BILL ANALYSIS �
AB 850
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ASSEMBLY THIRD READING
AB 850 (Nazarian)
As Amended April 15, 2013
Majority vote
LOCAL GOVERNMENT 9-0 BANKING &
FINANCE 12-0
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|Ayes:|Achadjian, Levine, Alejo, |Ayes:|Dickinson, Morrell, |
| |Bradford, Gordon, | |Achadjian, |
| |Melendez, Mullin, | |Blumenfield, Bonta, Chau, |
| |Waldron, Stone | |Gatto, Hagman, |
| | | |Linder, Perea, Torres, |
| | | | Weber |
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SUMMARY : Authorizes a joint powers authority to issue rate
reduction bonds for local publicly owned water utilities to
finance projects necessary to comply with water quality, water
conservation or water reclamation mandates. Specifically, this
bill :
1)Authorizes a joint powers authority (JPA) to finance utility
projects through the issuance of rate reduction bonds, and to
impose and adjust utility project charges in connection with
the financing pursuant to the provisions of this bill.
2)Allows a local agency that owns and operates a publicly owned
utility (POU) that provides water service to apply to a JPA to
finance costs of a utility project for the POU with the
proceeds of rate reduction bonds. In its application to a JPA
for the financing, the local agency shall specify the utility
project to be financed, the maximum principal amount, the
maximum interest rate, and the maximum stated terms of the
rate reduction bonds.
3)Prohibits a local agency from applying to a JPA for financing
of a utility project pursuant to this bill unless the
legislative body of the local agency has determined all of the
following:
a) The project to be financed is a utility project;
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b) The local agency is electing to finance costs of the
utility project pursuant to this bill and the financing
costs associated with the financing are to be paid from
utility project property, as defined, including the utility
project charge for the rate reduction bonds issued for the
utility project in accordance with this bill; and,
c) Based on information available to, and projections used
by, the legislative body, the financing is expected to
result in lower rates to the customers of the local
agency's POU compared with financing the utility project
through bonds payable from revenues of the POU.
4)Provides, subject to the requirements of Article XIII D of the
California Constitution, that a JPA financing the costs of a
utility project or projects for a local agency's POU with rate
reduction bonds is authorized and directed to impose and
collect a utility project charge with respect to the rate
reduction bonds as provided in this bill. The imposition of
the utility project charge shall be made and evidenced by the
adoption of a financing resolution by the governing body of
the JPA.
5)Imposes a number of additional requirements pertaining to:
financing mechanisms; ratepayer responsibilities and
protections; protections for bondholders; protections for and
responsibilities of the state; JPA and POU obligations and
authorities; bankruptcy remoteness; and, other provisions.
6)Provides that this bill and all grants of power and authority
in it shall be liberally construed to effectuate their
purposes, and all incidental powers necessary to carry into
effect the provisions of this bill are expressly granted to,
and conferred upon, public entities.
7)Provides that the provisions of this bill are severable. If
any provision of this bill or its application is held invalid,
that invalidity shall not affect other provisions or
applications that can be given effect without the invalid
provision or application.
8)Makes conforming changes to the Joint Exercise of Powers Act
(Act).
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9)Provides terms and definitions, as specified.
FISCAL EFFECT : None
COMMENTS : This bill allows JPAs to issue rate reduction bonds
to finance projects for POUs that provide water service.
Eligible projects must be necessary to respond to or comply with
a water quality mandate, such as a mandate under the Safe
Drinking Water Act, or to reduce customer water demand or the
amount of imported water the POU provides. This bill is
sponsored by the author.
According to the author, "AB 850 will result in interest
savings, lower debt service, and reduce local borrowing costs to
decrease future utility rate increases. JPAs, formed under
existing law, have successfully allowed public agencies to
finance the construction of capital projects by issuing
tax-exempt revenue bonds. JPAs have helped meet critical needs,
within the state, by helping to accelerate the construction,
repair and maintenance of public capital improvements. AB 850
will simply expand this same authority and benefit to JPAs
formed by municipal water utility companies."
California's joint powers agreements are federations of federal,
state, and local public agencies that jointly perform duties
that each entity could perform on its own. Joint powers
agreements collaborate to address public needs, such as
financing public facilities, forming insurance pools, and
enhancing planning and regulation. Joint powers agreements can
be structured as an agreement between existing agencies or as a
creation of a new, separate entity called a JPA.
