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  








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            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  








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            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