BILL ANALYSIS SB 77 Page 1 Date of Hearing: April 7, 2010 ASSEMBLY COMMITTEE ON APPROPRIATIONS Felipe Fuentes, Chair SB 77 (Pavley) - As Amended: March 22, 2010 Policy Committee: N/A Vote:NA Urgency: Yes State Mandated Local Program: No Reimbursable: SUMMARY This bill establishes a state-financed reserve for the Property Assessed Clean Energy (PACE) program using proceeds from the Renewable Resource Trust Fund, and makes other changes related to the PACE program. Specifically, the bill: 1)Authorizes the California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA) within the State Treasurer's Office to provide reserves for bonds issued through the PACE program. 2)Specifies that the reserves may be up to 10% of PACE bonds issued by local governments to support loans made for residential projects involving three or fewer units or commercial projects costing less than $25,000. 3)Sets forth various criteria that CAEATFA must consider when providing the debt reserves to localities, including whether the PACE program offers loans for energy efficiency projects. 4)Appropriates $50 million through January 1, 2015 from the Renewable Resource Trust Fund to fund the program. 5)Authorizes CAEATFA to pool local PACE bonds (for the purpose of reducing borrowing costs), by purchasing them from individual municipalities, combining them with other PACE bonds, and selling the pooled bonds through public or negotiated sales. FISCAL EFFECT 1)Appropriates $50 million from the Renewable Resources Trust SB 77 Page 2 Fund (special fund) for the PACE reserve program (special fund). 2)Authorizes up to $300,000 of the appropriation to be used by CAEATFA to cover start up costs of administering the program. Ongoing administrative costs would be recovered from fees paid by municipalities participating in the reserve program. COMMENTS 1)Rationale . The bill is intended to reduce the costs to local governments of issuing PACE related bonds, thereby making PACE loans more affordable and energy improvements more financially viable to homeowners and businesses. 2)Background - PACE program . The PACE program permits local public agencies and utility districts to provide up-front financing to property owners to install solar or other renewable energy-generating devices or make specified water or energy efficiency improvements to their properties. This financing mechanism was first used by Berkeley through its Charter Cities authority, and then authorized statewide by AB 811 (Levine), Chapter 159, Statutes of 2008, and AB 474 (Blumenfield), Chapter 444, Statutes of 2009. Under the program, a city, county, or other public agency issues bonds and uses the proceeds to make loans to property owners to finance energy retrofits. These loans are repaid by the property owner over 20 years via an annual assessment on the owner's property tax bill. The assessment remains on the property even if it is sold or transferred. From the property owner's perspective, the added property tax assessments are partly or fully offset by energy savings resulting from the retrofit. The loan repayments from the property owners are dedicated by the municipalities to the repayment of the revenue bonds. The recent negative developments in the economy, and specifically in the housing and bond markets, have made it difficult for local governments to sell PACE bonds, as potential investors have become wary over property tax defaults. Even though the loan assessments are secured by high priority liens (which are paid before the mortgage loan), investors have concerns about bond repayments being delayed. The reserve program would address these concerns by providing SB 77 Page 3 a 10% reserve cushion that would be used for payments in the event of defaults. The depleted reserves would eventually be replenished when the property taxes were recovered from the homeowners when the property is sold. The benefit of the reserve fund is that municipalities will be able to sell bonds at a lower interest rate, thereby reducing the loan costs to property owners and making energy efficiency projects more viable. Smaller municipalities that have a relatively small number of PACE loans may face prohibitively higher costs associated with bringing a small bond to market. This bill would give municipalities the option of using CAEATFA's bond authority to pool these smaller bonds, thereby reducing the cost of issuance. 3)Background - CAEATFA . This authority was created in 1980 to finance projects utilizing alternative sources of energy, such as cogeneration, wind and geothermal power. In 1994, its charge was expanded to include the financing of advanced transportation technologies. CAEATFA consists of five members - the Director of the Department of Finance, the Chairman of the CEC, the President of the Public Utilities Commission, the State Controller, and the State Treasurer. 4)Background - Renewable Resources Trust Fund. This fund was established in 1997 to promote development and expansion of in-state renewable electricity generation. Revenues to the fund are provided through surcharges levied on ratepayers by utility companies, and are used to support various renewable energy programs administered by the California Energy Commission. About 80% of the fund's proceeds are dedicated to the New Solar Homes Partnership program, which provides financial incentives to encourage the installation of solar energy systems on new residential construction. This program has been undersubscribed during recent years due to the lack of new home construction, and the fund currently has a large uncommitted balance of about $170 million. 5)Related Legislation . This bill is similar to SB 26 X8 (Pavley), which was approved by this committee on March 10, 2010, but expired on the Assembly floor when the special session adjourned on March 11, 2010. That measure would also have appropriated $50 million to finance bond reserves related SB 77 Page 4 to the PACE program. However, SB 26 X8 differed from this bill in three key ways: it permitted reserves to be used for bonds supporting all commercial and residential projections (rather than for just commercial projects costing less than $25,000 and residential projects with three or fewer units); it stated that the projects financed by bonds using the reserves are considered public works and thus subject to prevailing wage requirements; and it provided an exemption from the prevailing wage requirements for commercial projects costing less than $25,000 loans and residential projects involving three or fewer units. Analysis Prepared by: Brad Williams / APPR. / (916) 319-2081