POU activities and rates are regulated by locally elected boards
and/or city councils. POUs are subject to the Ralph M. Brown
Act, the Public Records Act, and Competitive Bid Requirements.
Los Angeles Department of Water and Power (LADWP) is the largest
POU in California, serving 3.9 million customer owners.
A rate reduction bond is a type of financing method, one of
several types of asset-backed securities, that provides for
lower borrowing costs than traditional financing sources used by
municipal water utilities. Under this bill, bonds would be
issued to investors by the JPA and the bond proceeds would go
the participating municipal water utility. The security for
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repayment of the bonds (the asset) takes the form of a
non-bypassable, dedicated special tariff that would be collected
by the participating water utility on behalf of the JPA as a
separate line item on water utility customers' bills.
Rate reduction bonds were used by California's investor-owned
electric utilities (IOUs) when the state restructured its energy
industry in the late 1990s. In that instance, the California
Infrastructure and Development Bank (I-Bank) formed a trust that
issued the bonds on behalf of the IOUs. These instruments
proved to be very successful on the bond market despite a
challenge by The Utility Reform Network (TURN), which argued
that ratepayers should have received a greater rate reduction
under the state's deregulation law - which provided an
across-the-board 10% rate cut - because ratepayers were
shouldering the debt service of the bonds. After losing an
appeal before the California Public Utilities Commission (PUC),
TURN petitioned the Supreme Court, which refused to grant a
judicial review of the PUC's decision.
This bill restricts the issuance of rate reduction bonds
exclusively to fund capital utility projects for publicly-owned
water utilities that are required to respond to or comply with a
water quality mandate, such as a mandate under the Safe Drinking
Water Act. Bond proceeds can fund projects that reduce the
amount of potable water supplied by the utility or reduce the
amount of water imported by the utility. This would include
projects for storm water capture and treatment, water recycling,
development of local groundwater resources, groundwater
recharging, and water reclamation.
LADWP is seeking this financing structure because it qualifies
for a higher bond-rating (AAA) than other types of financing
available to the utility, thereby reducing interest rates and
financing costs and, ultimately, rates for its customers. LADWP
argues that a JPA is necessary because rate reduction bonds
require a special tariff that is dedicated as a secured asset to
the rate reduction bondholders. LADWP states that, like other
municipal water utilities with outstanding revenue bonds, it is
limited in its ability to pledge a portion of its revenues only
to the rate reduction bondholders. A JPA charging the special
tariff would not have such restrictions.
In addition, the rate reduction bond issuer must be bankruptcy
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remote from the municipal water utility collecting the special
tariff. An entity that is separate from the municipal water
utility (such as a JPA) must issue the rate reduction bonds in
order to meet this requirement.
This method of securitization allows a lower debt service
coverage ratio by the bond rating agencies due to the enhanced
security provided by the dedicated special tariff and bankruptcy
remoteness. As a result, the amount of funds collected from
customers to meet the debt service coverage ratio is reduced.
Individual municipal utilities can have debt service coverage
requirements of about two times the annual principal and
interest payments of the bonds. With the rate reduction bonds,
this can be reduced to one times coverage.
The required debt service coverage ratio for the LADWP Water
System (currently at 2.00x, with a pending proposal to reduce it
to 1.85x) is a financial metric adopted by the LADWP Board of
Commissioners. These metrics are adopted based on standards of
the bond rating agencies, which publish guidelines for financial
metrics related to each rating category, as well as specific
rating considerations for the LADWP Water System. Rated
entities that wish to qualify for a good credit rating need to
establish financial metrics consistent with those rating
criteria or risk a downgrade, which increases borrowing costs.
LADWP estimates that ratepayers would save as much as $3 million
per year for each $100 million of financing under this bill's
provisions. In the case of LADWP, with its planned spending for
water quality and local water supply projects, rates are
projected to be 2-4% lower during the course of the next five
years than they would be absent this financing approach.
Please see the policy committee analysis for a full discussion
of this bill.
Analysis Prepared by : Angela Mapp / L. GOV. / (916) 319-3958
FN: 0000315
AB 850
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