Thursday, September 22, 2011 2:00 p.m. - 3:30 p.m. San Jose
Mission Statement: This Committee is a Policy committee. Its mission is to develop C.A.R.'s government finance and taxation policy. It has original jurisdiction to evaluate legislation and regulation in the following issue areas as they relate to real estate:
Commercial Investment Government Finance Property Tax Transaction Tax
Presiding: Patricia Bouie - Hinds, Chair Jeff Sposito, Vice-Chair
Issue Chairs: Hal Alpert, Commercial Investment Jeannie Anderson, Transaction Tax Ronna Brand, Property Tax Bill Nelson, Government Finance
Liaisons: Mike Riley, C.A.R. Executive Committee Liaison Dennis Badagliacco, NAR Federal Taxation Committee Representative Jared Martin, NAR Commercial Committee Representative
CAR Staff: Christopher Carlisle, Legislative Advocate Matt Roberts, Federal Government Affairs Manager
I. Welcome and Opening Comments - Patricia Bouie-Hinds, Chair
II. State Taxation Issues
A. Action Items:
1. Property Tax - Ronna Brand, Issue Chair
a. Assessment Appeals Boards Are Not Required to Comply with the Brown Act. In 1996, then Attorney General Daniel Lundgren issued an opinion which concluded: "The Ralph M. Brown Act … does not apply to the hearings of a county board of supervisors when acting as the county board of equalization or to the hearings of an assessment appeals board." This result was reached because there is a state statute that specifically enumerates the situations under which a closed session can be held and concludes with the prohibition on any other legislative body of any local agency holding a closed session. Since there is "no mention in the Brown Act of county boards of equalization or county assessment appeals boards" holding closed sessions, the Brown Act does not apply to county assessment appeals boards. That said, from a common sense perspective the Brown Act should apply to local assessment appeals boards. The public should be duly notified of meetings of local boards and their right to participate in the meetings should be protected. Moreover, local boards that have quasi-judicial functions such as assessment appeals boards arguably should be specifically allowed to meet in closed session to adjudicate such matters.* (See Issue Briefing Paper)
a. Debt Forgiveness Protections to Expire Next Year. In a foreclosure or a short sale, the former homeowner is not taxed on the forgiven debt under federal and state laws that will expire at the end of next year. In both cases, the lender likely ends up receiving less than the full amount of the outstanding balance. If so, the amount the borrower is no longer responsible for paying to the lender is considered "cancellation of debt" income and, thus, income to the borrower that - prior to the adoption of the federal and state protections - was subject to income tax. Those federal and state protections are scheduled to expire at the end of next year.* (See Issue Briefing Paper)
3. Government Finance - Bill Nelson, Issue Chair
a. Mortgage Interest Deduction Threatened Again. Due to the nation's and California's continuing budget deficits, the MID is again being threatened with at least some type of modification. The state Legislature’s non-partisan Legislative Analyst’s Office (LAO) has concluded that most of benefits of the MID accrue to taxpayers who would own a home even if the MID didn't exist. As a result, the LAO has outlined a number of options for modifying the MID. Similarly, the deficit-reduction commission established by President Obama proposed replacing the deduction with a 12% tax credit, limiting eligible mortgages to those of $500,000 or less, and eliminating the tax break for second homes and home equity loans. The LAO estimated that in fiscal year 2008-2009 the MID tax expenditure cost California $5.7 billion in lost tax revenues. As such, it is easy to see the appeal to elected officials of somehow limiting the MID. However, an analysis of 2008 Internal Revenue Service data showed that Californians claiming the MID saved $18,876 on average on their tax bill. As such, it is difficult to imagine the MID ever being completely eliminated. However, it is likely proposals to modify the MID will continue to be advanced. Does it make sense for C.A.R. to be prepared when these proposals are advanced by studying the economic impacts of the various modification proposals?* (See Issue Briefing Paper)
b. Proposition Number Pending, Increases "Rainy Day" Budget Stabilization Fund. Currently 3% of General Fund revenues are required to be transferred from the General Fund into the Budget Stabilization Fund (the state’s reserve account) until the total amount in the reserve Fund reaches 5% of state revenues. Under this proposition, in addition to the 3% transfer, any "unanticipated" revenues (i.e., revenues that exceeded the amount expected based on revenues received by the state over the past twenty years) not used to satisfy education funding obligations, are to be transferred into the Budget Stabilization Fund. These transfers will be required until the Budget Stabilization Fund has reached 10% of the General Fund revenues. Once the fund has reached the 10% threshold, "unanticipated" revenues will then be directed toward debt repayment and other one-time expenditures. This measure also limits the spending of the Budget Stabilization Fund to periods when state revenues are insufficient to support the previous year's expenditures or when there is a state emergency (i.e., earthquake, flood, etc.) Finally, this measure creates the Supplemental Budget Stabilization Account, which will receive half of the mandatory 3% transfer from the General Fund and which can only be used to pay for one-time infrastructure projects or debt service obligations.* (See Issue Briefing Paper)
