BILL ANALYSIS Ó SENATE GOVERNANCE & FINANCE COMMITTEE Senator Lois Wolk, Chair BILL NO: AB 561 HEARING: 6/22/11 AUTHOR: Gorell FISCAL: No VERSION: 6/7/11 TAX LEVY: No CONSULTANT: Lui VENTURA COUNTY WATERSHED PROTECTION DISTRICT'S DEBT Increases Ventura County Watershed Protection District's securitized limited obligation note limit. Allows the District to participate in state and federal loan programs. Background and Existing Law Before counties, cities, or school districts can create multi-year general obligation debt, the California Constitution requires that counties and cities receive 2/3-voter approval and 55% voter-approval for school district bonds. Because the Constitution doesn't mention special districts, the Legislature has allowed some districts to borrow money without voter approval by issuing "promissory notes," loans that are backed only by the promise to repay. Local officials have several fiscal tools to create public capital needed to pay for public works projects. General obligation (G.O.) bonds are funded through ad valorem tax revenues, outside of Proposition 13's (1978) 1% tax rate. Limited obligation bonds are securitized by a local government's existing revenues. Limited obligation bonds require 2/3-voter approval. Revenue bonds, which are funded by rates and user charges, need majority-voter approval. Mello-Roos Act bonds allow counties, cities, special districts, and school districts to levy special taxes (parcel taxes) to finance a wide variety of public works with 2/3-voter approval. AB 561 - 6-7-11 -- Page 2 Benefit assessment bonds allow property owners to pay for public improvements. The amount of the assessment is directly related to the amount of the benefit that the property receives. Benefit assessments require property owners' approval in weighted ballot elections. Special districts may issue securitized limited obligation notes (SLONs), which must be secured by pledging a dedicated revenue stream. Though SLONs don't require voter approval, they need a 4/5-vote of a district's governing board. Special districts can borrow up to $2 million to be paid back from designated revenues, over 10 years. The authority for special districts to issue SLONs sunsets on December 31, 2014 (SB 1770, Senate Local Government Committee, 2004). In 1987, the federal Clean Water Act created the Clean Water State Revolving Fund (CWSRF) loan program, which provides low-cost financing to state and tribal lands for water quality projects. The American Recovery and Reinvestment Act of 2009 granted the CWSRF $4 billion to fund high priority wastewater infrastructure projects. In 1944, the Legislature created the Ventura County Flood Control District, now called the Ventura County Watershed Protection District (AB 2320, Strickland, 2002). The District controls and conserves flood, storm waters, and watersheds to protect life, property, and public infrastructure. The Ventura County Board of Supervisors governs the District. The District funds its activities through property taxes, benefit assessments, and land development fees. In addition, the District can borrow money, but first: The Board of Supervisors must declare the existence of an emergency, or the board must form a special zone, and 2/3 of the voters must approve the borrowing in a special election. After Hurricane Katrina in 2005, the Federal Emergency AB 561 - 6-7-11 -- Page 3 Management Agency (FEMA) and the United States Army Corps of Engineers reviewed the nation's flood protection infrastructure. Levees built on a flood plain that has 1% annual chance of flooding must meet Federal Levee Certification Requirements. If a levee fails to meet these requirements, FEMA de-accredits the levee system, and flood insurance rate maps (FIRMs) show them as insufficient flood protection. As a result of FEMA's and the Army Corps' joint re-evaluation, the District identified around $209 million of flood protection capital projects which need to be designed, certified, or rehabilitated, and 7, 076 new parcels have been added to FIRMs. The District prioritizes two projects--along Highway 101 and the Calleguas Creek--that would cost an estimated $13 million in improvements. District revenues may not be enough to start the identified infrastructure projects. To expedite levee improvements and future capital projects, the District wants to increase its SLON limit. The District also wants to apply for state and federal revolving loan programs. Proposed Law Assembly Bill 561 authorizes the Ventura County Watershed Protection District to participate in state and federal revolving loan funds for the purposes of flood and storm water control, water conservation, erosion protection, beach and shoreline restoration, water reclamation, water storage, technical investigations, and capital works projects. AB 561 increases the District's promissory note borrowing capacity from $2 million to $20 million. State Revenue Impact No estimate. Comments 1. Purpose of the bill . During stressed fiscal times, local governments have fewer resources to allocate to critical infrastructure improvements. In 2009, 11 District AB 561 - 6-7-11 -- Page 4 levees failed to meet Federal Levee Certification requirements and must be retrofitted or enhanced. The District's levees protect more than $8 billion of property and improvements of parcels, and the estimated costs of prevented flood damages are roughly $526 million. Despite possible fiscal and safety incentives to improve levee systems, the District's steady revenue streams of assessments, property taxes, and land development fees aren't enough. AB 561 lets the District participate in state and federal revolving loans, rather than wait for lengthy borrowing procedures. Moreover, AB 561 raises the cap on the District's SLONs. By giving the District more access to additional borrowing, the bill helps the District prevent damage and stabilize flood insurance rates, rather than wait until a disaster wreaks costlier havoc. 2. For the people, by the people ? The California Constitution's stringent rules for incurring local debt reflect the voters' desire to have direct control over fiscal decisions related to public debt. If the District wants to finance projects by pledging existing revenues to SLONs, it incurs long-term debt without the voters' consent. The Committee may wish to consider if the bill's $18 million increase in the SLON cap runs counter to the voters' wishes. 3. How much is too much ? The District's enabling Act already provides an extensive array of financing mechanisms: loans, bonds, notes, and assessments. Nevertheless, the District wants to raise its SLON capacity from $2 million to $20 million. That's more than the $13 million that the District says it needs for priority repairs to its levees. It's also more than the $12 million SLON cap that the Legislature set for the San Bernardino Flood Control District (SB 1561, Soto, 2002). The Committee may wish to consider amending AB 561 to reset the District's SLON limit at $13 million. Assembly Actions Assembly Local Government Committee: 7-0 Assembly Floor: 73-0 Support and Opposition (6/16/11) Support : Calleguas Municipal Water District; Ventura AB 561 - 6-7-11 -- Page 5 County Board of Supervisors. Opposition : Unknown.