LAO Recommends Additional Improvements to Governor’s Initiative to Expand Scope of Infrastructure Financing Districts

by Best Best & Krieger LLP
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As part of California’s 2014-2015 budget, Governor Jerry Brown has proposed the expansion of infrastructure financing districts (IFDs), a funding mechanism for communitywide infrastructure and development projects that has not been widely used since its inception in 1990. The California Legislative Analyst’s Office (LAO) has reviewed the Governor’s proposal and made recommendations for improving the effort to broaden the use of IFDs in support of local infrastructure and economic development. Since the enactment of the Redevelopment Dissolution Act in 2011, cities and other local public agencies have sought alternative incentives for economic development and funding for infrastructure projects.

Under the current Government Code, approval by two-thirds of voters living within the IFD’s boundaries is required for both the formation of an IFD and when an IFD proposes to issue long-term debt. Gov. Brown proposes to lower these approval thresholds for formation and issuance from two-thirds to 55 percent. The LAO raised the concern that a 55 percent threshold would not comply with Article XVI of the California Constitution, which requires two-thirds voter approval for issuance of long-term city and county debt. In the current form, IFDs cannot be autonomous because they are governed by the legislative bodies of the cities and counties that form them. While the LAO generally supports Gov. Brown’s proposal to enhance IFDs, the LAO recommends that cities and counties be required to form autonomous IFDs. This would therefore allow a lower percentage vote required to form an IFD and issue bonds. The LAO also proposed as an alternative requiring approval by voters of neighboring agencies with jurisdictions overlapping with the IFD's boundaries.

Gov. Brown also proposes to expand the scope of projects that are eligible for IFD financing. Currently, IFDs may finance construction, improvement or rehabilitation of various types of public facilities of “communitywide significance,” including highways, roads, sewage and water treatment facilities, flood control, child care facilities, libraries, parks, and solid waste disposal facilities. The public facilities must provide significant benefits to an area larger than the district’s boundaries, and the financing cannot be used to fund the ongoing operation and maintenance of public facilities. Gov. Brown proposes to expand the scope to include the following, without the requirement that the projects be publicly owned or operated:

  • Housing, retail and manufacturing facilities;
  • Property development designed to meet sustainable communities goals established by Senate Bill 375 (Sustainable Communities and Climate Protection Act of 2008);
  • Restoration of underused or abandoned sites contaminated by hazardous materials and other environmental mitigation projects;
  • Military base reuse projects; and
  • Telecommunications infrastructure.
  • The LAO recommends against including retail facilities in the scope of IFDs, based on the risk that IFDs would incentivize the development of subsidized retail establishments and draw retailers away from neighboring jurisdictions.

The Governor’s proposal includes conditions. In order to form an IFD, a city or county must resolve all outstanding RDA-related litigation against the State and receive a “finding of completion” signifying that the city or county’s liquid assets have been distributed to local governments. The city or county must also comply with any asset transfers ordered by the State Controller’s Office. The LAO does not support these conditions, and contends that RDA-related lawsuits are not an appropriate reason to deny local governments access to a financial tool designed to help them respond to local infrastructure and economic development needs.

The LAO strongly endorsed the Governor’s proposal to enable IFDs to borrow from local agencies with overlapping jurisdictions. This interagency loan provision would enable local agencies to contribute funds to an IFD and would mitigate barriers to an IFD’s formation and startup costs as a new autonomous public entity. The interest rate for these loans would be capped at the rate earned by the Local Agency Investment Fund.

There are several other proposals to modify the IFD law that are still pending in the California Legislature. The usefulness of these proposals and any changes to the IFD law will depend on the final language approved.

Background:

In 1990, the enactment of Senate Bill 308 enabled cities and counties to form IFDs in order to finance communitywide infrastructure without excessively burdening new developments, especially for financing public works that benefit the broader community. IFDs were authorized to use tax increment—a portion of future property tax growth within the district—to fund specified infrastructure projects. IFDs are not authorized to levy taxes, but they may issue bonds to be repaid by tax increment. Local governments (except for school or community college districts) with jurisdictions overlapping the boundaries of an IFD may voluntarily elect to dedicate a portion of its property tax increment toward the IFD’s financing for a particular project. Very few IFDs have been formed since 1990 as redevelopment tax increment was such a powerful tool for local agencies.

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