31, 2015 deadline. On August 25, 2016, DOF issued another letter requiring the DLA or the City to repay the $10 million or enter a payment plan by October 24, 2016. Since neither occurred, DOF filed a petition with the Sacramento County Superior Court to compel the payment. The City appealed the judgment. Ultimately, the Third Appellate District Court of Appeal denied the City’s appeal. After subsequent court determinations, the City of Merced and DOF entered into a settlement agreement that required the City of Merced to pay more than $9 million. Additionally, the SCO’s asset transfer review stated that $35 million in unallowable transfers had to be turned over from the City to the successor agency. The City refused to comply with the findings of the asset transfer review, so the $35 million appears to remain outstanding.

Since Merced did not meet the conditions to receive a Finding of Completion, it can never form or join an EIFD. The City of Merced wants to form an EIFD despite never receiving a Finding of Completion.

Comments

1. Purpose of the bill. According to the author, “AB 1259 paves the way for the City of Merced to establish an EIFD to fund projects which will further the City’s affordable housing goals and is in alignment with the State’s priorities such as transit oriented development and respective rail projects. The EIFD will also fund necessary infrastructure improvements to support a growing UC Merced campus.”
2. Late bird gets the worm? RDA dissolution law is explicit that successor agencies who did not receive their Finding of Completion by December 31, 2015, were never to receive one. Since the DLA and the City did not make payments DOF required by that date, the City of Merced never received a Finding of Completion, which means it can never form an EIFD. Importantly, AB 1259 does not grant Merced a Finding of Completion, and all the benefits that go along with it. Instead, it allows the City to participate in an EIFD without a Finding of Completion, but only if it meets all the same conditions as the cities that did receive one. Before Merced can form an EIFD, it must comply with the settlement agreement it entered into with DOF, and comply with the findings and orders of the SCO’s asset transfer review. AB 2780 (Arambula, Chapter 598, Statutes of 2022) granted similar authority for the City of Selma. Like Merced, Selma also missed the statutory deadline to receive a Finding of Completion, pursued litigation against the State, had not made required payments, and had not complied with SCO asset transfer review findings. The Legislature may wish to consider whether the City of Merced should join the City of Selma in enjoying the benefit of forming an EIFD given it missed the statutory deadline to receive a Finding of Completion, pursued litigation against the State, has not complied with SCO asset transfer review findings, and the precedent it would set for the remaining successor agencies without a Finding of Completion.

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

SUPPORT: (Verified 9/6/23)

City of Merced (source)

California Association for Local Economic Development

OPPOSITION: (Verified 9/6/23)

Howard Jarvis Taxpayers Association

ASSEMBLY FLOOR: 63-11, 5/31/23

AYES: Addis, Aguiar-Curry, Alanis, Alvarez, Arambula, Bains, Bauer-Kahan, Bennett, Berman, Boerner, Bonta, Bryan, Calderon, Juan Carrillo, Wendy Carrillo, Cervantes, Connolly, Megan Dahle, Mike Fong, Friedman, Gabriel, Garcia, Gipson, Grayson, Haney, Hart, Holden, Irwin, Jackson, Jones-Sawyer, Kalra, Lee, Low, Lowenthal, Maienschein, McCarty, McKinnor, Muratsuchi, Stephanie Nguyen, Ortega, Pacheco, Papan, Pellerin, Ramos, Reyes, Luz Rivas, Robert Rivas, Rodriguez, Blanca Rubio, Santiago, Schiavo, Soria, Ting, Valencia, Villapudua, Waldron, Ward, Weber, Wicks, Wilson, Wood, Zbur, Rendon

NOES: Chen, Davies, Dixon, Essayli, Flora, Vince Fong, Gallagher, Mathis, Jim Patterson, Joe Patterson, Wallis

NO VOTE RECORDED: Hoover, Lackey, Petrie-Norris, Quirk-Silva, Sanchez, Ta

Prepared by: Jonathan Peterson / GOV. & F. / (916) 651-4119

9/7/23 10:26:40

**** END ****

SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Anna M. Caballero, Chair

2023 - 2024 Regular

Dissolution of redevelopment agencies: enhanced infrastructure financing districts: City of Merced

Allows the City of Merced to form or participate in an enhanced infrastructure financing district if it meets specified conditions.

Background

Redevelopment agencies. From the early 1950s until the state dissolved them in 2011, California redevelopment agencies (RDAs) used property tax increment financing (TIF) to pay for economic development projects in blighted areas. Generally, property TIF involves a city or county forming a tax increment financing district to issue bonds and use the bond proceeds to pay project costs within the boundaries of a specified project area. To repay the bonds, the district captures increased property tax revenues generated when projects financed by the bonds increase assessed property values within the project area. To calculate the increased property tax revenues captured by the district, the amount of property tax revenues obtained by any local agency that receives a share of property tax revenues from property within a project area is “frozen” at the amount it received from that property prior to the project area’s formation. In future years, as the project area's assessed valuation grows above the frozen base, the resulting additional property tax revenues—the increment—flows to the tax increment financing district instead of other local agencies. After the bonds have been fully repaid, the district is dissolved, ending the diversion of tax increment revenues from participating local agencies. Property tax revenues then flow back to each local agency that receives a share of the property tax.

