Enhanced Infrastructure Financing Districts: New Hope for Cities and Counties
Authors: Elizabeth Alonso | Roger Grable
On September 29, 2014, Governor Jerry Brown signed into law Senate Bill 628 (Chapter 785) which provides a mechanism for cities and counties to form Enhanced Infrastructure Financing Districts (EIFDs) to divert property tax increment revenues to fund public capital facilities, such as highways, parks, libraries, transit facilities, brownfield restoration, development on former military bases, and the acquisition, construction, or rehabilitation of housing for persons of low and moderate income.
The EIFDs are upgrades to existing Infrastructure Financing Districts (IFDs), a mechanism that has been in place for years but has seldom been used. In comparison to IFDs, EIFDs can be formed without voter approval, have longer terms (30 years after formation versus 45 years after issuance of bonds), the legislative body can issue bonds based upon a reduced percentage of voter approval (55% versus 66.67%), and EIFDs finance a greater range of public facilities. Given the vote requirement for the issuance of bonds, it is likely that the use of these districts will be in areas where there are fewer voters. In cases where there are fewer than 12 registered voters in the district, the vote is by the landowner or landowners in the district.
The EIFDs also contain certain safeguards to address some of the pitfalls of the redevelopment agencies. For example, cities and counties that previously formed redevelopment agencies may not form EIFDs, or participate in the governance or financing of an EIFD, until the successor agency or former redevelopment agency formed by the city or county first receives a finding of completion as specified in Section 34179.7 of the Health and Safety Code, certifies to the Department of Finance that no former redevelopment agency assets that are the subject of pending litigation involving the state, where the city or county, the successor agency, or the designated local authority are a named plaintiff will benefit the EIFD, and meets certain requirements imposed by the State Controller. These provisions were a subject of intense negotiation in the final days of the Legislature, but the final language seems acceptable to the various constituencies for now. Also, cleanup legislation can be expected early in the next legislative session.
Previous objections to tax increment financing were addressed in this legislation, which was proposed by Governor Brown’s administration. Local governments can choose not to participate in EIFDs and thereby preserve their tax increment revenue shares. If district boundaries overlap with the boundaries of any former redevelopment project area, any debt or obligation of an EIFD is subordinate to any and all enforceable obligations of the former redevelopment agency, but the legislative body of the city or county may dedicate any portion of its “net available revenue” (i.e., periodic distributions to the city or county from the Redevelopment Property Tax Trust Fund) to the EIFD. The “net available revenue” excludes certain funds, such as amounts allocated to preexisting legal commitments and statutory obligations, as well as amounts payable to certain school districts.
The formation of an EIFD is a simpler process than for IFDs. A city or county may form an EIFD merely by adopting a resolution of intention that sets forth the boundaries of the district, the intended public works, and goals of the EIFD. The resolution must also make clear that incremental property tax revenue from the city or county and some or all affected taxing entities may be used to finance the public capital facilities and set forth the time and place for the public hearing. If the resolution is adopted, an infrastructure financing plan is prepared for the EIFD, which must be sent to each landowner and tax entity in the EIFD and must be reviewed at a public hearing. The EIFD is the only entity liable for any issued bonds, which means the city, county, state, or any of its political subdivisions would not be responsible for the debt. While the new public capital facilities cannot supersede existing facilities, they may supplement, rehabilitate, upgrade, or make more sustainable any existing facilities. The public capital facilities may also benefit areas outside the EIFDs, regardless of whether they are contiguous, if they have a tangible connection to the work of the EIFD. An independent financial and performance audit is to be conducted every two years after the EIFD has issued bonds.
If the EIFD results in the destruction of housing for persons of low and moderate income, SB 628 requires that the dwelling units be replaced within two years and that replacement affordable housing units remain available as affordable units by recorded covenants and restrictions for not less than 55 years for rental units and 45 years for owner-occupied units (unless subject to an equity sharing agreement). As noted, it is expected that cleanup legislation will be proposed to address issues raised by affordable housing advocates.
The Governor, however, signaled that he is not yet ready for more comprehensive legislation restoring tax increment financing. The Governor vetoed SB 1129 (post-redevelopment cleanup legislation) and AB 2280, which would have restored limited redevelopment powers in specified urban areas. The Governor’s veto message indicated that he was willing to explore redevelopment-type programs in disadvantaged communities, but he felt AB 2280 unnecessarily vests the proposed program in redevelopment law.
The statutes enacted pursuant to SB 628 are effective January 1, 2015, and will be codified at Government Code Sections 53398.50 et seq.
If you have questions about this edition of the Real Estate and Land Use Update, please contact one of the authors listed or the Manatt lawyer with whom you normally consult. Click here to see a complete list of Manatt’s Real Estate and Land Use Updates.