BILL ANALYSIS                                                                                                                                                                                                    



                                                                  AB 850
                                                                  Page  1

          CONCURRENCE IN SENATE AMENDMENTS
          AB 850 (Nazarian)
          As Amended  August 12, 2013
          Majority vote
           
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          |ASSEMBLY:  |72-0 |(May 9, 2013)   |SENATE: |38-0 |(September 3,  |
          |           |     |                |        |     |2013)          |
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           Original Committee Reference:    L. GOV.  

           SUMMARY  :  Authorizes joint powers authorities to issue rate  
          reduction bonds to finance local publicly-owned water utility  
          projects, until December 31, 2020.  

           The Senate amendments  :  

          1)Limit the bill's provisions to water utilities that serve not  
            less than 25,000 retail customers.

          2)Clarify that the bill's authority to finance utility projects  
            via rate reduction bonds is limited to joint powers  
            authorities (JPAs) whose financing activities are limited to  
            financing utility projects and projects for the use and  
            benefit of pubic water agencies.

          3)Clarify that local agencies that own and operate a publicly  
            owned utility (POU) may apply for financing as authorized by  
            this bill if, at the time of application, bonds payable from  
            revenues of the POU are, or upon issuance would be, rated  
            investment grade by a nationally recognized rating agency.

          4)Require the California Pollution Control Financing Authority  
            (CPCFA) to review each issue of bonds and determine whether  
            the issue is qualified for issuance under the bill's  
            provisions, and outline the conditions that must be satisfied  
            for the CPCFA to reach such a determination.

          5)Require the CPCFA to establish procedures for the expeditious  
            review of a proposed bond issuance, including, but not limited  
            to, the establishment of reasonable application fees to  
            reimburse the CPCFA for administrative costs.

          6)Require the CPCFA to provide a written explanation for any  








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            refusal to qualify a proposed bond issuance, but specify that  
            the CPCFA may not alter or modify any term or condition  
            related to utility project property.

          7)Require the CPCFA to take action on any completed application  
            no later than its next meeting that occurs at least 60 days  
            following receipt of the application.

          8)Allow CPCFA review and qualification to be concurrent with a  
            JPA's processing of an application for financing so as to  
            allow for the issuance of rate reduction bonds as quickly as  
            feasible.

          9)Allow the CPCFA to adopt emergency regulations, pursuant to  
            current law, relating to this bill's provisions, as specified.

          10)Require, until December 31, 2020, the CPCFA to annually  
            submit by March 31 to the Legislature a report of its  
            activities pursuant to this bill for the preceding calendar  
            year ended December 31, and outline the required contents of  
            the report, as specified.

          11)Specify that in no event shall a utility project charge  
            exceed the maximum rate permitted under Article XIII D of the  
            California Constitution (added by Proposition 218 in 1996).

          12)Require a JPA that issues rate reduction bonds to include in  
            its preliminary notice and final report to the California Debt  
            and Investment Advisory Commission (CDIAC), which are required  
            under current law, a statement that the rate reduction bonds  
            are being issued pursuant to this bill.  

          13)Require a JPA that issues rate reduction bonds to include in  
            its final report to CDIAC the savings realized by issuing the  
            rate reduction bonds rather than bonds payable from the  
            revenues of the POU for whose benefit the rate reduction bonds  
            were issued.

          14)Terminate the authority to issue rate reduction bonds  
            pursuant to this bill after December 31, 2020.

          15)Make additional technical and clarifying changes.

           AS PASSED BY THE ASSEMBLY  , this bill:  









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          1)Authorized a 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)Allowed a local agency that owns and operates a 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)Prohibited 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;

             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)Provided, 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)Imposed a number of additional requirements pertaining to:   








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            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)Provided 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)Provided 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)Made conforming changes to the Joint Exercise of Powers Act  
            (Act).

          9)Provided terms and definitions, as specified.

           FISCAL EFFECT  :  None

           COMMENTS  :  This bill allows JPAs to issue rate reduction bonds  
          to finance projects for POUs with at least 25,000 retail  
          customers that provide water service.  Eligible projects must be  
          for conservation or reclamation purposes or must be necessary to  
          respond to or comply with a mandate.  This bill is sponsored by  
          the author.

          Amendments taken in the Senate require the CPCFA to review each  
          issue of bonds and determine whether the issue is qualified for  
          issuance under the bill's provisions, "in order to allow the  
          state to review the issuance of rate reduction bonds, collect  
          data, ensure transparency, and conduct an independent analysis  
          of the effectiveness of the use of rate reduction bonds pursuant  
          to" this bill.  The CPCFA is housed in the State Treasurer's  
          office, and provides low-cost financing for projects that  
          control pollution.  It also assists with clean-up of  
          contaminated sites.  Among other activities, CPCFA assists the  
          California Alternative Energy and Advanced Transportation  
          Financing Authority, which provides financing for facilities  
          needed to develop and commercialize advanced transportation and  
          alternative energy technologies that reduce air pollution,  








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          conserve energy, and promote economic development and jobs.

          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 JPAs 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  
          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  








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          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  
          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  
          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  








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          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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