B. Discussion/Reporting Items:
1. Commercial Investment - Hal Alpert, Issue Chair
a. Implementation of AB 758 (Statutes of 2009) - Comprehensive Energy Efficiency Program for Existing Residential and Nonresidential Buildings. AB 758 (Statutes of 2009) tasks the California Energy Commission (CEC) and Public Utilities Commission with creating a comprehensive statewide campaign of flexible cost-effective energy efficiency improvements for existing residential and nonresidential buildings that will not unreasonably or unnecessarily affect the home purchasing process. The CEC began holding workshops and regulatory proceedings over the summer. According to the CEC, the comprehensive energy efficiency program will focus on energy assessments, building benchmarking, building energy use ratings and labels, cost-effective energy efficiency improvements, public and private sector energy efficiency financing, public outreach and education and green workforce training. The CEC is currently evaluating multiple implementation strategies for ratings, disclosures and retrofits which include trigger events during the life of the building, point-of-refinancing, building alterations, replacement of appliances and equipment, utility service changes, as well as both voluntary and mandatory point-of-sale requirements that do not unreasonably or unnecessarily affect the home purchasing process. C.A.R. is an active participant in this regulatory process and has attended several meetings and workshops and will continue to play an active role in the development of these regulations in order to assure that real estate transactions are not negatively impacted. Additional information and updates on this regulatory process can be found at: http://www.energy.ca.gov/ab758/
b. AB 350 (Solorio) - Displaced Property Service Employees. Under current law an employer/contractor of janitorial service employees cannot terminate the employees of the prior employer/contractor for 60 days, unless there is "just cause" to do so. AB 350 extends these protections to several property service employees, including security, window cleaning, food cafeteria services and all cleaning related or light maintenance services. C.A.R. is opposed to this measure. This bill undermines the at-will employment presumption in California by forcing the new property services contractor to continue the employment relationships of the previous contractor.
Status: Senate Floor Position: Oppose
2. Government Finance - Bill Nelson, Issue Chair
a. AB 184 (Swanson) - Seismic Safety Improvements. Public agencies are currently allowed to enter into a contractual assessment with homeowners to fund the installation of various property improvements. AB 184 expands existing law to add seismic strength improvements to the list of allowed improvements. This measure also allows residential, commercial and industrial property owners to enter into a contract with a city or county to fund seismic improvements through an assessment on the property. C.A.R. supported AB 184 because it provides an opportunity for property owners to install seismic retrofits other than at point-of-sale and without burdensome up-front costs.
Status: Signed by the Governor on June 18, 2011 (Chapter 28, 2011 Statutes) Position: Support
b. AB 1424 (Perea) - License Revocation. Under existing law the Franchise Tax board (FTB) is required to make public a list of the 250 largest tax delinquencies in excess of $100,000. AB 1424 would require the State Board of Equalization (BOE), along with the FTB to generate a list of the top 500 largest tax delinquencies. This measure would, among other things, permit a state government licensing entity that issues professional or occupational licenses, certificates, registrations or permits to deny, revoke or suspend a person's license if they appear on the FTB's or the BOE's largest 500 delinquencies list. If the licensing entity fails to suspend the individual’s license, the FTB and BOE would be given superseding authority to suspend the individual’s license. This suspension would be canceled upon compliance with the licensees' tax obligations. C.A.R is opposed to AB 1424 because revoking or suspending a license for reasons unrelated to licensed activity is not appropriate; it also prevents that licensee from earning a living which, ironically, results in the licensee not having the income necessary to pay their tax debts.
