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           |
           ----------------------------------------------------------------- 

           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 


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