Private companies in California hoping for a tax-exempt bond allocation are going to have to lessen their expectations as state officials prioritize the state’s housing crisis.
As demand for private activity bonds in the state has become competitive in recent years, the board of the California Debt Limit Allocation Committee has had to make some tough choices.
It has reserved the bulk of the PAB capacity to help fund affordable housing projects. Given the need, CDLAC’s board has reduced the amount of PAB volume available for non-housing projects even more.
Bloomberg News
“Our focus is to put more of the resources to extremely low income and very low income units,” said California State Treasurer Fiona Ma, one of three voting committee members, along with State Controller Betty Yee and Finance Director Keely Bosler for Gov. Gavin Newsom’s administration. “That is something we voted on as a board.”
Since Ma took office in January 2019, only $600 million of $4.2 billion in private activity bonds issued have been for non-housing projects, she said.
This year, “the governor asked us to focus on funding projects for people who have extremely low income or very low income,” Ma said. “He thinks these units would help people who are experiencing homelessness or on the verge of homelessness.”
As for the goal of issuing PABs to encourage economic development? There are many different types of programs available that encourage business growth through the California Infrastructure and Economic Development Bank, Ma said.
“They also have the option of issuing taxable bond debt,” Ma said.
CDLAC’s board took some heat from housing advocates in 2019 for approving $600 million in debt to help fund a rail project from Las Vegas to Los Angeles that has yet to pan out, despite the heavy traffic congestion between the cities.
The federal government sets a ceiling on how much tax-exempt debt each state can issue annually to fund private projects.
The board received requests for nearly twice as much in PABs as the $4.3 billion allotted in 2021, Ma said. The allotment increased by $181.7 million in 2021 compared to 2020, according to data provided by the treasurer’s office. The IRS is expected to issue its per capital amount for the 2022 state ceiling in January, as it typically does.
The annual caps are determined by a formula that uses annual state population estimates from the U.S. Census Bureau. In 2020, California was among five states that experienced a reduced volume cap, because of a population decline.
The framework for issuing tax exempt PABs was established in the Revenue and Expenditure Control Act of 1968. Over time the number of eligible purposes or projects for which they can be used has gradually increased to 22 from 12, according to the nonpartisan Congressional Research Service.
Thirteen of those 22 activities are subject to annual state volume caps. Among them are multifamily housing bonds, single-family mortgage revenue bonds and qualified student loan bonds.
Others include small issue bonds, redevelopment bonds, exempt facility bonds such as water and sewage facilities, hazardous waste facilities and other utility facilities.
Among the PABs not subject to volume caps are those financing airports, docks, wharves and projects for nonprofit 501(c)(3) organizations such as hospitals and universities.
The Infrastructure Investment and Jobs Act also expanded the categories for PABs allowing for the issuance of tax-exempt private activity bonds for qualified broadband projects and carbon dioxide capture facilities.
Even as CDLAC wrestles with what has become a competitive environment for PABs, it and a sister agency, the California Tax Credit Allocation Committee, which administers the federal and state low-income housing tax credit programs, are going through a restructuring prompted by a report from State Auditor Elaine Howle released in fall 2020.
Silos and inefficiencies between the two departments and the state’s two other agencies resulted in $2.7 billion in bond issuing authority that could have helped to alleviate the state’s housing crisis going untapped, according to State Auditor Elaine Howle’s letter attached to the audit.
Howle’s audit found that the four state agencies charged with providing financing to housing developers have requirements that are misaligned, inconsistent and unnecessarily cumbersome. The audit found that the lack of coordination and planning between the two agencies hindered each agency’s ability to fulfill their respective directives and recommended the consolidation of both agencies and the delegation of CDLAC’s bond allocation authority to CTCAC.
Ma said she has been working to unify CTCAC and CDLAC ever since she took office, first by appointing one person as executive director over both agencies.
“That is one of my initiatives, because the bonds and tax credits were aligned,” Ma said. “They were two agencies, with two directors and two different sets of applications. That was the complaint I heard from the community, which is why I wanted to merge the two and streamline and make the processes more equal. The idea was also to allow applicants to receive tax credits and bonds in an expedited manner.”
Sjoberg Evashenk Consulting, hired by the treasurer’s office in June to prepare a recommendation for a strategic plan for CDLAC/CTCAC, gave a summary of its findings in a 20-page PowerPoint presentation during CDLAC’s Dec. 8 meeting.
The consultant was tasked with identifying steps that could be taken by CDLAC/CTCAC to address the state auditor’s 2020 findings and recommendations.
The goal is to increase coordination and alignment between the two agencies because both share a similar stakeholder base and often provide allocations to the same developers and projects, according to the consultant’s report.
The consultant recommended that workload be assigned to the staff not based on whether the applicant is tapping bond authority or tax credits, but based on the applicant; that the agencies need to implement a comprehensive IT overhaul, because the current systems are paper-based; and said high turnover and sustained vacancies are contributing to the loss of institutional knowledge and key resources for resolving complex problems.
The consultant recommended that the agencies develop remote options given today’s realities in the labor market and consider opening a southern California office to lessen the travel required from people located in the Sacramento office.
The treasurer’s office just began requiring the majority of its staff to return to the office two days a week in October, Ma said. Some of the turnover at the treasurer’s office has resulted from the pay differential between what people in the treasurer’s office make versus departments under the governor’s office.
“We train people and then they go work for the governor’s office, because they can make more money,” Ma said. “We are working to change that.”
Though the consultant said its recommendations are 70% complete, Ma said what was presented at the meeting was a summary of their findings “and the devil is in the details,” and her office looks forward to seeing the complete findings from the consultant.