BILL ANALYSIS Ó SB 475 Page 1 Date of Hearing: June 29, 2011 ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT Cameron Smyth, Chair SB 475 (Wright) - As Amended: June 20, 2011 SUBJECT : Infrastructure financing. SUMMARY : Changes the statutory authorization for local governmental agencies to utilize private sector financing alone or in concert with public financing, to study, plan, design, construct, develop, finance, maintain, rebuild, improve, repair, or operate, or any combination thereof, fee-producing infrastructure facilities. Specifically, this bill : 1)States that private financing may be used alone or in concert with public financing to construct publicly owned, fee-producing infrastructure. 2)Provides that the facilities constructed using this mechanism may be leased to the private sector partner, but does not require it. 3)Defines "fee-producing infrastructure project" or "fee-producing infrastructure facility" to mean that the operation of the infrastructure project or facility will be paid for, in whole or in part, by the persons or entities benefited by or utilizing the project or facility. 4)Adds sanitary sewer systems to the types of fee-producing infrastructure that may be constructed under the provisions of the relevant statutes. 5)Requires that the competitive negotiation process utilize criteria that the governmental agency identifies in the solicitation documents. 6)Requires the selection criteria, to the extent applicable to the proposed project, to include the following factors: a) Financial approach or price proposal; b) Features; c) Life cycle-costs; SB 475 Page 2 d) Technical approach, e) An acceptable safety record; f) An acceptable labor compliance record; g) Experience and qualifications of the private entity to perform the services under the agreement; and h) Any other criteria specifically identified by the governmental agency. 7)Requires, that prior to entering into an agreement with a private entity for a proposed project that will include some public financing and relates to a project for which public financing is available to finance the entire project, the governmental agency to assess whether the agreement provides greater benefits or value for money as compared to a project that is finance entirely with public financing and is subject to competitive bidding. 8)Provides that an agreement may include provisions for the lease, license, or other permissive use of rights away in, and airspace over, property owned by a governmental agency, for the granting of necessary easements, and for the issuance of permits or other authorizations to enable the private entity to construct, maintain, rebuild, improve, or repair infrastructure facilities supplemental to existing government-owned facilities. 9)Requires that all public works constructed pursuant to this bill shall comply with the provisions of the Labor Code pertaining to public works. 10)Provides that user fees may be paid to the governmental agency or the private entity, and that the fees must be dedicated exclusively to the payment of all parties' direct and indirect costs associated with construction, operation and maintenance of the facility, in addition to a reasonable return on the private sector partner's investment, which is negotiated in the procurement process. 11)Increases the number of public hearings regarding user fees SB 475 Page 3 from one to two. 12)Authorizes a governmental entity to determine the validity of any permits, authorizations or approvals, contracts and agreements, user fees, and other actions taken under these statutes through the validation process established in existing law. EXISTING LAW : 1)Permits a governmental agency to solicit proposals and enter into agreements with private entities for the design, construction or reconstruction by private entities for specific types of fee-producing infrastructure projects. 2)Permits these agreements to provide for private entities to lease or operate these fee-producing infrastructure facilities that are owned by a governmental entity constructed by a private entity, for a period of up to 35 years. FISCAL EFFECT : None COMMENTS : 1)In 1996 the Legislature passed AB 2660 (Aguiar), Chapter 1040, Statutes of 1996, which permitted a governmental agency to solicit proposals and enter into agreements with private entities for the design, construction or reconstruction by private entities for specific types of fee-producing infrastructure projects that could provide for private entities to lease or operate these fee-producing infrastructure facilities for a period of up to 35 years. These provisions have been essentially unchanged since their enactment. 