BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 2131
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          ASSEMBLY THIRD READING
          AB 2131 (Olsen)
          As Introduced  February 23, 2012
          Majority vote 

           LOCAL GOVERNMENT    9-0                                         
           
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          |Ayes:|Smyth, Alejo, Bradford,   |     |                          |
          |     |Campos, Davis, Gordon,    |     |                          |
          |     |Hueso, Knight, Norby      |     |                          |
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           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









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           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 








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          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 








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          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 








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          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 








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          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 
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