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  


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          the AAA rating, rate reduction bond financing typically  
                 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  

          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.