Status: Senate Floor Position: Oppose
c. SB 555 (Hancock) - Community Facilities Districts. Under existing law Community Facilities Districts (CFD) can finance various projects and SB 555 would expand CFD’s authority to include the acquisition, installation and improvement of energy efficiency and renewable energy. This measure would also change procedures for forming a CFD that can fund these types of improvements. Local agencies would define the area which will be contained by the CFD; however, individual property owners will be allowed to voluntarily opt-in to the district. C.A.R. supports SB 555 because it will allow, as an alternative to point of sale, property owners to voluntarily enter into the CFD to finance the installation of energy efficiency and renewable energy improvements at low interest rates over a number of years.
Status: To Governor Position: Support
d. Infrastructure Financing Districts
1. AB 485 (Ma). The governing body of a city or county is currently authorized to adopt an infrastructure financing plan, create an infrastructure financing district (IFD) or issue bonds upon voter approval. This measure would eliminate the voter approval requirement, allowing the legislative body to create the district, adopt the plan and issue bonds by resolution, and would require that a transit village development district funded by infrastructure financing district bonds use at least 20% of the revenue to increase, improve, preserve and develop the supply of low- and moderate-income housing. C.A.R. is opposed to AB 485 because it removes the voters' ability to determine whether an infrastructure district should be formed. While C.A.R. supports affordable housing, the landowners who are going to be paying the taxes should not be disenfranchised.
Status: Senate Floor Position: Oppose
2. SB 214 (Wolk). Under existing law the legislative body of a city or county is authorized to create and infrastructure financing district and to issue bonds to finance improvements within the district if two-thirds of the voters approve the plan. SB 214 would eliminate the current voter approval needed to establish an infrastructure financing district. C.A.R. is opposed to this measure as it would result in the property owners who would fund the infrastructure financing district through property taxes losing their ability to vote on the establishment of such a district.
Status: Assembly Floor Position: Oppose
3. SB 310 (Hancock). Currently, the legislative body of a city or county is authorized to adopt an infrastructure financing plan which creates an infrastructure financing district to fund infrastructure facilities and to issue bonds to finance these improvements if two-thirds of the voters in the proposed district approve the plan. The measure requires development projects in the district to provide 20% affordable units in rental or owner occupied housing for low- and moderate-income persons and families. However, as introduced, SB 310 would have eliminated the current voter approval needed to establish an infrastructure financing district. C.A.R. opposed this measure as it would result in the property owners who would fund the infrastructure financing district through property taxes losing their ability to vote on the establishment of such a district. The author of SB 310 amended the bill to delete the elimination of the two-thirds vote requirement for creating an infrastructure financing district.
a. AB 392 (Alejo) - Brown Act. The Brown Act currently requires local government entities to post their agendas 72 hours in advance of scheduled meetings; however, there is no requirement that staff reports be similarly posted. The Brown Act can be satisfied by posting a hard copy of the agenda at a location accessible to the public. This can present a formidable obstacle for individuals and organizations attempting to follow the actions of local governments. C.A.R. is sponsoring AB 392 which would require all local government entities governed by the Brown Act to post their agendas as well as staff reports relating to agenda items on their website (if they have a website - the measure does not require the establishment of a website) allowing individuals and organizations to more easily track proposed government actions. [Note: AB 1344 (Feuer and Alejo)] contains provisions requiring that agendas be posted on the internet.)
Status: Held in Assembly Appropriations Committee Position: Sponsor
b. SCA 7 (Yee) - Public Meeting Notification. The California Constitution requires that the meetings of public bodies be open to the public. SCA 7 amends the constitution to require public bodies to notify the public about their meetings and the actions they take. C.A.R. supports SCA 7 because it believes that the public has a fundamental right to be informed. By adding this requirement to the constitution, SCA 7 eliminates the state mandate and the reimbursement claims being submitted by local governments to cover the costs of appropriately notifying the public of scheduled meetings and proposed actions.
Status: Held in Assembly Appropriations Committee Position: Support
4. Property Tax - Ronna Brand, Issue Chair
a. AB 75 (Hill) - Solicitation Disclosures. Under existing law a non-governmental agency cannot seek funds or information using a solicitation, either paper or electronic, that contains a term or symbol that could be interpreted as implying a connection to any state or local government unless they have the agency’s approval or they include a notice disclosing that they are not associated with a state or government agency. AB 75 would expand this provision to include any symbol, term or general content implying a connection to a federal, state or local government agency. This bill would also require that the disclosure notice be conspicuously displayed on the front and back or each page of the solicitation and would increase the violation fine to $2,500 as well as allow an affected individual to recover damages. C.A.R. supports this measure which protects homeowners from misleading solicitations which often include real estate related services like mortgage modification, homestead filing and property tax reassessment filing services.
