BILL ANALYSIS Ó SENATE GOVERNANCE & FINANCE COMMITTEE Senator Lois Wolk, Chair BILL NO: AB 1292 HEARING: 7/6/11 AUTHOR: Roger Hernández FISCAL: Yes VERSION: 6/28/11 TAX LEVY: No CONSULTANT: Ewing INFRASTRUCTURE BANK'S BONDS Authorizes the Infrastructure Bank to sell bonds for the Department of Public Health. Background and Existing Law The California Infrastructure and Economic Development Bank (I-Bank) supports economic development and public and private infrastructure investments through its authority to issue bonds, make loans, and provide credit enhancements. The I-Bank manages the following programs: The Infrastructure State Revolving Fund Program (ISRF) provides low-cost financing to local agencies for public infrastructure projects. The Industrial Development Revenue Bond Program (IDB) provides tax-exempt revenue bond financing for eligible manufacturing companies. The 501(c)(3) Revenue Bond Program offers tax-exempt revenue bond financing for certain nonprofit, public benefit corporations. The State School Fund Apportionment Lease Revenue Bond Program offers tax-exempt revenue bond financing for school districts needing emergency apportionment loans. The Public Agency Revenue Bond Program provides tax-exempt revenue bond financing for governmental entities. The Infrastructure Guarantee Program guarantees bonds issued by other governmental entities. Housed within the Business, Transportation and Housing Agency (BTH), the I-Bank has a five-member board of directors that approves projects. The board includes the BTH Secretary, who serves as the chair, State Treasurer, director of the Department of Finance, Secretary of the AB 1292 -- 6/28/11 -- Page 2 State and Consumer Services Agency, and an appointee of the Governor. The I-Bank's Executive Director is appointed by the Governor and confirmed by the Senate. The I-Bank does not receive direct state funding. Funding comes from fees, interest income, and revenues tied to financing activities. The California Department of Public Health administers an array of programs to promote public health, including the Safe Drinking Water State Revolving Fund (SDWSRF) program (SB 1307 Costa, 1997). Federal grants from the U.S. Environmental Protection Agency capitalize the Fund. As a condition of receiving those grants, the Department must provide 20% matching funds on top of the federal allocation. The Department uses the Fund to provide loans to public and private entities to maintain and improve public water systems and promote the goals of the federal Safe Drinking Water Act. The amount of funding available from the EPA is based on Congressional allocations and evolving state needs. In 2010, California received $127 million. The Department anticipates receiving $87 million in 2011. In prior years, annual funding averaged about $67 million. To meet its match requirement, the Department initially relied on the State General Fund, but since has relied on proceeds from various bonds, including Propositions 50 and 84. As those bond proceeds are exhausted, the Department wants to use a new financing mechanism in partnership with the Infrastructure Bank. According to 2010 audits by the State Controller and the U.S. EPA, the Fund has $133 million in unallocated cash and pooled reserves, and $537.8 million in allocated but unspent obligations. The Department spends that money as loan recipients submit claims. There have been no reported defaults on loans issued through the Fund since its inception. AB 1292 -- 6/28/11 -- Page 3 Proposed Law Assembly Bill 1292 authorizes the California Infrastructure and Economic Development Bank to sell bonds on behalf of the Department of Public Health and deposit those proceeds into the Safe Drinking Water State Revolving Fund and authorizes the California Department of Public Health to repay those bonds from the Safe Drinking Water State Revolving Fund. State Revenue Impact No estimate. Comments 1. Purpose of the bill . AB 1292 allows the California Department of Public Health to partner with the Infrastructure Bank to sell bonds and use the resulting revenues to meet federal match requirements under the Safe Drinking Water State Revolving Fund (SDWSRF) program. Federal estimates from 2007 suggest that California has $39 billion in unmet water infrastructure needs. In prior years, the Department used State General Funds and other bond funds to meet the state's match requirements. AB 1292 enables the Department to partner with the Infrastructure Bank to issue revenue bonds and ensure that California can maximize access to federal funding to meet its drinking water needs without putting additional demands on the State General Fund or other bond funds. 