AB1862, titled the Use of Taxpayer Funds Act, forbids California public entities from entering agreements that let a private party restrict, condition, or otherwise control the use of revenue derived from taxes or assessments that the public entity is authorized to levy. The bill also voids any contractual provisions coming into effect on or after January 1, 2027 that would prevent the public entity from using taxpayer funds — including clauses framed as noncompetition, exclusivity, or similar restraints.
The statute preserves the ability of public entities to negotiate restrictions over nontaxpayer revenue (service fees, rents, private grants, donations), but draws a bright line for taxpayer-derived funds. For officials, contractors, and financiers, AB1862 forces new attention to how revenues are classified, how contracts are drafted, and how public projects are financed when tax receipts are in play.
At a Glance
What It Does
The bill prohibits public entities from contracting away the right to allocate or spend taxpayer funds, and it declares any offending clause that takes effect on or after January 1, 2027 void and unenforceable. It permits private parties to control or restrict only nontaxpayer revenues such as fees, rents, donations, and private grants.
Who It Affects
Cities, counties, special districts and other public entities (as defined in Cal. Section 811.2), private contractors and concessionaires, nonprofit grant recipients, and private financiers or investors who rely on public revenue streams as collateral or cash flow. Legal counsels and municipal finance officers will be directly involved in implementation.
Why It Matters
AB1862 shifts contracting leverage toward public entities by protecting taxpayer revenue from private encumbrance, but it also complicates deals that depend on predictability of revenue controls — including public-private partnerships and concession financing that historically use exclusivity or revenue-allocation clauses.
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What This Bill Actually Does
AB1862 sets a simple-but-strict rule: a public entity cannot agree to let a private party dictate how tax-derived money is used. The bill defines taxpayer funds narrowly as revenue derived from any tax or assessment the public entity is authorized to impose, and contrasts those with nontaxpayer funds such as fees, rents, private donations, and grants.
Structurally, the law attaches its prohibition to contracts, leases, grant agreements, joint ventures, partnerships, and “other arrangements.”
On the prohibition side, AB1862 covers two common transaction mechanics. First, it forbids any contractual grant of authority to a private party that would let that party restrict or condition how the public entity allocates or disburses taxpayer funds.
Second, it forbids contractual restrictions — explicitly including noncompetition and exclusivity clauses — that would prevent the public entity from using taxpayer funds to award grants, make payments, or fund programs. If such a provision takes effect or “commences” on or after January 1, 2027, the bill declares the provision void and unenforceable.The bill draws an important exception: public entities may still let private parties control or restrict nontaxpayer funds, and may use exclusivity or noncompetition clauses so long as they apply only to those non-tax revenues.
That creates a compliance obligation: entities must track revenue sources and make contractual language precise so that protections over fees, rents, and private grants do not accidentally extend to tax receipts. AB1862 is silent about remedies beyond the voiding of offending provisions and does not amend other statutory pledge or trust requirements used in municipal finance, so implementation will require coordination with existing bond covenants and trust indentures.Practically, AB1862 will change how staff and counsel draft concessions, vendor agreements, and PPP contracts.
Deal parties will need granular revenue accounting, explicit carve-outs in exclusivity language, and likely new certifications that no taxpayer funds are being encumbered. Financiers and investors who rely on predictability created by exclusivity or other restrictions may ask for alternative protections — for example, liens on nontaxpayer revenues or changed credit terms — and public entities will need to evaluate whether those workarounds comport with the bill’s text.
The Five Things You Need to Know
The bill distinguishes ‘taxpayer funds’ (revenue from taxes or assessments a public entity may levy) from ‘nontaxpayer funds’ (service charges, fees, rents, private donations, private grants).
It prohibits contracts that grant a private party the right to restrict or condition the use, allocation, or disbursement of taxpayer funds collected by the public entity.
It voids contractual provisions (including noncompetition and exclusivity clauses) that, starting January 1, 2027, restrict a public entity from using taxpayer funds to award grants, make payments, or fund programs.
Restrictions or control over nontaxpayer funds remain permitted, provided those controls do not extend in any way to taxpayer-derived revenue.
The statute applies to a broad set of instruments—contracts, leases, grant agreements, joint ventures, partnerships, and ‘other arrangements’—requiring careful contract drafting and revenue source segregation.