Citing a significant State General Fund deficit, Governor Brown’s 2011-12 budget proposed eliminating RDAs and returning billions of dollars of property tax revenues to schools, cities, and counties to fund core services. Among the statutory changes that the Legislature adopted to implement the 2011-12 budget, AB X1 26 (Blumenfield, 2011) dissolved all RDAs. The California Supreme Court's 2011 ruling in California Redevelopment Association v. Matosantos upheld AB X1 26, but invalidated AB X1 27 (Blumenfield, 2011), which would have allowed most RDAs to avoid dissolution. In response, the California Redevelopment Association (CRA) challenged the two measures. The Supreme Court denied the petition for peremptory writ of mandate with respect to AB X1 26, but granted it with respect to AB X1 27. As a result, all RDAs dissolved as of February 1, 2012. At the time of dissolution, over 400 RDAs statewide were diverting 12% of property taxes, over $5.6 billion yearly.

RDAs’ dissolution deprived many local agencies of the primary tool they used to eliminate physical and economic blight, finance new construction, improve public infrastructure, rehabilitate existing buildings, and increase the supply of affordable housing. Until their dissolution, state law required RDAs to set aside 20% of funding generated in a project area to increase the supply of low- and moderate-income housing. At the time the state dissolved RDAs, the State Controller’s Office (SCO) estimated that statewide, this requirement obligated RDAs to spend $1 billion on affordable housing.

RDA dissolution. AB X1 26 (Blumenfield, 2011) prohibited RDAs from incurring new or expanding existing monetary or legal obligations unless otherwise specified, removed the authority for RDAs to engage in most activities except continuing to pay off enforceable obligations, and established successor agencies to manage the process of unwinding former RDA affairs. With the exception of seven cities, the city or county that created each former RDA now serves as that RDA’s successor agency.

RDA dissolution law required the SCO to review the activities of RDAs to determine whether asset transfers occurred after January 1, 2011, between the city or county that created the RDA. If such an asset transfer did occur, the SCO had to order the available assets to the RDA, or after October 1, 2011, the successor agency. Upon receiving that order, the local agency must reverse the transfer and return the assets to the RDA or successor agency.

One of a successor agency’s primary responsibilities is to make payments for the enforceable obligations RDAs entered into. These payments are supported by property tax revenues that would have gone to RDAs, but are instead deposited in a Redevelopment Property Tax Trust Fund (RPTTF). Enforceable obligations include bonds, bond-related payments, some loans, payments required by the federal government, obligations to the state or imposed by state law, payments to RDA employees, judgements or settlements, and other legally binding and enforceable agreements or contracts. Any remaining property tax revenues that exceed these enforceable obligations are returned to cities, counties, special districts, and school and community college districts to support core services. The amount these taxing entities receive increases as the successor agency pays off these enforceable obligations. If a successor agency adds additional enforceable obligations, the slower this stream of property tax revenue returns to these taxing entities.

Each successor agency has an oversight board responsible for supervising and approving its actions. The oversight board includes one member of the legislative body from each type of taxing entity, including the county, city, special districts, schools, and community colleges. Additionally, the county board of supervisors appoints a public member, and the mayor or board of supervisors appoints one member to represent RDA employees.

The Department of Finance (DOF) can review and request reconsideration of an oversight board’s decision. Once a successor agency takes over for an RDA, it reviews the RDA’s outstanding assets and obligations. Each successor agency had to employ an accountant to conduct a due diligence review (DDR) to determine the unobligated balances in the RDA’s funds available for the county auditor-controller to transfer to taxing entities. The successor agency had to develop a plan to resolve those obligations, also known as a Recognized Obligation Payment Schedule (ROPS). To obtain required DOF approval, a successor agency submits a series of ROPS to the department. If DOF agrees with the plan, it issues a Finding of Completion acknowledging their progress towards paying off their obligations. Successor agencies issued a Finding of Completion can submit a Last and Final ROPS, meaning that (1) the remaining debt is limited to administrative costs and payments pursuant to enforceable obligations with defined payment schedules, (2) all remaining obligations have been previously listed on the ROPS and approved by DOF, and (3) the agency is not a party to outstanding or unresolved litigation. Successor agencies had until December 31, 2015, to receive their Finding of Completion from DOF. RDA dissolution law states successor agencies that did not receive their Finding of Completion by this date, or did not enter into a written installment payment plan with DOF, were never to receive a Finding of Completion. Nine successor agencies did not receive a Finding of Completion by the deadline.

If a successor agency receives a Finding of Completion, loan agreements made between the RDA and the local agency that created it can become enforceable obligations. Without a Finding of Completion, these loans cannot become enforceable obligations and the successor agency cannot repay the loans with property tax revenue. Additionally, successor agencies with a Finding of Completion can spend a greater portion of bond proceeds in excess of what is necessary to pay off enforceable obligations provided they remain consistent with bond covenants, not just to cancel or defease the bonds. When bond proceeds are defeased or cancelled, property tax revenue used to pay off bonds returns to the local agencies that generated the property tax revenue, not the RPTTF.

Enhanced Infrastructure Financing Districts. After RDAs were dissolved in 2011, local officials sought other ways to use TIF to raise the capital they need to fund public works projects. In response, the Legislature enacted SB 628 (Beall, 2014) to allow local officials to create Enhanced Infrastructure Financing Districts (EIFDs), which augment the tax increment financing powers available to local agencies under existing infrastructure financing district statutes. While the Legislature has created other similar financing tools, they have seldom, or never, been used.

EIFDs can finance public capital facilities or other specified projects of communitywide significance that provide significant benefits to the district or the surrounding community with an estimated useful life of 15 years or more. An EIFD is governed by a public financing authority (PFA) with three members of each participating taxing entity’s legislative body and a minimum of two public members. Member agencies can also appoint an alternate member from their legislative body. If at least three taxing entities participate in the district, upon agreement of all taxing entities participating, the district’s governing board can be reduced to one member and one alternate member of each legislative body and a minimum of two public members.