2. Authority vs. delivery . AB 1292 expands the financing mechanisms available to the Department of Public Health to meet federal match requirements. But a June 2010 audit by the U.S. EPA found that California is slow to spend the money it already has. The Fund has more than $133 million in unspent funds plus another $538 million in allocated but undistributed funds. Before the Legislature gives the Department access to new funding sources, legislators should insist that the Department make better use of its existing resources. AB 1292 -- 6/28/11 -- Page 4 3. Unmet needs . Every four years, the EPA surveys the progress of states in meeting infrastructure needs to comply with safe drinking water standards. While some states saw declines in unmet needs, in the last two surveys, California's unmet needs grew. The next survey is due this year. State officials think that California's unmet needs will have grown even more in the new survey. An EPA audit indicates that other states are more aggressive in leveraging state revolving funds, on average spending 86.7% of funding in 2009. In that period, California spent just 57% of its funds. The EPA expressed this concern because Congress has highlighted the economic development potential of this program. The Committee may wish to consider amending AB 1292 to create clearer expectations that the Department more assertively leverage its authority to address unmet needs and spur economic growth. 4. Good advice ? EPA's recent audit noted that the Department needs to increase the speed with which it spends Fund proceeds and called for the Department to establish "programmatic and financial milestones and goals so it can reach an acceptable range of performance." The Committee may wish to consider amendments that direct the Department to establish goals and milestones to ensure that it fully leverages its authorities to meet unmet needs through the Safe Drinking Water State Revolving Fund program. 5. Let's be clear . AB 1292 authorizes the Infrastructure Bank to contract with the Department of Public Health and with any agency as necessary to perform its mission, but its language is ambiguous. It's not clear if the bill meant to permit the Infrastructure Bank to offer its conduit financing services to any state agency, or if that broad contracting authority only allows the Infrastructure Bank to contract for technical assistance in performing its mission. The Committee may wish to consider amending AB 1292 to clarify that state agencies must seek legislative authorization before accessing conduit financing through the Infrastructure Bank, but that the Bank has broad authority to enter into contracts when necessary to deliver services. 6. Related legislation . A number of bills have passed through the Committee relating to the Infrastructure Bank: AB 1292 -- 6/28/11 -- Page 5 AB 696 (Hueso) directs the I-Bank to establish a methodology for determining the economic benefits of projects under consideration and, as of January 1, 2013, restricts the I-Bank to approve only those projects that provide economic benefits and meet land use criteria. AB 700 (Blumenfield) requires the I-Bank to adopt two-year goals and measurable objectives, consistent with state infrastructure, economic development and environmental plans and authorizes the I-Bank to pursue streamlined administrative functions. AB 893 (V. Manuel Pérez) directs the I-Bank to enhance outreach and technical assistance to small and rural communities to obtain financing for infrastructure projects. AB 1094 (John A. Pérez) adds two legislative members to the I-Bank's board of directors. AB 1292 is modeled after AB 1571 (Costa, 2000), which authorized the Infrastructure Bank to issues bonds and deposit proceeds into the State Water Pollution Control Revolving Fund Program in support of local projects under the Clean Water Act. Assembly Actions Assembly Environmental Safety and Toxic Materials Committee: 8-0 Assembly Appropriations Committee: 17-0 Assembly Floor: 78-0 Support and Opposition (6/30/11) Support : Association of California Water Agencies; California Association of Environmental Health Administrators; California Conference of Directors of Environmental Health, California Department of Public Health; California Water Association; City of Long Beach; San Gabriel Valley Municipal Water District; Three Valleys Municipal Water District; Upper San Gabriel Valley AB 1292 -- 6/28/11 -- Page 6 Municipal Water District; Valley County Water District; Water Replenishment District of Southern California. Opposition : Unknown.