Status: To Governor Position: Support
b. Property Tax Deferment
1. AB 34 of the First Extraordinary Session (Blumenfield). The Senior Citizens and Disabled Citizens Property Tax Postponement Law, which expired February 20, 2009, allowed the Controller to postpone payment of property taxes for those qualified property owners who applied for the program. AB 34 of the First Extraordinary Session would have re-created the Senior Citizens and Disabled Citizens Property Tax Fund within the State Treasury. This fund would allow, beginning in July 1, 2012 and going until January 1, 2013, qualified individuals to file a claim with the Controller to postpone the payment of their property taxes.
Status: Vetoed by the Governor on July 7, 2011 Position: Support
2. AB 1090 (Blumenfield). The Senior Citizens and Disabled Citizens Property Tax Postponement Law, which expired February 20, 2009, allowed the Controller to postpone payment of property taxes for those qualified property owners who applied for the program. AB 1090 would establish the County Deferred Property Tax Program for Senior Citizens and Disabled Citizens. This program would allow counties that opt–in to defer property taxes for those individuals who qualify, retroactively, for taxes due on or before February 20, 2011, and on an ongoing basis. Each individual wishing to participate in this program shall apply each year that they wish to have their taxes deferred; the deferred amount along with interest being charged on the balance shall be secured by a county property lien. C.A.R. supports this measure as it protects individuals who are on a fixed income, such as senior citizens or disabled individuals, from losing their home as a result of their inability to pay their property taxes.
a. Seniority of PACE Liens. Under the PACE program, local governments make loans to homeowners to cover the upfront costs of installing energy improvements. Homeowners repay the loan through a contractual assessment collected at the same time they pay their property taxes; assessments have tax or "first priority" lien status in California and many other states, but not all. The Federal Housing Finance Agency (FHFA) has announced that Fannie Mae and Freddie Mac are prohibited from financing mortgages which have PACE liens senior to a Fannie or Freddie lien.* (See Issue Briefing Paper)
1. Commercial Investment - Hal Alpert, Issue Chair
a. Lease Accounting Standard. On July 21, 2011, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) announced that they would re-expose proposed new lease accounting rules for public comment. NAR was among the many organizations that called for re-exposure of the rules due to changes in the most recent draft that would force businesses to bring leased assets onto their books as liabilities.
REALTORS® disagree with this approach to accounting for leased assets, and will continue to make their concerns known to FASB and IASB in comments on the draft rules. Read the FASB and IASB Press Release
b. Lead Paint Rule Update. On July 13, 2011, the House Appropriations Committee approved the 2012 budget for the Department of Interior and the EPA, sending the bill to the full House for consideration. During the bill’s consideration, the Committee voted to add a REALTORS®-supported amendment by Rep. Rehberg (R-MT), to prohibit the implementation of controversial lead paint Renovation, Repair and Painting (RRP) rules until the EPA meets its obligations under the statute and provides the requisite information and equipment for businesses to comply. NAR, along with a broad coalition of regulated industry sectors, sent a letter to the House Appropriations Committee supporting this Amendment.
a. Private Transfer Fee. The Federal Housing Finance Agency (FHFA) has issued a proposed rule intended to limit the usage of private transfer fees (PTF). This is a follow up to their proposed guideline stating "the Enterprises (Fannie Mae and Freddie Mac) should not purchase or invest in mortgages encumbered by private transfer fee covenants or securities backed by private transfer fee revenue, as such investments would be unsafe and unsound practices and contrary to the public missions of the Enterprises and the Banks." However, unlike the proposed guidelines, the proposed rule creates many exceptions that would make the final rule ineffective in California.
The proposal creates exceptions for homeowners associations (HOA) and non-profit entities who utilize the money to provide a "direct benefit" to the encumbered property. The FHFA has defined "direct benefit" as:
Direct benefit means that the proceeds of a private transfer fee are used exclusively to support maintenance and improvements to encumbered properties as well as cultural, educational, charitable, recreational, environmental, conservation or other similar activities that benefit exclusively the real property encumbered by the private transfer fee covenants. Such benefit must flow to the encumbered property or the community comprising the encumbered properties and their common areas or to adjacent or contiguous property. A private transfer fee covenant will be deemed to provide a
direct benefit when members of the general public may use the facilities funded by the transfer fees in the burdened community and adjacent or contiguous property only upon payment of a fee, except that
de minimis usage may be provided free of charge for use by a charitable or other not-for-profit group.