To create an EIFD, the legislative body of a city or county must adopt a resolution of intention to establish the financing district and follow specified procedures. Once approved by the initiating city or county, an EIFD can receive funding from three revenue streams to fund its infrastructure financing plan. Similar to RDAs, EIFDs can use a portion of the property tax increment, if the local governments approve it. They may also use revenue that the infrastructure project generates, such as money generated from user fees, public-private partnerships, loans, and grants. Finally, an EIFD may receive the local share of sales and use taxes and transactions and use taxes Like an RDA, an EIFD may issue bonds backed by these revenues to pay for projects. Until the Legislature enacted AB 116 (Ting, 2019), EIFDs required 55% voter approval to issue bonds. AB 116 replaced voter approval with a protest process, which includes three required public meetings.

Cities or counties that created RDAs cannot create or participate in an EIFD, until each of the following has occurred:

• The successor agency for the RDA has received a finding of completion;
• The city or county certifies to DOF and the PFA that no former RDA assets are the subject of litigation involving the state, where the city or county, or its successor agency, are a named plaintiff, have been or will be used to benefit any efforts of an EIFD, unless the litigation and all possible appeals have been resolved in court. The city or county must provide this certification to DOF within 10 days of its legislative body’s action to participate in, or initiate formation of an EIFD; and
• The SCO has completed its review of RDA asset transfers and the successor agency and entity that created the former RDA have complied with all the SCOs findings and orders stemming from the review.

In addition to complying with these conditions, in EIFDs where the district’s boundaries overlap with the boundaries of any former redevelopment project area, any debt or obligation of the EIFD is subordinate to any and all enforceable obligations of the former RDA.

As of March 2022, nearly two dozen local agencies had initiated EIFD formation, including 15 that have formed the PFA and adopted their infrastructure financing plan.

City of Merced. The City of Merced is the county seat for Merced County. The City of Merced incorporated in 1889, and has a population of approximately 90,000 people. The city had an RDA that completed various economic development projects, including many targeted towards revitalization the downtown after store closures. Unlike most other cities, the City decided not to be the successor agency. Instead, Governor Brown appointed a three-member board to serve as the Merced Designated Local Authority (DLA), and function as City’s successor agency.

Litigation. Following the dissolution of the Merced RDA, in 2015, the DLA submitted its DDRs for both its Low and Moderate Income Housing Fund (LMIHF) and its Other Funds and Accounts (OFA). DOF identified a $13.2 million outstanding balance the DLA needed to remit to the Merced County Auditor-Controller. DOF and the DLA engaged in a meet and confer process, and DOF revised the outstanding amounts down to $13 million. The DLA remitted $3 million to the Merced County Auditor-Controller. Due to the $10 million outstanding balance, DOF did not issue the City of Merced a Finding of Completion by the December 31, 2015, deadline.

On August 25, 2016, DOF issued another letter requiring the DLA or the City to repay the $10 million or enter a payment plan by October 24, 2016. Since neither occurred, DOF filed a petition with the Sacramento County Superior Court to compel the payment. The City appealed the judgment. Ultimately, the Third Appellate District Court of Appeal denied the City’s appeal.

After subsequent court determinations, the City of Merced and DOF entered into a settlement agreement that required the City of Merced to pay more than $9 million dollars in accordance with the following schedule:

• $2 million by no later than October 1, 2019.
• $2 million by no later than July 1, 2020.
• $1.25 million by no later than Ju1y 1, 2021.
• $1.25 million by no later than July 1, 2022.
• $1.25 million by no later than July 1, 2023.
• $1.25 million by no later than July 1, 2024.
• $528,395.83 by no later than July 1, 2025.

SCO asset transfer review. In July 2015, the SCO completed its asset transfer review for assets the Merced Redevelopment Agency transferred to the City of Merced after January 1, 2011. The review identified $42 million in unallowable transferred assets. While the RDA transferred $7 million after February 1, 2012, back to the successor agency, the review stated that $35 million in unallowable transfers had to be turned over. The City refused to comply with the findings of the asset transfer review, so the $35 million appears to remain outstanding.

Since Merced did not meet the conditions to receive a Finding of Completion, it can never form or join an EIFD. The City of Merced wants to form an EIFD despite never receiving a Finding of Completion.

Proposed Law

Assembly Bill 1259 allows the City of Merced to initiate, participate in, government, or finance an EIFD, if the City of Merced, and the Merced DLA acting as the successor agency to the former Merced Redevelopment Agency, has:

• Certified to DOF and the PFA that no former RDA assets are the subject of litigation involving the state, where the city or county, or its successor agency, are a named plaintiff, have been or will be used to benefit any efforts of an EIFD, unless the litigation and all possible appeals have been resolved in court. The city must provide this certification to DOF within 10 days of its legislative body’s action to participate in, or initiate formation of an EIFD;
• Complied with the settlement agreement it has entered into with the state to resolve any RDA dissolution issues; and
• Complied with all SCO findings and orders stemming from its asset transfer review.

State Revenue Impact

No estimate.

Comments

1. Purpose of the bill. According to the author, “AB 1259 paves the way for the City of Merced to establish an EIFD to fund projects which will further the City’s affordable housing goals and is in alignment with the State’s priorities such as transit oriented development and respective rail projects. The EIFD will also fund necessary infrastructure improvements to support a growing UC Merced campus.”

