BILL ANALYSIS                                                                                                                                                                                                    

                                                                  SB 77
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          Date of Hearing:   April 7, 2010

                                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:              


          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  


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            Fund (special fund) for the PACE reserve program (special  

          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.

           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  


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            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  

           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  


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            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