Section-by-Section Breakdown
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Short title: Use of Taxpayer Funds Act
This subsection gives the statute its name. Practically, the short title signals legislative purpose — protecting tax-derived revenue from private encumbrance — and will be the reference point in guidance and litigation about intent.
Definitions of key terms
Subsection (b) supplies operational definitions that drive the statute. ‘Nontaxpayer funds’ lists examples (service charges, fees, rents, donations, private grants) but is otherwise broad; ‘taxpayer funds’ is tied to any tax or assessment the public entity is authorized to levy. The bill also imports the statutory meaning of ‘public entity’ from Section 811.2, which determines the range of governmental actors covered. These definitions will be decisive in disputes because many practical questions hinge on whether a particular revenue stream counts as a tax/assessment or as a fee or grant.
Ban on granting private control over taxpayer funds
Paragraph (c)(1)(A) bars contractual language that gives a private party the right to restrict, condition, or otherwise control how taxpayer funds collected by a public entity are used. This targets deal structures where an operator or investor is given veto power or delegated authority over public budgeting decisions involving tax receipts — for example, a concessionaire contract that requires the city to spend certain tax receipts only in ways the operator approves.
Ban on clauses that limit public use of taxpayer funds; voiding rule
Subsection (c)(1)(B) expressly includes noncompetition and exclusivity clauses among the kinds of provisions that cannot limit the public entity’s ability to use taxpayer funds. Subsection (c)(2) imposes a temporal boundary: any offending provision that takes effect or ‘commences’ on or after January 1, 2027 is void and unenforceable. That timing means preexisting clauses that began before that date are not automatically voided, while new or renewed agreements after that date must comply.
Permitted restrictions on nontaxpayer funds
Subsection (d) clarifies the carve-out: public entities may enter agreements that let private parties restrict the use or allocation of nontaxpayer funds or impose exclusivity tied only to those revenues. The practical effect is that concessions, fee-based operations, or privately funded amenities can still come with contractual protections for private parties — but the contract must draw a clear, enforceable line so those controls do not touch tax-derived money.
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Who Benefits
- Taxpayers and voters — their elected bodies retain unencumbered authority over how tax and assessment revenues are deployed, protecting democratic control of public funds.
- Competing vendors, public operators, and community programs — exclusivity or noncompetition arrangements that previously blocked public initiatives funded with tax dollars will be harder to enforce.
- Municipal budget officers and auditors — the statute simplifies a baseline rule (tax money cannot be contracted away), giving finance staff a strong legal anchor when reviewing proposed agreements.
Who Bears the Cost
- Private contractors, concessionaires, and investors who relied on contractual exclusivity or revenue carve-outs tied to tax receipts — they lose bargaining leverage and may face reduced expected returns.
- Public entities and their counsel — they will incur transaction costs to redraw contracts, segregate revenue streams, add certifications, and defend interpretations about whether funds are taxable or not.
- Financiers and bondholders backing projects that depended on predictability of encumbrances on public revenue — lenders may demand higher risk premiums or alternative collateral when taxpayer funds cannot be encumbered.
Key Issues
The Core Tension
The central dilemma is preserving democratic control over tax-derived public money versus preserving contractual certainty that attracts private capital and enables long-term projects. Protecting taxpayers by forbidding contractual encumbrances improves public authority but reduces the pool of risk-shifting tools private investors use to finance large projects, forcing trade-offs between public control and the feasibility or price of privately financed services.
AB1862 creates several implementation and legal wrinkles. First, the practical line between taxpayer and nontaxpayer funds is often blurred: many public programs pool revenues, and revenues labeled as ‘fees’ or ‘service charges’ have sometimes been treated as tax-equivalent for financing or pledge purposes.
The bill does not provide an accounting regime for mixed or commingled funds, so public entities will need internal rules or statutory guidance to avoid inadvertent violations.
Second, the enforcement mechanism is limited: offending provisions are simply declared void and unenforceable when they commence on or after January 1, 2027. The bill does not specify remedies, severability rules, or whether voiding a provision would invalidate related and interdependent financing covenants.
That silence creates risk for projects that depend on integrated contract packages and for bond documents that assume certain exclusivities or revenue priorities.
Third, the statute invites circumvention risks. Parties may re-label tax-like revenues as ‘fees’ or structure deals to shift the economic reliance from tax receipts to separately identified nontaxpayer cash flows.
Preventing such workarounds will require careful drafting, audits, and potentially litigation to test where the line actually falls.
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