2. Late bird gets the worm? RDA dissolution law is explicit that successor agencies who did not receive their Finding of Completion by December 31, 2015, were never to receive one. Since the DLA and the City did not make payments DOF required by that date, the City of Merced never received a Finding of Completion, which means it can never form an EIFD. Importantly, AB 1259 does not grant Merced a Finding of Completion, and all the benefits that go along with it. Instead, it allows the City to participate in an EIFD without a finding of completion, but only if it meets all the same conditions as the cities that did receive one. Before Merced can form an EIFD, it must comply with the settlement agreement it entered into with DOF, and comply with the findings and orders of the SCO’s asset transfer review. AB 2780 (Arambula, 2022) granted similar authority for the City of Selma. Like Merced, Selma also missed the statutory deadline to receive a Finding of Completion, pursued litigation against the State, had not made required payments, and had not complied with SCO asset transfer review findings. The Committee may wish to consider whether the City of Merced should join the City of Selma in enjoying the benefit of forming an EIFD given it missed the statutory deadline to receive a Finding of Completion, pursued litigation against the State, has not complied with SCO asset transfer review findings, and the precedent it would set for the remaining successor agencies without a Finding of Completion.

3. Sure, but will it work? The City of Merced wants to create an EIFD to help carry out its long-term economic development plans. However, recent reports by the Governor’s Office of Planning and Research have pointed out that, despite the ability of EIFDs and other post-RDA infrastructure financing tools to finance infrastructure projects with TIF, they have seldom been used in part because they do not have access to the school share of property tax increment like RDAs did, and which the state backfilled from the General Fund in many cases. These reports recommended the Legislature explore ways to encourage participation of multiple taxing entities and leverage state resources to increase TIF district revenue potential. Given these challenges, and the rigorous EIFD formation process, will forming an EIFD immediately address the Merced’s current economic development needs?

4. Are we there yet? AB 1259 requires Merced to comply with all SCO findings and orders stemming from the asset transfer review it completed for Merced in 2015. This review identified $35 million in unallowable asset transfers from the RDA to the City of Merced. AB 1259 does not outline specific steps for the City to take to comply with the SCO’s findings and orders, so it will have to work with SCO and DOF to ensure it adequately complies with this requirement before forming the EIFD.

5. Special legislation. Section 16 of Article IV of the California Constitution prohibits special legislation when a general law can apply. AB 1259 contains findings and declarations explaining the need for legislation that applies only to the City of Merced.

Assembly Actions

Assembly Local Government Committee: 7-1
Assembly Floor: 63-11

Support and Opposition

(6/16/23)

Support: City of Merced (Sponsor)
California Association for Local Economic Development (CALED)

Opposition: Howard Jarvis Taxpayers Association (HJTA)

-- END --

ASSEMBLY THIRD READING

ATR Bill Id:AB 1259

Author:(Soria)

As Amended Ver:May 4, 2023

Majority vote

SUMMARY

Allows the City of Merced to initiate, participate in, govern or finance an enhanced infrastructure financing district (EIFD) if it meets specified conditions.

Major Provisions

1. Specifies that the City of Merced may initiate, participate in, govern, or finance an EIFD if the City of Merced, and the Merced Designated Local Authority acting as the successor agency to the former Redevelopment Agency (RDA) of the City of Merced, are in compliance with specified requirements.
2. Finds and declares that a special statute is necessary and that a general statute cannot be made applicable because of the unique circumstances in the City of Merced and the city's need to participate in an EIFD to give it additional tools to fund housing construction, social services centers, and climate resilience projects.

COMMENTS

Redevelopment. Article XVI, Section 16 of the California Constitution authorizes the Legislature to provide for the formation of RDAs to eliminate blight in an area by means of a self-financing schedule that pays for the redevelopment project with tax increment derived from any increase in the assessed value of property within the redevelopment project area (or tax increment). Generally, property tax increment financing involves a local government forming a tax increment financing district to issue bonds and use the bond proceeds to pay project costs within the boundaries of a specified project area. To repay the bonds, the district captures increased property tax revenues that are generated when projects financed by the bonds increase assessed property values within the project area.

To calculate the increased property tax revenues captured by the district, the amount of property tax revenues received by any local government participating in the district is "frozen" at the amount it received from property within a project area prior to the project area's formation. In future years, as the project area's assessed valuation grows above the frozen base, the resulting additional property tax revenues — the so-called property tax "increment" revenues — flow to the tax increment financing district instead of other local governments. After the bonds have been fully repaid using the incremental property tax revenues, the district is dissolved, ending the diversion of tax increment revenues from participating local governments.

Prior to Proposition 13 very few RDAs existed; however, after its passage, RDAs became a source of funding for a variety of local infrastructure activities. Eventually, RDAs were required to set-aside 20% of funding generated in a project area to increase the supply of low and moderate income housing in the project areas. At the time RDAs were dissolved, the Controller estimated that statewide, RDAs were obligated to spend $1 billion on affordable housing. At the time of dissolution, over 400 RDAs statewide were diverting 12% of property taxes, over $5.6 billion yearly.

In 2011, facing a severe budget shortfall, the Governor proposed eliminating RDAs in order to deliver more property taxes to other local agencies. Ultimately, the Legislature approved and the Governor signed two measures, ABX1 26 (Blumenfield), Chapter 5, Statutes of 2011-12 First Extraordinary Session and ABX1 27 (Blumenfield), Chapter 6, Statutes of 2011-12 First Extraordinary Session that together dissolved RDAs as they existed at the time and created a voluntary redevelopment program on a smaller scale. In response, the California Redevelopment Association (CRA) and the League of California Cities, along with other parties, filed suit challenging the two measures. The Supreme Court denied the petition for peremptory writ of mandate with respect to ABX1 26. However, the Court did grant CRA's petition with respect to ABX1 27. As a result, all RDAs were required to dissolve as of February 1, 2012.