2)According to the author, over the past decade, local agencies and private entities seeking to build projects using these provisions have encountered a series of situations where the law has been ambiguous, which made use of the statute frustrating. Questions and issues that have arisen in the implementation of this act include the following: a) Is 100% private financing always required, or can the governmental agency contribute financing as well? SB 475 Page 4 b) Must the financing always be in the form of equity (cash) or could contributions include loans, carrying costs, assumptions of risks, or any combination thereof? c) Numerous terms generated confusion. For example, does "agreement" include a "license?" d) Concern arose that the limitation on the lease/operation period was too short, and that the statute was ambiguous as to whether leasing to a private entity is allowed ("may") or required ("shall") when facilities are constructed under the statutory terms. The purpose of this bill is to facilitate use of the original statutory scheme. As such, the bill contains a series of technical clarifications, the purpose of which are not to expand the existing statute, but facilitate its use. 3)According to the author, while the need to build new infrastructure is daunting, the need to replace existing infrastructure is equally important and, in most instances, more expensive. Private investment is critical if the state is to meet the mounting infrastructure needs of a growing population. During the past decade, innovative financing techniques have emerged to meet these financing challenges. This bill is designed to acknowledge this change and allay the concerns of local officials that the original law does not inadvertently constrain deployment of new financing arrangements that will help them meet their infrastructure needs. 4)The bill was recently amended on June 20, 2011, to include provisions that state that if a governmental entity is going into an agreement with a private entity where there are public funds available to cover the entire cost of the project, then the governmental entity is required to assess whether the agreement provides greater benefits or value for money than if the work was financed entirely through public funds and subject to competitive bidding. However, the bill is silent on what the governmental entity must use to make that assessment. Should the assessment be done by evidence in the public record? If the governmental entity has to determine what the cost would be if the project was done through competitive bid, what criteria should they be using to SB 475 Page 5 determine these costs since an actual bid will not have occurred? The Committee may wish to consider asking the author to clarify the assessment process. 5)SB 475 is similar to AB 1261 (Caballero, 2007), which this Committee passed 7-0. AB 1261 died on the Senate Inactive File. 6)Support arguments: Supporters argue that with the downturn in the economy, local government agencies are having an increasingly difficult time delivering vital infrastructure projects. Local agencies need a wide variety of tools made available to them so they can deliver the infrastructure projects their communities need. Effective public-private- partnership (P3) authority is one such tool that can help them to deliver vital projects despite declining revenues. Opposition arguments: Opposition argues that there is already sufficient state and local P3 authority. Moreover, opposition argues that P3s do not generate new money and by adding in "public financing" to the revenues that are eligible to be used in local P3s this just proves yet again that P3s lack the ability to generate new revenues. Furthermore, the opposition argues that so-called P3s have cost taxpayers hundreds of millions of dollars and it makes no sense to create a new P3 authority. REGISTERED SUPPORT / OPPOSITION : Support American Council of Engineering Companies of California American Fence Association, California Chapter American Water Associated General Contractors Bay Area Council California Association of Sanitation Agencies California Chamber of Commerce California Conference of Carpenters California Fence Contractors' Association California-Nevada Conference of Operating Engineers California State Council of Laborers California Taxpayers Association California Water Association Chambers of Commerce Alliance SB 475 Page 6 CH2M Hill Engineering Contractors' Association Flasher Barricade Association Irvine Chamber of Commerce League of California Cities Marin Builders Association National Association of Water Companies Orange County Transportation Authority PERC Water San Jose Water Company Skanska Infrastructure Development Suburban Water Systems Veolia Water North America - West, LLC Western Council of Construction Consumers W.M. Lyles Co. Opposition American Federation of State, County and Municipal Employees, AFL-CIO California Professional Firefighters California School Employees Association, AFL-CIO California State Pipe Trades Council Food & Water Watch Glendale City Employees Association International Brotherhood of Electrical Workers Laborers' International Union of North America, Locals 777 and 792 Organization of SMUD Employees Peace Officers Research Association of California Professional Engineers in California Government San Bernardino Public Employees Association San Luis Obispo County Employees Association Santa Rosa City Employees Association State Building and Construction Trades Council of California Western Electrical Contractors Association Western States Council of Sheet Metal Workers Analysis Prepared by : Katie Kolitsos / L. GOV. / (916) 319-3958 SB 475 Page 7