BILL ANALYSIS �
Senate Appropriations Committee Fiscal Summary
Senator Kevin de Le�n, 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
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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
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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
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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.