RDA Dissolution. AB X1 26 (2011) established successor agencies to manage the process of unwinding former RDA affairs. With the exception of seven cities, the city or county that created each former RDA now serves as that RDA's successor agency. One of a successor agency's primary responsibilities is to make payments for the enforceable obligations RDAs entered into. These payments are supported by property tax revenues that would have gone to RDAs, but are instead deposited in a Redevelopment Property Tax Trust Fund (RPTTF). Enforceable obligations include bonds, bond-related payments, some loans, payments required by the federal government, obligations to the state or imposed by state law, payments to RDA employees, judgements or settlements, and other legally binding and enforceable agreements or contracts. Any remaining property tax revenues that exceed these enforceable obligations return to cities, counties, special districts, and school and community college districts to support core services.

Each successor agency has an oversight board responsible for supervising and approving its actions. DOF can review and request reconsideration of an oversight board's decision. Once a successor agency takes over for an RDA, it reviews the RDA's outstanding assets and obligations, and develops a plan to resolve those obligations, also known as a Recognized Obligation Payment Schedule (ROPS). To obtain required DOF approval, a successor agency submits a series of ROPS to DOF. If DOF agrees with the plan, it issues a Finding of Completion acknowledging their progress towards paying off their obligations. Successor agencies issued a Finding of Completion can submit a Last and Final ROPS, meaning that 1) the remaining debt is limited to administrative costs and payments pursuant to enforceable obligations with defined payment schedules, 2) all remaining obligations have been previously listed on the ROPS and approved by DOF, and 3) the agency is not a party to outstanding or unresolved litigation. Successor agencies had until December 31, 2015 to receive their Finding of Completion from DOF. RDA dissolution law states that successor agencies that did not receive their Finding of Completion by this date, or did not enter into a written installment payment plan with DOF, were to never receive a Finding of Completion. Approximately nine successor agencies did not receive a Finding of Completion by the deadline.

If a successor agency receives a Finding of Completion, loan agreements made between the RDA and the local agency that created it can become enforceable obligations. Without a Finding of Completion, these loans cannot become enforceable obligations and the successor agency cannot repay the loans with property tax revenue. Additionally, successor agencies with a Finding of Completion can spend a greater portion of bond proceeds in excess of what is necessary to pay off enforceable obligations provided they remain consistent with bond covenants, not just to cancel or defease the bonds. When bond proceeds are defeased or cancelled, property tax revenue used to pay off bonds returns to the local agencies that generated the property tax revenue, not the RPTTF. Due to outstanding disputed funds, the City of Merced did not receive a Finding of Completion by the December 21, 2015, deadline.

City of Merced. The City of Merced is located in the Central Valley of California, approximately 110 miles southeast of San Francisco and 310 miles northwest of Los Angeles. The City has a population of about 87,000, according to the most recent census, and serves as the county seat. Merced was incorporated in 1889 and operates under the Council-Manager form of government. Merced was one of the few cities that chose not to serve as the successor agency to its former Merced RDA. Instead, the Merced Designated Local Authority (DLA) serves as the successor agency for the City's former RDA.

Following the dissolution of the Merced RDA, the Merced DLA submitted its Due Diligence Review (DDR) for other funds and accounts on January 15, 2015, and its DDR for the Low and Moderate Income Housing Fund on May 15, 2015. According to the settlement agreement between the City of Merced and DOF, "Finance issued letters dated December 4, 2015, identifying a balance of over $13,158,141 in the two DDRs combined. After a meet and confer about the determinations, Finance issued letters dated January 8, 2016, revising but largely upholding the determinations, and calculating a new balance of $13,035,007 for the two DDRs. The City of Merced DLA subsequently remitted $3,014,796.17 to the Auditor-Controller [of Merced County] leaving a $10,020,210.83 balance.

"After an extensive meet and confer about Finance's determinations, Finance issued a letter dated August 25, 2016, requiring the City and Merced DLA to either remit the full $10,020,210.83 balance or agree to a payment plan with Finance by October 24, 2016. Neither the City nor Merced DLA remitted the DDR balance or reached agreement with Finance on a payment plan. Finance filed a Petition for Writ of Mandate on November 15, 2016, entitled California Department of Finance v. City of Merced, et al., Sacramento County Superior Court Case No. 34-2016-80002485 ("Action"), alleging that the City and Merced DLA had a clear, present, and ministerial duty to remit the $10,020,210.83 balance in accordance with California Health and Safety Code sections 34179.6 and 34179.9.

"The superior court granted the petition, and on September 15, 2017, Finance filed notice of entry of the superior court's order, the peremptory writ of mandate, and the judgement. In the course of this litigation, the Parties agreed that the $10,020,210.83 balance should be reduced to reflect that the City had remitted $491,815 in unencumbered bond proceeds. The remaining balance is $9,528,395.83. The City appealed the judgment on October 12, 2017. The Third Appellate District of the Court of Appeal issued an opinion on March 22, 2019, directing the superior court to recall the writ and modify the judgement to specify the exact dollar amount of the unencumbered bond proceeds within the DDR balance. The Third Appellate District affirmed the judgement as modified. The California Supreme Court denied the City's petition for review on June 19, 2019, and the Third Appellate District issued a remittitur to the superior court on June 27, 2019. On July 15, 2019, the superior court directed the parties to prepare a modified proposed judgement."

After the Court's determinations, The City and DOF entered into a settlement agreement where the City of Merced will pay more than $9 million dollars in accordance with a specified schedule.

According to the Author

According to the author, "The City of Merced has made great strides since 2015 and is on track to receive its Pro-Housing Designation from the State and is a considered a good actor in increasing the supply of housing.

"The City is working to establish an Enhanced Infrastructure Financing District (EIFD) to fund projects which will further the City's affordable housing goals and is in alignment with the State's priorities such as transit oriented development and respective local rail projects as well as High Speed Rail.

