BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 118
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          Date of Hearing:   March 12, 2013

           ASSEMBLY COMMITTEE ON ENVIRONMENTAL SAFETY AND TOXIC MATERIALS
                                Luis A. Alejo, Chair
              AB 118 (Environmental Safety Committee) - As Introduced:   
                                  January 14, 2013
           
          SUBJECT :   Safe Drinking Water State Revolving Fund.

           SUMMARY  :   Authorizes the California Department of Public Health  
          (CDPH), when implementing the Safe Drinking Water State  
          Revolving Fund (SDWSRF), to adopt interim regulations and take  
          other actions to expedite the process of providing funds for  
          drinking water projects, especially to severely disadvantaged  
          communities.  Specifically,  this bill  :

          1)Authorizes CDPH to adopt interim regulations to implement the  
            SDWSRF and to meet the requirements of the federal Safe  
            Drinking Water Act (SDWA).
             a)   Exempts the interim regulations from the rulemaking  
               provisions of the Administrative Procedures Act (APA) and  
               requires the interim regulations to:
               i)     Be subject to a public review and comment period of  
                 not less than 30 days;
               ii)    Take effect when filed with the Secretary of State,  
                 and to be published in the California Code of Regulations  
                 (CCR); 
               iii)   Remain in effect for three years, unless sooner  
                 repealed or amended by additional interim regulations;  
                 and,
               iv)    Supersede any conflicting emergency regulations.
             b)   Authorizes the interim regulations to amend or repeal  
               emergency regulations.
             c)   Requires applicable regulations in effect at the time a  
               complete funding application is received by CDPH to apply  
               to the project funding, unless CDPH determines a regulation  
               adopted later, but prior to the date a funding agreement is  
               issued for a project, would be more beneficial to the  
               project applicant, in which case the later adopted  
               regulation may be applied.

          2)Makes the following changes to CDPH criteria for project  
            funding through the SDWSRF:
             a)   Requires the applicant to complete, prior to receiving a  
               funding agreement, environmental review and documentation  








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               of the defined project, including, but not limited to, the  
               review required by the California Environmental Quality Act  
               (CEQA).  Requires any measures required for compliance with  
               applicable environmental laws and regulations to be  
               included in the final plans for the defined project, rather  
               than to be included in the preliminary plans for the  
               project.
             b)   Provides that a defined project may be subject to  
               further or supplemental review consistent with the  
               requirements of any applicable environmental laws or  
               regulations.
             c)   Requires the applicant to demonstrate that it has the  
               technical, managerial, and financial capacity to operate  
               and maintain its water system, including the project, in  
               accordance with the federal SDWA, state law, and applicable  
               regulations for at least 20 years, or requires the  
               applicant to submit an acceptable plan for achieving this  
               capacity by the time the project is scheduled to be  
               completed.

          3)Provides that planning and preliminary engineering studies,  
            project design, and construction costs incurred by community  
            and not-for-profit non-community public water systems may be  
            funded under the SDWSRF by loans, and, if these systems are  
            owned by public agencies or private not-for-profit water  
            companies, by grants, or a combination of grants and loans.

          4)Provides that a small community water system or non-transient  
            non-community water system that is owned by a public agency or  
            a private not-for-profit water company and that serves a  
            severely disadvantaged community is deemed as having no  
            ability to repay a loan.

          5)Sets limits for grant expenditures (not more than 30 percent  
            and not less than 15 percent) from the capitalization grant,  
            instead of from the total amount deposited in the SDWSRF.

             6)   Authorizes an applicant to receive up to the full cost  
               of the project in the form of a loan bearing interest,  
               instead of the current limit of $20 million per project.

             7)   Requires CDPH, when it enters into contracts with  
               applicants for grants or loans from the SDWSRF, to include  
               in the contract the time for the completion of the project.  
                Authorizes CDPH to determine an appropriate amount of  








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               time, not to exceed 36 months, for the completion of a  
               planning and a preliminary design project, instead of the  
               current time limit of 18 months.

