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League Initial Analysis of Governor’s Enhanced IFD Proposal

May 23, 2014
The League has advocated for new economic development tools to help cities invest infrastructure, create jobs and generate crucial revenues.
 
Infrastructure Finance Districts (IFDs) are a little used tool that could have the potential to facilitate the financing of infrastructure. Workable IFD’s could attract partnerships with counties and special districts, especially on specific infrastructure investments of wider benefit. The League is supporting SB 33 by Sen. Lois Wolk (D-Davis), which would make changes to the law to remove cumbersome two-thirds voting thresholds, authorizing rehabilitation and maintenance and some other changes.

The Governor’s IFD proposal, introduced in January with the budget, has a major distinction of retaining vote thresholds but at 55 percent. In the May Revise, the Governor altered his original IFD plan and has dubbed the new version the Enhanced IFD Proposal. The major distinctions between the proposal released in January and the most recent version are the following:
  • Existing IFD Law is left as it is, and can be accessed by local agencies.
  • The Governor’s proposal would be contained in a new Enhanced IFD Law.
  • The Enhanced IFD law retains the 55 vote thresholds, clarifies some additional uses, and continues the requirement for Department of Finance (DOF) approval of the creation of an Enhanced IFD, provided that all pending issues and litigation associated with a jurisdiction’s redevelopment agency are resolved.
  • One unique feature of the Enhanced IFD Law is that is authorizes the growth of property tax received by a local agency as part of the VLF-Property Tax Swap to be dedicated to an IFD. The League’s attorneys are still researching this issue. 
There has been limited interest by cities on the usefulness of the Governor’s proposal. The requirement for two separate votes remains problematic and DOF signoff adds to the perception that the tool will be little used, except on the urban edge or parcels with few if any residents.
 
The League’s review of the Governor’s Enhanced IFD proposal also focused on a number of other issues including:
 
Debt Limit: Analysis by the League’s attorneys suggests that additional language would be needed to ensure that the structure of the measure will not raise issues with the Constitutional debt limit (which would require a two-thirds vote). This could be addressed by making some changes to support the legal conclusion that the IFD is truly a separate legal entity. The League worked on this in SB 33 and the Governor’s proposal would be improved by importing some language from that measure. Retaining the 55 percent vote requirement, however, could also complicate the future legal analysis of whether the debt limit vote threshold applies. During the League’s work on SB 214 (Wolk), the predecessor to SB 33, the League obtained a letter from bond counsel that helped assure that debt-limit issues with that bill had been effectively addressed. The Enhanced IFD tool should be also subject to bond counsel review to ensure it is structured in a manner which would avoid vulnerability.
 
Alternative to Current 55 Percent Vote Proposal: The vote requirement is a key hurdle to the usefulness of the Enhanced IFD tool. The League’s analysis suggests that there are several adjustments that could be made that would still achieve the “buy in” and pre-approval of those affected in a less onerous fashion, which include:
  • Establishing a single consolidated approval process. The current proposal recognizes that there could be up to 25 years between the approval of an Enhanced IFD and issuing debt. A more workable process is to have one approval on the front end, where those approving the plan have an understanding that they are authorizing both the approval of the Enhanced IFD and the necessary financing to go with it. That will also remove any uncertainty associated with getting initial approval to create the Enhanced IFD, then years later having the financing rejected.
  • Adopting the same process that is currently used for property assessments (allow for a protest process and if protests exceed a majority protest then the Enhanced IFD does not go forward) instead of an automatic vote. This would help ensure that where there is a lack of support for the Enhanced IFD it does not go forward.
All Redevelopment Agency (RDA) Areas Included: The League’s analysis found that if any of the former RDA areas are included in an Enhanced IFD, then all of the former RDA’s former territory should be included. The way it is currently drafted would create confusion and opposition in many cases by expanding the affected areas unnecessarily.
 
DOF Approval: The drafting of the measure is improved by excluding communities that never had an RDA from the DOF-approval requirement. If such a structure is to be maintained, it is imperative that there is a difference between the treatment for an Enhanced IFD that is not proposing to include a former RDA area and one that is.
  • If the IFD does not include a former RDA area, there should be no requirement for DOF sign off, because there are no state funds affected and otherwise worthwhile infrastructure projects could be delayed while the legal process associated with RDA dissolution continues.
  • If the IFD does include former RDA areas, it would be impractical to establish an IFD on former RDA territory until there is certainty that the underlying RDA dissolution issues that could affect flows of property tax from the area have been resolved. But there are less intrusive ways of accomplishing such certainty. There is also a difference between a city or successor agency having pending litigation against DOF, and other outstanding litigation where the city or successor agency is not a named party, such as the League’s anti-clawback lawsuit. The League calls for more finality to the uncertainties of the Controller’s reviews etc. and the possibility that the Controller’s reviews result in findings contrary to previously completed DDRs and prefers that certain findings of fact be made by the agency proposing the Enhanced IFD (finding of completion, etc.) with notice to DOF, rather than having DOF approve.
Clarify Enhanced IFD as Alternative: While Enhanced IFD Law was represented to be a new alternative to existing IFDs; the proposed language should be clear on this point.
 
Need More Tools in the Tool Box: It is positive that the Governor has put a proposal on the table for discussion, but more work needs to be done to ensure that cities will find it useful.  Even if the Enhanced IFD tool is improved in the ways described above, the tool will not be applicable in many situations. Other options and policies must be developed to assist communities to address some of the significant infrastructure and other challenges of our urban core and poorer neighborhoods, such as AB 2280 (Alejo). 
 
Next Steps: While the Governor has put forward this proposal as part of his budget proposal, it is unclear whether this issue will be addressed as part of the budget discussion, or later in the session.


 
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