"Additionally, establishing an EIFD will support efforts to fund necessary infrastructure improvements to support a growing UC Merced campus."

Arguments in Support

According to the city of Merced, "Successor agencies had until December 31, 2015, to receive their Finding of Completion from DOF. RDA dissolution law states that successor agencies that did not receive their Finding of Completion by this date or that did not enter into a written installment payment plan with DOF were to never receive a Finding of Completion. Due to outstanding disputed funds, the City of Merced did not receive a Finding of Completion by the December 21, 2015, deadline. However, (1) the City has been in good faith negotiations with DOF and has a settled defined payment plan with the last payment due to DOF on July 1, 2025, (2) remaining obligations have been approved by DOF, (3) the City is not a party to any outstanding litigation.

"The City is looking to form an EIFD to fund projects that will further the City's affordable housing goals and align with the State's priorities, such as transit-oriented development and respective rail projects. The EIFD will also fund necessary infrastructure improvements around a growing UC Merced campus. Without this funding, these projects will not come to fruition. The City of Merced is on track to receive its Pro-Housing Designation from the State and is a good actor. Limiting local ability to create an EIFD has a chilling effect on the community and the City's ability to address its residents' needs. AB 1259 will allow the City of Merced to form or participate in an enhanced infrastructure financing district if it meets specified conditions, just as AB 2780 did for the City of Selma."

Arguments in Opposition

According to the Howard Jarvis Taxpayers Association, "EIFD's represent a far broader redevelopment scope than traditional IFDs, a scope we believe to be overly expansive. EIFDs also do not require voter approval to form, and AB 116 (2019) eliminated any voter approval requirement for EIFD bonds. Further, EIFD bonds are not the same as local General Obligation bonds. GO bonds are backed by the full faith and credit of a municipality's General Fund. EIFD bonds have no such assurances. This creates a much greater risk for the bond holders and taxpayers, resulting in higher interest rates and thus less money for projects.

"Last year, we warned that if the City of Selma was allowed to reopen negotiations to create an EIFD (AB 2780) [Arambula, Chapter 598, Statutes of 2022], other local jurisdictions would surely follow and more EIFDs would be created. And here we are."

FISCAL COMMENTS

None.

VOTES

ASM LOCAL GOVERNMENT: 7-1-0

YES: Aguiar-Curry, Boerner, Pacheco, Ramos, Robert Rivas, Waldron, Wilson

NO: Dixon

UPDATED

VERSION: May 4, 2023

CONSULTANT: Jimmy MacDonald / L. GOV. / (916) 319-3958 FN: 0000317

Date of Hearing: May 3, 2023

ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT

Cecilia Aguiar-Curry, Chair

ABPCA Bill Id:AB 1259 (

Author:Soria) – As Amended Ver:March 16, 2023

SUBJECT: Dissolution of redevelopment agencies: enhanced infrastructure financing districts: City of Merced.

SUMMARY: Allows the City of Merced to initiate, participate in, govern or finance an enhanced infrastructure financing district (EIFD) if it meets specified conditions. Specifically, this bill:

1. Specifies that the City of Merced may initiate, participate in, govern, or finance an EIFD if the City of Merced, acting as the successor agency to the former Merced County Redevelopment Agency, is in compliance with specified requirements.
2. Finds and declares that a special statute is necessary and that a general statute cannot be made applicable because of the unique circumstances in the City of Merced and the city’s need to participate in an EIFD to give it additional tools to fund housing construction, social services centers, and climate resilience projects.

EXISTING LAW limits a city or county that created a RDA, as defined, from initiating the creation of an EIFD, nor participating in the governance or financing of an EIFD, until each of the following has occurred (Government Code § 53398.53):

• 1. The successor agency for the former RDA created by the city or county has received a Finding of Completion, as specified.
  2. The city or county certifies to the Department of Finance (DOF) and to the public financing authority that no former RDA assets that are the subject of litigation involving the state, if the city or county, the successor agency, or the designated local authority are a named plaintiff, have been or will be used to benefit any efforts of an EIFD, unless the litigation and all possible appeals have been resolved in a court of law. The city or county shall provide this certification to DOF within 10 days of its legislative body’s action to participate in or form an EIFD, as specified.
     
  3. The office of the State Controller has completed its review as required by existing law.
     
  4. The successor agency and the entity that created the RDA have complied with all of the State Controller’s findings and orders stemming from the reviews specified in 3), above.

FISCAL EFFECT: None.

COMMENTS:

1. Bill Summary and Author’s Statement. This bill allows the City of Merced to initiate, participate in, govern or finance an EIFD if certain conditions are met. The City of Merced is the sponsor of this bill.
   
   According to the author, “The City of Merced has made great strides since 2015 and is on track to receive its Pro-Housing Designation from the State and is a considered a good actor in increasing the supply of housing.
   

“The City is working to establish an Enhanced Infrastructure Financing District (EIFD) to fund projects which will further the City’s affordable housing goals and is in alignment with the State’s priorities such as transit oriented development and respective local rail projects as well as High Speed Rail.

“Additionally, establishing an EIFD will support efforts to fund necessary infrastructure improvements to support a growing UC Merced campus.”

1. Redevelopment. Article XVI, Section 16 of the California Constitution authorizes the Legislature to provide for the formation of RDAs to eliminate blight in an area by means of a self-financing schedule that pays for the redevelopment project with tax increment derived from any increase in the assessed value of property within the redevelopment project area (or tax increment). Generally, property tax increment financing involves a local government forming a tax increment financing district to issue bonds and use the bond proceeds to pay project costs within the boundaries of a specified project area. To repay the bonds, the district captures increased property tax revenues that are generated when projects financed by the bonds increase assessed property values within the project area.