          8)Adds the following terms and conditions to those that CDPH is  
            authorized to require in contracts with applicants for grants  
            or loans from the SDWSRF:
             a)   An agreement by the supplier to complete, as part of the  
               project, a rate study pursuant to guidelines established by  
               CDPH;
             b)   An agreement by the supplier to implement, not later  
               than the conclusion of the project, the approved plan for  
               achieving technical, managerial, and financial capacity, as  
               specified; and,
             c)   An agreement by the supplier to comply with guidelines  
               adopted by CDPH for any procurement of engineering,  
               environmental compliance, or architectural services if the  
               supplier is a small community water system or non-transient  
               non-community water system owned by a public agency or  
               private not-for-profit water company receiving grant  
               funding.

          9)Requires all loans made pursuant to the SDWSRF to carry the  
            interest rate established for the calendar year in which the  
            funds are committed to the loan, as of the date of the  
            issuance of the funding commitment, rather than of the date of  
            the letter of commitment.

          10)Clarifies that the administrative fees for loans are to be  
            paid by the funding recipient instead of the applicant.

          11)Requires CDPH to annually establish in the Intended Use Plan  
            the amount of any administrative fee.

           EXISTING LAW  :

          1)Pursuant to the federal SDWA, authorizes the United States  
            Environmental Protection Agency (US EPA) to set standards for  
            drinking water quality and to oversee the states, localities,  
            and water suppliers who implement those standards.  Under the  
            SDWA Amendments of 1996 (PL 104-182), establishes the SDWSRF  
            program, which authorizes the US EPA to award capitalization  
            grants to states and authorizes the states to, in turn,  
            provide low-cost loans and other types of assistance to public  
            water systems to finance the costs of infrastructure projects  








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            needed to achieve or maintain compliance with federal SDWA  
            requirements.

          2)Pursuant to the California SDWA (Health and Safety Code (HSC)  
            § 116275 et seq.), requires CDPH to regulate drinking water  
            and to enforce the federal SDWA and other regulations.

          3)Pursuant to the Safe Drinking Water State Revolving Fund  
            (SDWSRF) Law of 1997 (HSC § 116760 et seq.):

             a)   Establishes the SDWSRF and continuously appropriates the  
               SDWSRF to CDPH to provide grants or revolving fund loans  
               for the design and construction of projects for public  
               water systems that will enable suppliers to meet safe  
               drinking water standards.

             b)   Requires CDPH to administer the SDWSRF and authorizes  
               CDPH to undertake specified actions to implement the SDWSRF  
               pursuant to the federal SDWA.

             c)   Authorizes CDPH to adopt emergency regulations to  
               implement the SDWSRF.

             d)   Requires CDPH to establish criteria that must be met for  
               projects to be eligible for consideration for funding,  
               including requiring the applicant to have included plans  
               for compliance with CEQA in its preliminary plans for the  
               project.

             e)   Sets requirements and standards for approval of  
               applications for funds.

             f)   Authorizes planning and preliminary engineering studies,  
               project design, and construction costs to be funded by  
               loans, or, in the case of public agencies or private  
               not-for-profit water companies, by grants or a combination  
               of grants and loans.
               i)     Requires CDPH to determine what portion of the full  
                 costs the public agency or private not-for-profit water  
                 company is capable of repaying and to authorize a loan  
                 for that amount.
               ii)    Authorizes CDPH to authorize a grant only to the  
                 extent that it finds the public agency or not-for-profit  
                 water company is unable to repay the full costs of a  
                 loan.








