BILL ANALYSIS Ó AB 2131 Page 1 ASSEMBLY THIRD READING AB 2131 (Olsen) As Introduced February 23, 2012 Majority vote LOCAL GOVERNMENT 9-0 ----------------------------------------------------------------- |Ayes:|Smyth, Alejo, Bradford, | | | | |Campos, Davis, Gordon, | | | | |Hueso, Knight, Norby | | | ----------------------------------------------------------------- SUMMARY : Authorizes the legislative body of a local agency to invest up to 5% of the city or county's aggregate investment funds in Property Assessed Clean Energy (PACE) bonds or projects financed with PACE bonds. EXISTING LAW : 1)Authorizes the legislative body of a local agency, as defined, that has a sinking fund or moneys in its treasury that are not required for immediate needs to invest in specified investments, including United States Treasury notes, bonds, bills, or certificates of indebtedness, and bonds issued by the local agency. 2)Defines "Property Assessed Clean Energy bond" or "PACE bond" as a bond that is secured by any of the following: a) A voluntary contractual assessment on a property; b) A voluntary contractual assessment or a voluntary special tax on property to finance the installation of distributed generation renewable energy sources, electric vehicle charging infrastructure, or energy or water efficiency improvements that is levied pursuant to a chartered city's constitutional authority; or, c) A special tax on property authorized under a Community Facilities District (CFD). FISCAL EFFECT : None AB 2131 Page 2 COMMENTS : Under existing law, a local agency that has money not required for its immediate needs may invest any portion of that money in any of 15 specified investment types, as specified. Such investments may not exceed a term of maturity in excess of five years without explicit legislative authorization. This bill would permit a city or county (including the city and county of San Francisco) to invest in PACE bonds or projects funded by PACE bonds, provided that the local agency may not invest more than 5% of its aggregate investment funds in the PACE bonds or projects. This is an author-sponsored measure. PACE financing programs offer government loans to private property owners to cover the initial costs of renewable energy, energy efficiency, and water efficiency improvements that are permanently affixed to real property. Participating property owners repay the loans through annual assessments, secured by priority liens, on their property tax bills. PACE programs avoid a major obstacle to smaller-scale efficiency and renewable power programs by allowing residential and commercial property owners to borrow the funds necessary to pay for the upfront costs of the investment. The PACE loans are then paid back gradually by an annual special property tax assessment, usually over the course of 20 years. The assessment remains on the property when sold or transferred. Such programs are part of a larger recent trend in the promotion of "voluntary contractual assessments" as a means for local agencies to fund energy and water improvements. Supporters of PACE funding argue that the programs empower property owners to invest in valuable upgrades to their property while helping local agencies promote energy efficiency and renewable generation, all the while spurring job creation and local economic development. PACE programs are often funded through municipal bonds, which create no liability for the local agency. The program is voluntary, so that only property owners who chose to participate are assessed. According to the author, "AB 2131 will give local jurisdictions more control over their idle investment dollars, allowing them to be able to get better returns on investments while also helping homeowners and businesses perform energy efficiency projects. Local leaders should be given more flexibility to AB 2131 Page 3 invest funds, since they are the closest to citizens and will be held accountable if funds are not wisely managed." There is some question as to whether or not this bill is premature, given that there is ongoing uncertainty over the fate of the PACE residential program and pending legislative and administrative initiatives at the federal level. The California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA), within the State Treasurer's Office, administers a PACE Bond Reserve Program (Program) created by SB 77 (Pavley), Chapter 15, Statutes of 2010. According to CAEAFTA, as of March 2012, while it "is monitoring the development and implementation of new PACE programs, ÝCAEAFTA] has not engaged the administrators of PACE commercial programs given a statutory restriction allowing the bond reserve funds to only be used to support bonds with commercial property project costs less than $25,000, and, most commercial buildings that undergo any energy efficiency or renewable energy improvements have project costs ranging from $250,000 to $1 million." However, not all PACE programs need go through CAEAFTA. On July 6, 2010, the Federal Housing Finance Agency (FHFA), which oversees the nation's largest mortgage finance companies Fannie Mae and Freddie Mac, issued a pronouncement concluding that PACE programs "present significant safety and soundness concerns" and violated standard mortgage provisions since PACE tax liens have priority over any other loan or mortgage (which means that, in the event of a default, FHFA could incur higher mortgage loan losses). The concerns expressed by FHFA caused the majority of the PACE residential programs throughout the country to be placed on hold, including many of the existing residential PACE programs in California. In response, the California Attorney General and several local governments began legal action to overturn the FHFA directives. According to a 2011 annual report to the Legislature from CAEATFA issued March 2012, FHFA's issues with the residential PACE program may be resolved through federal rulemaking: "In an August 2011 ruling?the federal district court in the Northern District of California directed that FHFA must publish, accept and consider comments on FHFA's directive regarding mortgages with PACE obligations. More recently, in January 2012, the AB 2131 Page 4 Northern District court ordered FHFA to initiate an official rulemaking process to allow for stakeholder input in regards to the PACE energy financing programs. The FHFA is