To calculate the increased property tax revenues captured by the district, the amount of property tax revenues received by any local government participating in the district is “frozen” at the amount it received from property within a project area prior to the project area’s formation. In future years, as the project area's assessed valuation grows above the frozen base, the resulting additional property tax revenues — the so-called property tax “increment” revenues — flow to the tax increment financing district instead of other local governments. After the bonds have been fully repaid using the incremental property tax revenues, the district is dissolved, ending the diversion of tax increment revenues from participating local governments.

Prior to Proposition 13 very few RDAs existed; however, after its passage, RDAs became a source of funding for a variety of local infrastructure activities. Eventually, RDAs were required to set-aside 20% of funding generated in a project area to increase the supply of low and moderate income housing in the project areas. At the time RDAs were dissolved, the Controller estimated that statewide, RDAs were obligated to spend $1 billion on affordable housing. At the time of dissolution, over 400 RDAs statewide were diverting 12% of property taxes, over $5.6 billion yearly.

In 2011, facing a severe budget shortfall, the Governor proposed eliminating RDAs in order to deliver more property taxes to other local agencies. Ultimately, the Legislature approved and the Governor signed two measures, ABX1 26 (Blumenfield), Chapter 5 and ABX1 27 (Blumenfield), Chapter 6 that together dissolved RDAs as they existed at the time and created a voluntary redevelopment program on a smaller scale. In response, the California Redevelopment Association (CRA) and the League of California Cities, along with other parties, filed suit challenging the two measures. The Supreme Court denied the petition for peremptory writ of mandate with respect to ABX1 26. However, the Court did grant CRA's petition with respect to ABX1 27. As a result, all RDAs were required to dissolve as of February 1, 2012.

1. RDA Dissolution. AB X1 26 (2011) established successor agencies to manage the process of unwinding former RDA affairs. With the exception of seven cities, the city or county that created each former RDA now serves as that RDA’s successor agency. One of a successor agency’s primary responsibilities is to make payments for the enforceable obligations RDAs entered into. These payments are supported by property tax revenues that would have gone to RDAs, but are instead deposited in a Redevelopment Property Tax Trust Fund (RPTTF). Enforceable obligations include bonds, bond-related payments, some loans, payments required by the federal government, obligations to the state or imposed by state law, payments to RDA employees, judgements or settlements, and other legally binding and enforceable agreements or contracts. Any remaining property tax revenues that exceed these enforceable obligations return to cities, counties, special districts, and school and community college districts to support core services.
   

Each successor agency has an oversight board responsible for supervising and approving its actions. DOF can review and request reconsideration of an oversight board’s decision. Once a successor agency takes over for an RDA, it reviews the RDA’s outstanding assets and obligations, and develops a plan to resolve those obligations, also known as a Recognized Obligation Payment Schedule (ROPS). To obtain required DOF approval, a successor agency submits a series of ROPS to DOF. If DOF agrees with the plan, it issues a Finding of Completion acknowledging their progress towards paying off their obligations. Successor agencies issued a Finding of Completion can submit a Last and Final ROPS, meaning that (1) the remaining debt is limited to administrative costs and payments pursuant to enforceable obligations with defined payment schedules, (2) all remaining obligations have been previously listed on the ROPS and approved by DOF, and (3) the agency is not a party to outstanding or unresolved litigation. Successor agencies had until December 31, 2015 to receive their Finding of Completion from DOF. RDA dissolution law states that successor agencies that did not receive their Finding of Completion by this date, or did not enter into a written installment payment plan with DOF, were to never receive a Finding of Completion. Approximately nine successor agencies did not receive a Finding of Completion by the deadline.

If a successor agency receives a Finding of Completion, loan agreements made between the RDA and the local agency that created it can become enforceable obligations. Without a Finding of Completion, these loans cannot become enforceable obligations and the successor agency cannot repay the loans with property tax revenue. Additionally, successor agencies with a Finding of Completion can spend a greater portion of bond proceeds in excess of what is necessary to pay off enforceable obligations provided they remain consistent with bond covenants, not just to cancel or defease the bonds. When bond proceeds are defeased or cancelled, property tax revenue used to pay off bonds returns to the local agencies that generated the property tax revenue, not the RPTTF. Due to outstanding disputed funds, the City of Merced did not receive a Finding of Completion by the December 21, 2015, deadline.

1. Attempts to Replace RDAs. After the Supreme Court’s 2011 Matosantos decision dissolved all RDAs, legislators enacted several measures creating new tax increment financing tools to pay for local economic development. The Legislature authorized the creation of EIFDs [SB 628 (Beall), Chapter 785, Statutes of 2014] quickly followed by CRIAs [AB 2 (Alejo), Chapter 319, Statutes of 2015]. Similar to EIFDs, CRIAs use tax increment financing to fund infrastructure projects. CRIAs may currently only be formed in economically depressed areas. The Legislature has also authorized the formation of affordable housing authorities (AHAs), which may use tax increment financing exclusively for rehabilitating and constructing affordable housing and also do not require voter approval to issue bonds [AB 1598 (Mullin), Chapter 764, Statutes of 2017]. SB 961 (Allen), Chapter 559, Statutes of 2018, removed the vote requirement for a subset of EIFDs to issue bonds and required these EIFDs to instead solicit public input, and AB 116 (Ting), Chapter 656, Statutes of 2019, removed the voter requirement for any EIFD to issues bonds in favor of a formal protest process. While these entities share fundamental similarities with RDAs in terms of using various forms of tax-increment financing, they differ in two significant aspects, 1) not having access to the school’s share of property tax increment, and 2) not automatically including the tax increment of other taxing entities.

