BILL ANALYSIS Ó Senate Appropriations Committee Fiscal Summary Senator Kevin de León, Chair AB 850 (Nazarian) - Rate reduction bonds: public utility water infrastructure projects. Amended: August 12, 2013 Policy Vote: G&F 7-0 Urgency: No Mandate: No Hearing Date: August 12, 2013 Consultant: Mark McKenzie This bill does not meet the criteria for referral to the Suspense File. Bill Summary: AB 850 would authorize joint powers authorities (JPAs) to issue rate reduction bonds to finance publicly owned utility (POU) projects until December 31, 2020. The bonds would be secured by utility project property and repaid through a separate utility project charge imposed on the POU customers' bills. The bill would also require the California Pollution Control Financing Authority (CPCFA) to review each issue of rate reduction bonds proposed by JPAs, as specified. Fiscal Impact: Estimated one-time CPCFA costs of up to $150,000 over two fiscal years to develop and adopt emergency regulations for the expeditious review of rate reduction bond issuances, including the establishment of application fees (Pollution Control Financing Authority Fund). Unknown ongoing costs to review and act on applications, collect data on issuances, and submit annual reports to the Legislature (Pollution Control Financing Authority Fund). The bill provides CPCFA with the authority to recover administrative costs through a fee charged on applicants. The ability to fully recover costs would depend upon the number of applications and the amount of the proposed fees established through the regulatory process. Background: Rate reduction bonds are asset-backed securities that are structured to minimize borrowing costs by qualifying for AAA credit ratings. AAA ratings allow a utility to borrow funds at an interest rate that is well below the rate that would otherwise apply to a utility's long-term debt. To qualify for AB 850 (Nazarian) Page 1 the AAA rating, rate reduction bond financing typically includes: Statutory authority to impose a dedicated charge on utility customers to repay the bonds. A requirement that the bonds must be issued, and the dedicated charge must be imposed, by a "bankruptcy remote special purpose entity." A "true-up" mechanism by which charges collected to pay debt service are regularly adjusted to ensure that bonds are paid off at the final maturity date. A pledge made by the state not to impair the right to collect charges until bonds are paid in full. The Joint Exercise of Powers Act allows two or more public agencies to use their powers in common if they sign a joint powers agreement, which sometimes results in the creation of a new, separate governmental entity known as a joint powers authority (JPA). The Marks-Roos Local Bond Pooling Act allows public agencies to use JPAs to finance infrastructure. These JPAs issue Marks-Roos Act bonds and loan the capital to local agencies for public works, working capital, and insurance programs. Proposed Law: AB 850 would authorize the financing of specified POU utility projects with rate reduction bonds until December 31, 2020. Specifically, this bill would: Authorize a JPA, upon the application of a local agency that owns and operates a POU, to finance costs of a utility project with the proceeds of rate reduction bonds secured by utility project property, as specified. Specify that the utility project financed with rate reduction bonds must be in response to a specified mandate or for conservation or reclamation purposes, including storm water capture and treatment, water recycling, development of local groundwater resources, groundwater recharging, and water reclamation. Authorize a JPA to impose and collect a utility project charge, which will be added as a separate charge to the bill of each POU customer and used to pay debt service on the rate reduction bonds. The utility project charge must be adjusted annually to ensure timely payment of rate reduction bond financing costs. Require the CPCFA to review each issue of bonds and determine that it qualifies for issuance if it satisfies AB 850 (Nazarian) Page 2 specified criteria. CPCFA must provide a written explanation for any refusal to qualify a proposed issuance. Require the CPCFA to act on an application by the next meeting that occurs after at least 60 days following receipt of the application. Require the CPCFA to adopt emergency regulations and establish procedures for the expeditious review of proposed issuances of rate reduction bonds, including the establishment of reasonable application fees to reimburse CPCFA for administrative costs. Require the CPCFA to submit a report to the Legislature by March 31 of each year that includes a listing of applications received and qualified issuances, a detailed accounting of bonds sold, and a comparison of interest rates and transactional costs on qualified issuances with interest rates on comparable debt issuances. Specify how JPAs must impose utility project charges and issue rate reduction bonds, create a statutory lien on property related to rate reduction bonds, shield JPAs from bankruptcy cases, allow JPAs to finance utility projects through limited liability companies, define terms, and make other conforming changes. Staff Comments: To comply with federal and state clean drinking water standards, remediate groundwater contamination, and address challenges of water scarcity, public water utility operators anticipate investing billions of dollars in vital water infrastructure projects over the coming years. For example, just to comply with two primary drinking water standards under the Safe Drinking Water Act, the Los Angeles Department of Water and Power (LADWP) expects to spend $1.4 billion between 2011-12 and 2015-16 to complete its water quality improvement program. Financing water infrastructure projects with rate reduction bonds is anticipated to produce lower borrowing costs for public agencies, which should in turn reduce the water rates paid by customers compared to rates they would pay if the water infrastructure had been financed using more traditional financing mechanisms, such as revenue bonds. Given its planned spending for water quality and local water supply projects, LADWP projects that rate reduction bond financing would lower rates by 2-4% during the course of the next five years. The rate-reduction bonds issued pursuant to this bill would not AB 850 (Nazarian) Page 3 constitute a debt or liability of the State of California, nor do they constitute a pledge of the full faith and credit of the State of California. The only state fiscal impacts of AB 850 are those associated with the new duties imposed upon the CPCFA. Staff assumes that one-time costs to develop and adopt emergency regulations related to the process for reviewing and approving rate reduction bond issuance applications and establishing an application fee could be up to $150,000 over the 2013-14 and 2014-15 fiscal years. Although the bill authorizes CPCFA to charge a fee to administer the program, including costs associated with the collection of data and preparation of the report, it is unclear that fees could be established at a level sufficient to fully recover administrative costs. It is unlikely, however, that a relatively high fee would discourage a large POU from applying for approval for issuance of rate reduction bonds, considering the potential savings related to these issuances over traditional financing methods.