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             g)   Establishes guidelines for disbursements of SDWSRF  
               funds, including that the total funding for a single  
               project, whether in the form of a loan or a grant, or both,  
               is determined by an assessment of affordability using  
               criteria established by CDPH.

             h)   Authorizes a small community water system or  
               non-transient non-community water system, owned by a public  
               agency or private not-for-profit water company, serving  
               severely disadvantaged communities to be eligible to  
               receive up to 100 percent of eligible project costs in the  
               form of a grant, to the extent the system cannot afford a  
               loan as determined by CDPH.

             i)   Provides that not more than 30 percent and not less than  
               15 percent of the total amount deposited in the SDWSRF may  
               be expended for grants.  Limits grants to disadvantaged  
               communities.

             j)   Requires CDPH to establish the interest rate for loans  
               from the SDWSRF according to specified guidelines,  
               including requiring that all loans carry the interest rate  
               established for the calendar year in which the funds are  
               committed to the loan, as of the date of the letter of  
               commitment. 

             aa)  Authorizes CDPH to establish a reasonable schedule of  
               administrative fees for loans, and requires that the fees  
               be paid by the applicant to reimburse the state for the  
               costs of the state administration of the SDWSRF.

          4)Pursuant to the Administrative Procedure Act (APA) (Government  
            Code §11340 et seq.), establishes rulemaking procedures and  
            standards for state agencies.  Requires state regulations to  
            also be adopted in compliance with regulations adopted by the  
            Office of Administrative Law (OAL).

           FISCAL EFFECT  :   Unknown.

           COMMENTS  :

           Need for the bill  :  AB 118 is a reintroduction of the May 1,  
          2012, version of AB 2529 (Wieckowski), from the 2012 legislative  
          session.  AB 2529, which was an Administration sponsored bill,  








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          passed the Assembly ESTM Committee on a 9 - 0 vote; the Assembly  
          Appropriations Committee on a 17 - 0 vote; and, the Assembly  
          floor on a 78 - 0 vote.  The bill was substantially amended in  
          the Senate Environmental Quality Committee, and subsequently  
          gutted and amended in the Senate Appropriations Committee to  
          amend provisions of the California Global Warming Solutions Act  
          of 2006.  The author argues that the provisions of AB 118 are  
          necessary to improve efficiency within the SDWSRF program.

          AB 2529 was sponsored by CDPH, which argued at the time that the  
          bill would modify the SDWSRF statutes to, "Enable the CDPH to  
          ease the process of providing funds to correct small water  
          system deficiencies, particularly those serving severely  
          disadvantaged communities?  Since the SDWSRF was implemented in  
          1997, changes have occurred in federal and state laws that  
          affect the administration of the [SDWSRF] Program.  To address  
          these changes, it is necessary that CDPH has greater flexibility  
          in its rulemaking process in order to be more responsive to  
          changes in federal laws, the needs of the regulated utilities  
          (public water systems), and the communities they serve.  AB 2529  
          would modify the SDWSRF statute to provide CDPH with the  
          flexibility necessary to assist the neediest water systems with  
          SDWSRF funding, while still complying with the SDWSRF federal  
          requirements.  In addition, this would provide CDPH with  
          statutory authority to adopt interim and permanent regulations  
          necessary to implement the changes to the Program."
           
          Safe Drinking Water State Revolving Fund (SDWSRF)  :  Congress  
          established the SDWSRF as part of the SDWA Amendments of 1996 to  
          better enable public water systems to comply with national  
          primary drinking water standards and to protect public health.   
          The SDWSRF provides financial assistance in the form of  
          capitalization grants to states to provide low interest loans  
          and other assistance to public water systems.  In order to  
          receive these funds, states must provide a state match equal to  
          20 percent of the federal capitalization grants and must create  
          a drinking water state revolving fund program for public water  
          system infrastructure needs and other drinking water-related  
          activities.  In response to this opportunity, California  
          established the SDWSRF through SB 1307 (Costa) Chapter 734,  
          Statutes of 1997, to help fund projects to address the state's  
          drinking water needs.  

          The author argues that this bill will better enable CDPH to  
          efficiently and effectively administer the SDWSRF.  The CDPH  








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          provided background material to support last year's identical  
          proposal, which is included below.

