BILL ANALYSIS Ó AB 118 Page 1 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and to be published in the California Code of Regulations (CCR); iii) Remain in effect for three years, unless sooner repealed or amended by additional interim regulations; and, iv) Supersede any conflicting emergency regulations.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 AB 118 Page 2 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 AB 118 Page 3 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 AB 118 Page 4 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. AB 118 Page 5 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, AB 118 Page 6 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 AB 118 Page 7 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 AB 118 Page 8 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 AB 118 Page 9 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 AB 118 Page 10 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