Cities that did not receive a Finding of Completion are prohibited from forming, or participating in, an EIFD.

1. City of Merced. The City of Merced is located in the Central Valley of California, approximately 110 miles southeast of San Francisco and 310 miles northwest of Los Angeles. The City has a population of about 87,000, according to the most recent census, and serves as the county seat. Merced was incorporated in 1889 and operates under the Council-Manager form of government. Merced was one of the few cities that chose not to serve as the successor agency to its former Merced RDA. Instead, the Merced Designated Local Authority (DLA) serves as the successor agency for the City’s former RDA.
   

Following the dissolution of the Merced RDA, the Merced DLA submitted its Due Diligence Review (DDR) for other funds and accounts on January 15, 2015, and its DDR for the Low and Moderate Income Housing Fund on May 15, 2015. According to the settlement agreement between the City of Merced and DOF, “Finance issued letters dated December 4, 2015, identifying a balance of over $13,158,141 in the two DDRs combined. After a meet and confer about the determinations, Finance issued letters dated January 8, 2016, revising but largely upholding the determinations, and calculating a new balance of $13,035,007 for the two DDRs. The City of Merced DLA subsequently remitted $3,014,796.17 to the Auditor-Controller [of Merced County] leaving a $10,020,210.83 balance.

“After an extensive meet and confer about Finance’s determinations, Finance issued a letter dated August 25, 2016, requiring the City and Merced DLA to either remit the full $10,020,210.83 balance or agree to a payment plan with Finance by October 24, 2016. Neither the City nor Merced DLA remitted the DDR balance or reached agreement with Finance on a payment plan. Finance filed a Petition for Writ of Mandate on November 15, 2016, entitled California Department of Finance v. City of Merced, et al., Sacramento County Superior Court Case No. 34-2016-80002485 (“Action”), alleging that the City and Merced DLA had a clear, present, and ministerial duty to remit the $10,020,210.83 balance in accordance with California Health and Safety Code sections 34179.6 and 34179.9.

“The superior court granted the petition, and on September 15, 2017, Finance filed notice of entry of the superior court’s order, the peremptory writ of mandate, and the judgement. In the course of this litigation, the Parties agreed that the $10,020,210.83 balance should be reduced to reflect that the City had remitted $491,815 in unencumbered bond proceeds. The remaining balance is $9,528,395.83. The City appealed the judgment on October 12, 2017. The Third Appellate District of the Court of Appeal issued an opinion on March 22, 2019, directing the superior court to recall the writ and modify the judgement to specify the exact dollar amount of the unencumbered bond proceeds within the DDR balance. The Third Appellate District affirmed the judgement as modified. The California Supreme Court denied the City’s petition for review on June 19, 2019, and the Third Appellate District issued a remittitur to the superior court on June 27, 2019. On July 15, 2019, the superior court directed the parties to prepare a modified proposed judgement.”

After the Court’s determinations, The City and DOF entered into a settlement agreement where the City of Merced will pay more than $9 million dollars in accordance with the following schedule:

• 1. $2 million by no later than October 1, 2019.
     
  2. $2 million by no later than July 1, 2020.
     
  3. $1.25 million by no later than Ju1y 1, 2021.
     
  4. $1.25 million by no later than July 1, 2022.
     
  5. $1.25 million by no later than July 1, 2023.
     
  6. $1.25 million by no later than July 1, 2024.
     
  7. $528,395.83 by no later than July 1, 2025.
     

1. Previous Legislation. AB 2780 (Arambula), Chapter 598, Statutes of 2022, authorized the City of Selma to initiate, participate in, govern, or finance an EIFD if certain conditions are met.
   
2. Committee Amendment. The author has agreed to the following amendment to correct a drafting error:

53398.54 (f) Notwithstanding subdivision (a), the City of Merced may initiate, participate in, govern, or finance an enhanced infrastructure financing district if the City of Merced, and the Merced Designated Local Authority acting as the successor agency to the former Merced County Redevelopment Agency, is Redevelopment Agency of the City of Merced, are in compliance with subdivisions (b), (c), and (d), and has have paid in full the amount outstanding specified in subdivision (b) of Section 34183.5 of the Health and Safety Code.

1. Arguments in Support. According to the city of Merced, “Successor agencies had until December 31, 2015, to receive their Finding of Completion from DOF. RDA dissolution law states that successor agencies that did not receive their Finding of Completion by this date or that did not enter into a written installment payment plan with DOF were to never receive a Finding of Completion. Due to outstanding disputed funds, the City of Merced did not receive a Finding of Completion by the December 21, 2015, deadline. However, (1) the City has been in good faith negotiations with DOF and has a settled defined payment plan with the last payment due to DOF on July 1, 2025, (2) remaining obligations have been approved by DOF, (3) the City is not a party to any outstanding litigation.
   

“The City is looking to form an EIFD to fund projects that will further the City’s affordable housing goals and align with the State’s priorities, such as transit-oriented development and respective rail projects. The EIFD will also fund necessary infrastructure improvements around a growing UC Merced campus. Without this funding, these projects will not come to fruition. The City of Merced is on track to receive its Pro-Housing Designation from the State and is a good actor. Limiting local ability to create an EIFD has a chilling effect on the community and the City’s ability to address its residents’ needs. AB 1259 will allow the City of Merced to form or participate in an enhanced infrastructure financing district if it meets specified conditions, just as AB 2780 did for the City of Selma.”

1. Arguments in Opposition. None on file.

REGISTERED SUPPORT / OPPOSITION:

Support

City of Merced [SPONSOR]

League of California Cities

Opposition

None on file

Analysis Prepared by: Jimmy MacDonald / L. GOV. / (916) 319-3958