required by federal law to factor all comments into a reassessment of their current position on residential PACE programs. It is anticipated that FHFA could make a determination on its existing position on mortgages with PACE assessments in Spring 2012. There is also an active and cooperative mobilization effort being led by non-profit organizations, municipalities, counties and states. There is optimism that the legal and legislative challenges to PACE programs will be resolved in 2012." There is federal legislation pending on this same matter. The PACE Assessment Protection Act of 2011 (H.R. 2599), sponsored by Representatives Nan Hayworth (R-N.Y.), Dan Lungren (R-Calif.) and Mike Thompson (D-Calif.) would restore the ability of local governments to offer PACE programs to finance the installation of renewable energy and energy efficiency improvements. H.R. 2599 is intended to incorporate best practices and guidelines from the U.S. Department of Energy to ensure safety for homeowners, private capital providers and existing mortgage lenders. It is important to note that FHFA's objections and the resulting legal challenges apply only to residential projects. According to the author's office, roughly half of residential mortgages are outside of the FHFA system, meaning that many individual homeowners could still theoretically participate in a PACE program. Several PACE commercial programs were launched in California in 2011. The Legislature may wish to ask the author for current information on the PACE bond market in California and the projects expected to utilize the public funds (percentage of residential vs. commercial, average project size, most common project types, geographic location, etc.) that could be made available under this measure. To the extent that residential PACE programs are partially on hold and some commercial efforts are limited to smaller projects, the Legislature may wish to ask the author to clarify how much current demand there is for PACE investment. According to the author, "PACE would be a safe investment with a reasonable rate of return. PACE project loans would be protected AB 2131 Page 5 like ÝCFD] bond liens. If a bank forecloses on a house with a PACE project funded by a local municipality, banks would have to pay the property taxes, CFD, PACE and Mechanics liens before the property could be processed for sale." On March 13, 2012, the Modesto City Council voted in favor of this bill (Resolution No. 2012-94). The findings and resolutions state in part that city staff consulted with an outside asset management company to provide a general opinion on the potential fiscal impact on the city of the investments contemplated by this bill. According to those findings, the outside firm "concluded that while there is a potential for higher yield on investment returns it is also possible that the securities will be illiquid and that this type of investment would differ from the typical objectives of a public agency portfolio that focuses on stability and liquidity?" The Legislature may wish to ask the author for data on the historical expected return and default rates for PACE bonds in California, indicators of the strength of any secondary PACE bond market, and any other information that would indicate whether or not PACE bonds are safe (and liquid) enough to justify the investment of public funds. SB 555 (Yee), Chapter 493, Statutes of 2011, added the acquisition, installation, and improvement of energy efficiency, water conservation, and renewable energy improvements that are affixed to the types of facilities that a CFD may finance or refinance. SB 1340 (Kehoe), Chapter 649, Statutes of 2010, expanded the PACE Reserve program to assist local jurisdictions in financing the installation of electric vehicle charging infrastructure. AB 44 (Blakeslee), Chapter 564, Statutes of 2010, expanded the use of voluntary contractual assessments to include financing electricity purchase agreements by expanding the definition of "permanently fixed to real property" to include systems attached to a residential, commercial, industrial, agricultural, or other real property. In 2010, AB 1755 (Swanson) would have added seismic strengthening improvements that are permanently fixed to real property to the list of improvements that local agencies can AB 2131 Page 6 finance using "voluntary contractual assessments." This bill also stated the Legislature's intent that a property owner cannot participate in a voluntary contractual assessment program if participation would result in the total amount of any annual property taxes and assessments exceeding 5% of the property's market value. The measure was subsequently vetoed by Governor Schwarzenegger because he did "not support expanding contractual assessment programs to these types of property improvements." In 2010, AB 2182 (Huffman) would have added onsite sewer and septic improvements that are permanently fixed to real property to the list of improvements that local agencies can finance using "voluntary contractual assessments." The bill also stated the Legislature's intent that a property owner cannot participate in a voluntary contractual assessment program if participation would result in the total amount of any annual property taxes and assessments exceeding 5% of the property's appraised market value. The measure was subsequently vetoed by Governor Schwarzenegger because he did "not support expanding contractual assessment programs to these types of property improvements." AB 474 (Blumenfield), Chapter 444, Statutes of 2009, expanded the authorization that allows public agencies to enter into contractual assessments to finance the installation of specified improvements to now include water efficiency improvements. Support arguments: According to the author, this measure "will give cities and counties the choice if they want to invest idle funds into promoting clean energy?Not only is AB 2131 a local control measure but it will also promote construction and manufacturing jobs for which California is in great need." Opposition arguments: Arguably, this bill authorizes local agencies to put public funds in investments with unpredictable risk levels that federal lenders discourage residential property owners from using to upgrade their homes. Analysis Prepared by : Hank Dempsey / L. GOV. / (916) 319-3958 FN: 0003599 AB 2131 Page 7