BILL ANALYSIS SB 613 Page 1 Date of Hearing: June 30, 2010 ASSEMBLY COMMITTEE ON APPROPRIATIONS Felipe Fuentes, Chair SB 613 (Harman) - As Amended: January 21, 2010 Policy Committee: Local GovernmentVote:9-0 Urgency: No State Mandated Local Program: Yes Reimbursable: No SUMMARY This bill provides new bond-related authority to the Irvine Ranch Water District (IRWD) and the Santa Margarita Water District (SMWD) to address the lack of affordable bond insurance and credit enhancements in the municipal bond markets. Specifically, the bill: 1)Authorizes the water districts to pledge their general revenues (including property taxes and rate payments) as backup security for general obligation bonds issued through their improvement districts. Currently such bonds are secured solely by property taxes generated from parcels located within the geographical boundaries of the improvement districts. 2)Requires the districts to report to the State Treasurer and Legislature on the use of the new authority granted by this measure. FISCAL EFFECT 1)No state costs. Local costs are not reimbursable. 2)Potential reduction in overall borrowing costs to IRWD and SMWD, and potential redistribution of liability for debt service payments within the districts. COMMENTS 1)Background . 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 SB 613 Page 2 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 are authorized to form improvement districts, which are geographical subdivisions through which each district can fund capital improvements that benefit entities located within the improvement districts. With a two-thirds vote of the property owners in an improvement district, IRWD and SMWD can finance capital projects by issuing general obligation bonds. These bonds are secured by property taxes, in excess of the 1% general rate, that are attributable to parcels within the improvement district. When issuing general obligation bonds for improvements, IRWD and SMWD typically purchase third-party credit enhancements, such as bond insurance or a letter of credit, to provide additional security for the bonds. Investors rely on the higher rating of a third-party credit enhancement provider rather than the issuer's rating. This reduces the interest rate on the bonds, normally more than offsetting the cost of the credit enhancement. 2)Rationale . This bill is intended to address problems that the districts, along with many municipal issuers, are facing with respect to securing credit enhancements for their general obligation bonds. Recent turmoil in the credit markets has diminished the number of third-party credit enhancement providers, and has made it difficult for municipal borrowers to purchase affordable third-party credit enhancements. To address this problem, IRWD and SMWD are seeking authority to pledge their general district revenues (both property taxes and rate payments) as backup security for the payment of their improvement districts' general obligation bonds. The districts assert that, by allowing them to use their strong overall credit as backup support for general obligation bonds issued by their improvement districts, the bill will significantly lower the districts' cost of borrowing and, as a result, will save money for taxpayers and ratepayers. 3)Shift in risk ? Though this bill has no state fiscal implications, it could have some implications for ratepayers and property owners within the IRWD and SMWD. By pledging all revenues of the districts as backup for bond repayments, the bill shifts the ultimate obligation for debt repayment from SB 613 Page 3 the beneficiaries of the capital projects supported by the bonds - property owners within the geographical boundaries of the improvement districts - to all ratepayers and property owners within the water districts. The districts contend, however, that any payments related to such a backup pledge would only occur in the unlikely event that property taxes within the improvement districts were insufficient to support bond payments. IRWD also contends that the authority it is seeking already exists with respect to agreements it may enter into with providers of credit enhancements. Specifically, as part of a credit enhancement transaction, issuers and third-party credit enhancement providers enter into a reimbursement agreement that specifies the issuer's obligation to repay the third party if there are draws upon the credit for bond payments. IRWD asserts that it is currently able to pledge general district revenues for such reimbursements on bonds issued through its improvement districts. Analysis Prepared by : Brad Williams / APPR. / (916) 319-2081