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Finally! Guidance on “Significant Public Benefits” for Issuing Bonds Under the Marks-Roos Local Bond Pooling Act of 1985

On July 24, Sacramento Superior Court Judge Tim Frawley issued a proposed Statement of Decision in Gonzalez v. Johnson (Superior Court of California, County of Sacramento, Case No. 34-2014-80001489, July, 24, 2015), which effectively ended the last legal challenge to the new $477 million multi-purpose entertainment and sports arena that will serve as the home of the Sacramento Kings NBA team. While the case focused on claims of a “secret subsidy” relating to a public-private partnership agreement between the City of Sacramento and the owners of the Kings, the trial also addressed an area of unadjudicated law as plaintiffs’ reverse validation claim challenged the City’s finding that there is a “significant public benefit” from issuing bonds under the Marks-Roos Local Bond Pooling Act of 1985. Prior to Gonzalez v. Johnson, there were no legal precedents guiding cities in their issuance of bonds under the Marks-Roos Act. Gonzalez v. Johnson provides much-needed clarification of this murky area of law.

How are “Significant Public Benefits” Defined in the Marks-Roos Act?
The Marks-Roos Act permits local agencies to form a public financing authority to finance public capital improvements and other projects through the issuance of bonds “whenever there are significant public benefits for taking that action.” (Cal. Gov. Code Section 6586.) Section 6586 describes a significant public benefit as any of the following:

(a) Demonstrable savings in effective interest rate, bond preparation, bond underwriting, or bond issuance costs.
(b) Significant reductions in effective user charges levied by a local agency.
(c) Employment benefits from undertaking the project in a timely fashion.
(d) More efficient delivery of local agency services to residential and      commercial development.

What “Significant Public Benefits” were Identified by the City of Sacramento?
The City of Sacramento’s bond resolution found that financing the City’s share of the new arena with bonds issued under the Mark-Roos Act would produce significant public benefits including:

  • The maintenance and promotion of economic development and increased employment within the City and the region.
  • The improvement of the feasibility and enhancement of the development and redevelopment of the City’s downtown core.
  • The maintenance and generation of increased tax revenue to the City.
  • The promotion of the general welfare, sense of community, and quality of life within the City and the region.
  • The development of a multi-purpose entertainment and sports center to provide recreational and entertainment activities, amenities, and attractions to the people of the City and the region.
  • The provision of a new facility for use by a National Basketball Association basketball team as the primary user in order to assure the continued presence of professional basketball in the City and the region, and the beneficial and frequent media exposure and recognition that the continued presence of professional sports would bring to the City and the region.
  • The demonstrable savings in effective interest rate and the costs of bond preparation, bond underwriting, and bond issuance that will result from financing the City’s share of the Project through the Authority.

How did the Court Rule re: “Employment Benefits” and “Demonstrable Savings”?
The judge noted that the “court’s review is limited to determining whether the agency’s decision was arbitrary, capricious, or entirely lacking in evidentiary support, or whether it failed to conform to the procedures required by law.” (citing American Board of Cosmetic Surgery v. Medical Board (2008) 162 Cal.App.4th 534, 547.) Plaintiffs argued that this claim should be based only on evidence presented at trial, not the record of the decision, but the court disagreed, holding that the “evidence” considered by the court will only include the same evidence considered by the administrative agency, not evidence created after-the-fact, such as plaintiffs’ expert testimony presented at trial.

Plaintiffs’ contended that the only relevant findings by the City were “employment benefits” and “demonstrable savings” and that those findings were not supported by the evidence. The judge disagreed.

Employment Benefits – The judge cited the following items as sufficient evidence of employment benefits: (1) reports from City staff that the Arena could retain 800 jobs and create 2,000 – 6,000 new jobs, and generate $260 million – $400 million in total economic output locally and nearly $1 billion regionally and statewide; and (2) information that the anticipated “ancillary development” could add more jobs and economic output. It is important to note that the judge found that plaintiffs’ use of a different economic model “amounted to nothing more than a classic disagreement among experts on methodology, which is insufficient to overturn the City’s finding.”

Demonstrable Savings – The judge held there was evidence to support the City’s finding that its decision to issue lease-revenue bonds, rather than monetizing the City’s parking assets, would result in a better deal for the City because the bonds are “stronger credit” and the City would receive “better market reception,” “better credit rating,” and, ultimately, a “better interest rate.” The judge held that plaintiffs’ failed to show that there is no evidence to support the finding that issuance of bonds will result in demonstrable savings in interest rate, bond preparation, bond underwriting, or bond issuance costs.

The judge found that “plaintiffs have failed to meet their burden of proof on any of their causes of action” and awarded the recovery of defense costs. Cities issuing bonds under the Marks-Roos Act can refer to Gonzalez v. Johnson for some guidance on what type of information needs to be on the record to meet the supporting evidence requirement of the Act in order to withstand a potential legal challenge.