C.A.R. is strongly opposed to the proposed rule and has met personally with the FHFA and submitted a comment letter expressing our concern, opposition and recommended changes to ensure the implementation of a prohibition on PTFs is done in a manner that benefits California’s housing market.
To date the FHFA has not yet published its final rule on this.
3. Government Finance - Bill Nelson, Issue Chair
a. Debt Ceiling Increase/Proposed Budgets/Debt Reduction Commissions and Real Estate Taxes. Members of Congress and the White House are facing growing pressure from constituents, Wall Street, and foreign governments to put the nation’s financial house in order. To date the nation’s national debt is approaching $15 trillion, the 2010 deficit was $1.3 trillion, and while 2011 is not yet over this year’s deficit is expected to be greater than that.
Past attempts by D.C. to address this issue include a Debt Reduction Commission proposal, the Senate Gang of Six proposal, the Biden Group, the House Budget Committee Chairman Paul Ryan’s proposal, the Obama Fiscal Year 2012 budget proposal, the GOP proposed Cut, Cap and Balance proposal, the Reid plan, the McConnell plan, and now the creation of the "Super Committee." This committee was created as part of the debt ceiling increase legislation the President signed in early August.
While a number of these proposals have proposed changes to tax benefits for property owners, including the MID, to date Congress has yet to pass anything that significantly increases taxes on any sector. However, it is inevitable that this will change in the coming years.
Looking forward there are dates that Congress will have to take action by that will bring the issue of revenue into the discussion:
- The government's fiscal year will begin on October 1, 2011. Congress must pass a spending bill prior to this date or the government will shut down. Congress will not pass all of its appropriation bills so they will pass a short term Continuing Resolution to temporarily fund the government for a few months which will give them more time to finalize a budget. They are also likely to wait and see what is produced by the Super Committee.
- According to the debt ceiling increase law the Super Committee has until November 23 to draft a plan that will save the government $1.5 trillion minimum. Congress then has until December 23 to pass the plan (which will only allow for an up or down vote, no amendments). Should Congress fail to meet these requirements, then an automatic $1.2 trillion spending cut would kick in with half of it going towards defense spending and half going towards non-defense spending. The Super Committee will be allowed to raise revenue if they want.
While no one idea has gained significant traction to even begin the process of moving through Congress, some proposals that have gained some traction in the past include:
- A simplification of the tax code, if not a full reform of it. The goal would be to ultimately lower tax rates for the current income tax brackets. While this is widely supported, it is unclear what deductions and credits would be eliminated to cover the cost of reducing the rates.
- Most politicians support leaving the MID alone, or at least maintain it in some form. This means there are many in Congress who are open to the idea of limiting the MID’s benefit. Targets include second homes, home equity loans, higher earners, and the revamping of the deduction into a tax credit.
- Allowing the bush tax rates to expire, including allowing the current capital gains rate of 15 percent to increase to 20 percent.
Super Committee Members:
Representatives Xavier Becerra (D-CA) James Clyburn (D-SC) Chris Van Hollen (D-MD) Jeb Hensarling (R-TX) Dave Camp (R-MI) Fred Upton (R-MI)
Senators Jon Kyl (R-AZ) Rob Portman (R-OH) Patrick Toomey (R-PA) Patty Murray (D-WA) Max Baucus (D-MT) John Kerry (D-MA)
IV. Other Business
A. Discussion/Reporting Items:
1. Interim Report, Public Policy Reorganization. The reorganized public policy committee structure recommended by the task force of 2009 has been in place for approximately 18 months. The new structure concentrates C.A.R.'s public policy (i.e., legislative and regulatory) discussions in four different policy committees which report their work product to either the state or federal level of government committee for review. Staff reviewed anecdotal reports and surveyed membership of the six committees. In general, slightly over 70% of the director-respondents said the structure was adequate, good or excellent, with over 50% grading it as good or excellent. Most members thought they understood the system, but most (90%) also suggested that their colleagues needed additional training in how the system works. While most were comfortable with the system, the largest minority voices for breaking out an additional issue area into a sub-committee or separate committee were in Housing for property management, and Taxation and Government Finance, where commercial investment issues are placed.