BILL ANALYSIS                                                                                                                                                                                                    



                                        
                       SENATE LOCAL GOVERNMENT COMMITTEE
                        Senator Patricia Wiggins, Chair


          BILL NO:  SB 613                     HEARING:  1/6/10
          AUTHOR:  Harman                      FISCAL:  No
          VERSION:  12/15/09                   CONSULTANT:   
          Weinberger

                      IRVINE RANCH WATER DISTRICT'S BONDS
          
                           Background and Existing Law  

          The Irvine Ranch Water District (IRWD) and the Santa  
          Margarita Water District (SMWD) are special districts,  
          formed under the California Water District Act, which  
          together provide water and sewer service to approximately  
          480,000 residents within a service area of over 177,000  
          acres in Orange County.  

          IRWD and SMWD can form improvement districts, which are  
          geographical subdivisions through which each district can  
          fund capital improvements that benefit those specific  
          geographic areas.  With a 2/3-vote of the property owners  
          in an improvement district, IRWD and SMWD can finance  
          capital projects by issuing general obligation bonds, which  
          are secured by property tax revenues outside of the  
          standard 1% rate. 

          When issuing general obligation bonds for improvement  
          districts, IRWD and SMWD typically purchase credit  
          enhancement, like bond insurance or a letter of credit, to  
          provide additional security for the bonds.  Credit  
          enhancement improves the bonds' credit rating and lowers  
          the districts' borrowing costs.   Investors rely on the  
          higher rating of a third-party credit enhancement provider  
          rather than the issuer's rating, so that the investors will  
          demand a lower interest rate, more than paying for the cost  
          of the credit enhancement. 

          Recent turmoil in the credit markets is making it more  
          difficult for IRWD and SMWD to purchase affordable  
          third-party credit enhancement for their improvement  
          districts' general obligation bonds.  District officials  
          want greater flexibility to provide their own direct credit  
          enhancement for their bonds.






           
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                                   Proposed Law  

          Senate Bill 613 authorizes the Irvine Ranch Water District  
          and the Santa Margarita Water District to provide credit  
          enhancement, liquidity support, or both, by pledging and  
          applying all or any part of the districts' revenues to the  
          payment or security of the principal, redemption price,  
          purchase price, and interest of any general obligation  
          bonds for improvement districts or consolidated general  
          obligation bonds for improvement districts issued or  
          carried by the districts.  The bill allows the districts to  
          make that pledge in the manner and upon terms that the  
          districts' boards deem advisable.
           
          In connection with the pledge, SB 613 authorizes the board  
          of each district to provide, in the document in which the  
          pledge is provided for or created, any covenants, promises,  
          restrictions, and provisions that the district may deem  
          necessary or desirable, including, but not limited to,  
          covenants, promises, restrictions, and provisions relating  
          to:
                 The use of bond proceeds, 
                 The maintenance, operation, and preservation of the  
               district's facilities, 
                 Any rates and charges to be established and  
               collected by the district, including rates and charges  
               for the services or products furnished or provided by  
               the district's facilities, 
                 The incurring of additional indebtedness payable  
               from the revenues, and 
                 The establishment, maintenance, and use of reserve  
               funds, sinking funds, interest and redemption funds,  
               maintenance and operation funds, and other special  
               funds for the payment or security of any or all of the  
               principal, redemption price, purchase price, and  
               interest.

          SB 613 allows the board of each district to exercise the  
          powers specified in the Revenue Bond Law of 1941 to carry  
          out the bill's provisions.  

          SB 613 specifies that pledges authorized by the bill are  
          governed by specified statutes relating to pledges of  
          collateral to secure bonds.






           
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          SB 613 requires the board of each district to adopt  
          criteria to govern its determinations to use the general  
          revenue pledge.  The criteria may include evaluating the  
          use of a pledge in lieu of, or in combination with, other  
          available credit enhancement and liquidity options.

          SB 613 states that the authority granted by the bill is in  
          addition to any authority granted by other provisions of  
          law relating to the payment of the districts' general  
          obligation bonds from the proceeds of assessments to be  
          levied upon and collected from lands of any improvement  
          district or relating to the levy and collection of the  
          assessments.   The bill states that it does not affect any  
          other law authorizing or providing for the issuance or  
          carrying of bonds by the districts.  SB 613 declares that  
          it shall be deemed to provide a complete and supplemental  
          method for exercising the powers authorized by the bill,  
          and shall be deemed supplemental to the powers conferred by  
          other applicable laws.


                                     Comments  

          1.   Making credit more affordable  .  Recent volatility in  
          the credit markets and the financial industry has increased  
          bond issuers' costs of borrowing by dramatically increasing  
          the cost of purchasing third-party credit enhancements for  
          bonds.  Credit enhancement costs can be particularly high  
          for the issuance of consolidated improvement district bonds  
          because the bond market tends to perceive the strength of  
          the consolidated bonds in terms of the weakest improvement  
          districts included in those bonds.  Rather than relying  
          entirely on third-party credit enhancements, IRWD and SMWD  
          can use SB 613 to pledge their general revenues towards the  
          payment and security of their improvement districts'  
          general obligation bonds.  By allowing IRWD and SMWD to use  
          their strong overall credit to support general obligation  
          bonds issued by their improvement districts, SB 613 will  
          significantly lower the districts' cost of borrowing and,  
          as a result, will save money for taxpayers and ratepayers.

          2.   Oversight  .  SB 613 responds to the unprecedented  
          scarcity and expense of credit enhancement for bonds over  
          the last two years.  However, it is possible that improved  
          credit market conditions, within a few years of the bill's  





           
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          January 1, 2011 effective date, could eliminate these  
          credit enhancement cost and availability problems.  Because  
          SB 613 authorizes IRWD and SMWD to use a new form of bond  
          credit enhancement, and because future credit market  
          conditions could change dramatically, legislators may wish  
          to ensure oversight of the use of the revenue pledges that  
          the bill authorizes.  The Committee may wish to consider  
          amending SB 613 to require the districts to report back to  
          the Legislature and State Treasurer's Office on their use  
          of the bill's provisions by January 1, 2014. 

          3.   Cut out the middle-man  .  As part of a credit  
          enhancement transaction, issuers and third-party credit  
          enhancement providers enter into a reimbursement agreement,  
          which specifies the issuer's obligations to repay the third  
          party if there are draws upon the credit or surety extended  
          to the issuer by the third party.  IRWD asserts that it is  
          currently able to make a pledge of district revenues as a  
          part of a reimbursement agreement for its improvement  
          districts' general obligation bonds.  As a result, IRWD  
          argues that SB 613 allows it to effectively "cut out the  
          middle-man" by pledging district revenues directly to  
          bondholders as a form of credit enhancement, rather than  
          pledging them to a third-party.

          4.   Not a hybrid  .  Ad valorem property taxes outside the  
          standard 1% rate pay for general obligation bonds.  By  
          specifying that the use of a revenue pledge would function  
          only as credit enhancement or liquidity support for IRWD  
          and SMWD's general obligation bonds, the December 15  
          amendments clarify that SB 613 does not allow IRWD and SMWD  
          to issue a new type of hybrid general obligation/revenue  
          bond.

          5.   Special legislation  .  The California Constitution  
          prohibits special legislation when a general law can apply  
          (Article IV, 16).  SB 613 contains findings and  
          declarations explaining the need for legislation that  
          applies only to IRWD and SMWD.




                        Support and Opposition  (12/22/09)
           





          
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          Support  :  Irvine Ranch Water District, California Special  
          Districts Association, Orange County Business Council,  
          Santa Margarita Water District.

           Opposition  :  Unknown.