           Interim regulations  :  Last November, Chairman Alejo requested  
          the Legislative Analyst's Office (LAO) to complete an analysis  
          of CDPH's administration of the SDWSRF.  The LAO found that, in  
          general, to complete the rulemaking process within CDPH, an  
          interdisciplinary Rulemaking Project Team is formed to develop  
          the rulemaking documents in accordance with APA standards.   
          Those documents are reviewed by the deputy of the Center for  
          Environmental Health, the CDPH Director, the California Health  
          and Human Services Agency, and the Department of Finance.  Once  
          approved by those agencies, the regulation package then enters  
          the public participation process.  CDPH has stated that it  
          generally takes 15 months from the formation of the Rulemaking  
          Project Team to the beginning of the public participation  
          process. 

          Once the public participation process has begun, CDPH submits  
          the regulatory package to the Director of CDPH for final  
          approval and then to the Office of Administrative Law for review  
          and approval.  If approved, the regulations then go into effect.  
           CDPH stated that it may take another 15 months from the point  
          at which the regulations begin the public participation process  
          to the point at which they go into effect.  CDPH stated that, in  
          general, it takes two to three years to complete a regulatory  
          package; however, a complex regulation may take significantly  
          longer to complete.

          AB 118 authorizes CDPH to adopt "interim regulations" for the  
          SDWSRF, which would remain in effect for up to three years while  
          CDPH completes the full APA rule-making process for permanent  
          regulations.  While the interim regulations are subject to  
          public review and comment, they can still be adopted more  
          quickly than permanent regulations.  According to CDPH, it has  
          already successfully utilized interim regulations for  
          implementation of point-of-use and point-of-entry treatment  
          devices.  

           Affordability review  :  Currently, CDPH utilizes a two-step  
          evaluation process to authorize grant funding from the SDWSRF.   
          First, it determines whether the applicant community is a  
          disadvantaged community, based on a review of Median Household  
          Income (MHI) for the service area.  Second, in accordance with  
          federal SDWA requirements, it determines the loan amount the  








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          community can afford to assume for the project.  This requires  
          obtaining the average residential water rate, and comparing it  
          to the MHI for the service area.  Only communities for which the  
          water rate exceeds 1.5% of the MHI are eligible for grant  
          funding.  AB 118 deems severely disadvantaged communities (MHI  
          of less than 60% of the statewide MHI) to be unable to afford a  
          loan, thus reducing the time necessary to process SDWSRF funding  
          for these communities.

           Technical, managerial, and financial capacity requirements  :   
          According to CDPH, a water system that must obtain a loan for  
          infrastructure improvements is more likely to properly maintain  
          the facilities constructed with those funds, due to the water  
          system's vested interest.  Water systems that receive 100% grant  
          funding for construction may not have the same dedication to the  
          facilities.  For example, CDPH cites a water treatment facility  
          recently built with US Department of Agriculture funds.  Neither  
          the number of customers nor the anticipated water use was  
          accurately ascertained, nor was the water system required to  
          adopt rates sufficient to maintain the system.  After completion  
          of the project, the demand for water exceeded expectations,  
          increasing the costs for chemicals and electric services and  
          forcing the water system to close - wasting taxpayer funds.  To  
          avoid similar situations, AB 118 requires a recipient for grant  
          funding to demonstrate that it will have technical, managerial,  
          and financial capacity to operate and maintain the water system.

           Grant funding  :  Recent legislation, including AB 983 (Perera,  
          Chapter 515, Statutes of 2011) and AB 1438 (Conway, Chapter 531,  
          Statutes of 2009), increased the amount and proportion of grant  
          funding for disadvantaged communities available from the SDWSRF.  
           While these actions reduced the financial burden for many  
          communities (by authorizing grants instead of loans), they  
          increased the potential for a large proportion of the SDWSRF  
          funding to be awarded as grants.  Current state law limits the  
          amount of grants to 30% of the "amount deposited in the fund,"  
          which includes repayments of principal and interest (now nearing  
          $40 million per year), the annual capitalization grant from US  
          EPA (currently $87 million per year), and interest earned on the  
          fund balance.  This bill would limit the amount of grants  
          available each year to 30% of the annual capitalization grant  
          from US EPA, thus maintaining the revolving nature and long-term  
          viability of the SDWSRF.

           Interest-bearing loans  :  By removing the cap on interest-bearing  








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          loans for water systems (the current cap is set in regulation at  
          $20 million per project, with limited exceptions), this bill  
          will allow CDPH to make larger interest-generating loans, which  
          increases the funds returning to the SDWSRF and provides  
          additional security for revenue bonds that were authorized by AB  
          1292 (Hernandez, Chapter 518, Statutes of 2011).

           Length of projects  :  Currently, planning studies that are funded  
          by the SDWSRF are limited by regulation to 18 months, which has  
          been found to be insufficient time for some projects to  
          accomplish all the necessary elements.  This bill would  
          authorize up to 36 months for planning projects at CDPH's  
          discretion.

           Qualified consultants  :  According to CDPH, in the past, small  
          water systems have been taken advantage of by unqualified  
          consultants.  To help prevent that situation, this bill requires  
          grant recipients to follow guidelines adopted by CDPH for  
          procurement of engineering, environmental compliance, or  
          architectural services.  This requirement will also speed the  
          funding process because CDPH will work with knowledgeable  
          professionals acting on behalf of the water systems.

           Prior legislation:
           AB 2529 (Wieckowski).  Would have authorized the CDPH, when  
          implementing the SDWSRF, to adopt interim regulations and take  
          other actions to expedite the process of providing funds for  
          drinking water projects, especially to severely disadvantaged  
          communities.  AB 2529 was substantially amended in the Senate  
          Environmental Quality Committee and then further amended in the  
          Senate Appropriations Committee to instead amend provisions of  
          the California Global Warming Solutions Act of 2006.
           
          Related legislation  :
          1)AB 21 (Alejo).  Creates the Safe Drinking Water Small  
            Community Emergency Grant Fund to address contaminated water  
            in small communities.  Authorizes DPH to assess a specified  
            annual charge in connection with loans (in lieu of interest)  
            for certain drinking water projects funded by the SDWSRF.   
            This bill passed the Assembly ESTM Committee on February 12,  
            2013, and was referred to the Assembly Appropriations  
            Committee.  

          2)AB 115 (Perea).  Authorizes funding, through the SDWSRF, of  
            projects to benefit a disadvantaged community that is not the  








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            applying agency, extending applicant eligibility to larger  
            agencies with the expertise to assist disadvantaged  
            communities that suffer from contamination of their drinking  
            water sources.  This bill is scheduled to be heard in the  
            Assembly ESTM Committee on March 12, 2013.

          3)AB 145 (Perea and Rendon).  Transfers the State drinking water  
            program under the California SDWA, including the SDWSRF, from  
            CDPH to the SWRCB.  Makes findings regarding the need for  
            consolidation of programs for safe drinking water and clean  
            water.  This bill has been double referred to the Assembly  
            Committees on Water, Parks and Wildlife and on ESTM.  

          4)SB 117 (Rubio).  Transfers the various duties and  
            responsibilities imposed on CDPH under the California SDWA to  
            the SWRCB and makes conforming changes.  This bill has been  
                                                                double referred to the Senate Committees on Health and on  
            Environmental Quality.  


           REGISTERED SUPPORT / OPPOSITION  :   

           Support 
           
          Association of California Water Agencies
          Rural County Representatives of California
          Sierra Club California

           Opposition 
           
          None received.  
           
          Analysis Prepared by  :    Shannon McKinney / E.S. & T.M. / (916)  
          319-3965