BILL ANALYSIS                                                                                                                                                                                                    Ó




                     SENATE GOVERNANCE & FINANCE COMMITTEE
                            Senator Lois Wolk, Chair
          

          BILL NO:  AB 2395                     HEARING:  6/25/14
          AUTHOR:  Lowenthal                    FISCAL:  No
          VERSION:  5/8/14                      TAX LEVY:  No
          CONSULTANT:  Urquiza                  

            OXNARD HARBOR DISTRICT: INFRASTRUCTURE PROJECTS: FUNDING
          

          Raises the maximum amount of indebtedness the Oxnard Harbor  
          District can incur from $1 million to 15% of the District's  
          total assets. 


                           Background and Existing Law
                                         
          The California Constitution prevents counties and cities  
          from creating multi-year general obligation debt without  
          2/3-voter approval.  School districts need 55% voter  
          approval.  Because the constitutional ban doesn't mention  
          special districts, the Legislature has allowed many types  
          of special districts to borrow money without voter approval  
          by issuing promissory notes.

          Unlike bonds, promissory notes are usually short-term debts  
          that are not backed by a specified revenue source.  This  
          lack of identified revenue makes them relatively more risky  
          for private investors, which drives up borrowing costs.   
          However, because promissory notes don't need voter  
          approval, they are politically more attractive than bonds.   
          Districts use promissory notes to finance office buildings  
          and other facilities that don't generate revenues.  State  
          laws limit most promissory notes from $5 million to $10  
          million, repaid over 2 to 10 years. 

          Securitized limited obligation notes (SLONs) are like  
          promissory notes, but state law requires the special  
          district to securitize them by pledging a dedicated stream  
          of revenues.  State law also imposes more stringent  
          disclosure requirements (SB 1561, Soto, 2002).  While SLONs  
          don't need voter approval, they require a four-fifths vote  
          of a district's governing board.  Typically, special  
          districts can use SLONs to borrow up to $2 million for 10  
          years, to be paid back from pledged revenue.





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          State law authorized harbor districts to borrow money by  
          the issuance of promissory notes for the purposes of  
          acquiring land for constructing and/or operating any work,  
          project, or facility, or for making improvements, and  
          purchasing and maintaining equipment.  Harbor district may  
          issue promissory notes for up to $1 million dollars that  
          must be repaid in five years and with interest rate that  
          cannot exceed 12% per year.  Districts can also issue SLONs  
          for up to $10 million to be paid back in 10 years. 

          The Oxnard Harbor District in Ventura County is one of five  
          independent harbor special districts.  The District owns  
          and manages the commercial Port of Hueneme.  A five-member  
          Board of Harbor Commissioners, elected at-large from the  
          District, sets the policies for the Port.  The Port does  
          not levy, collect or spend local taxes, but instead relies  
          on revenue generated from its operation to support its  
          activities, in conjunction with occasional state and  
          federal funding. Major capital investments of the Port have  
          been historically financed through revenue bonds.  The  
          Oxnard Harbor Districts argues that the $1 million cap for  
          promissory notes takes away a valuable financing option to  
          cover the costs of important infrastructure projects to  
          accommodate the Port's anticipated needs in the next  
          several decades.  The Oxnard Harbor District wants the  
          Legislature to increase its general borrowing authority  
          from $1 million to 15% of the District's total assets. 


                                   Proposed Law  

          Assembly Bill 2395 allows the Oxnard Harbor District to  
          borrow an amount equal to or less than 15% of its total  
          assets, as determined based on the estimated values of the  
          assets included in the Port of Hueneme Comprehensive Annual  
          Financial Report (CAFR).

          AB 2395 requires the District, before commencing any action  
          to borrow funds, to conduct a public hearing to consider  
          the proposed borrowing. 

          AB 2395 prohibits the District from borrowing any funds  
          unless the proposed borrowing is approved by a two-thirds  
          vote of the board. 
           
          The bill authorizes the District to expend any funds for  





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          the acquisition of any interest in lands pursuant to  
          current law, and for the acquisition, construction,  
          development, ownership, and leasing of port facilities,  
          infrastructure, and other projects, including, but not  
          limited to, harbor deepening, and for any other buildings,  
          plants, equipment, aids, facilities, and improvements  
          necessary for, or incident to, the accommodation and  
          promotion of commerce and fisheries in the District. 

          AB 2395 authorizes the District to borrow money and incur  
          indebtedness and to accept financial or other assistance  
          from the state or federal government. 

          The bill makes findings and declarations regarding the need  
          to finance several significant infrastructure projects, the  
          constraints that the $1 million limit places on the  
          District, and the District's accomplishments. 



                               State Revenue Impact
           
          No estimate. 


                                     Comments  

          1.   Purpose of the bill  .  The Oxnard Harbor District owns  
          and operates the Port of Hueneme, the only deep water port  
          between northern and southern California.  The District has  
          identified specific infrastructure projects it must  
          complete in order to accommodate the Port's anticipated  
          need and planned growth objectives, including harbor  
          deepening and associated wharf improvements. These critical  
          projects will require the District to borrow more than it  
          is allowed under the current statutory limit.  The $1  
          million borrowing cap was established 30 years ago and does  
          not adequately account for the needs and escalated project  
          costs of a modern port competing in a global market.  AB  
          2395 will help the Oxnard Harbor District fund the  
          infrastructure necessary to meet its goals by increasing  
          the limit on the amount of money the district can borrow. 

          2.   Promises, promises  .  Cities and counties can't issue  
          promissory notes because of a constitutional ban.  State  
          law limits most special districts' promissory notes to  





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          short terms of two years, five years, and sometimes ten  
          years.  Traditionally, short-term promissory notes are for  
          smaller projects that don't have a dedicated revenue  
          stream.  Only regional park and open space districts have  
          access to 20-year promissory notes and the districts must  
          have anticipated special tax revenues to pay back the  
          notes.  For long-term debts, local officials usually use  
          30-year bonds that are backed by new revenues.  Cities' and  
          counties' long-term bonds require voter approval;  
          short-term promissory notes don't.  AB 2395 allows the  
          Oxnard Harbor District to borrow money and incur  
          indebtedness, including issuing promissory notes, without  
          any maximum term on the debt and without the need for voter  
          approval.  The Committee may wish to consider whether AB  
          2395 converts the District's short-term promissory notes  
          into the functional equivalent of long-term bonds that  
          ordinarily should require voter approval. 

          3.   Assets and repaying debt  ?  The amount of total assets  
          may not reflect the District's capacity to repay debt or  
          loans because the assets may not be liquid or disposable.   
          This estimate also changes annually.  Based on the most  
          recent financial report, the Districts' total assets are  
          listed at approximately $95 million.  Under AB 2395, the  
          borrowing capacity of the district would be approximately  
          $14 million based on its current assets.  The amount of  
          total assets also does not include any outstanding debt or  
          liabilities of the District.  At the close of fiscal year  
          2013, the District held $21.2 million in outstanding  
          revenue bond debt.  Based on these factors, the committee  
          may wish to consider if it is appropriate to base the  
          amount that the District can borrow on a percentage of the  
          District's total assets. 

          4.   Precedent and Pattern  .  Allowing the Oxnard Harbor  
          District to issue promissory notes without a maturity date  
          and interest rate on the notes is unprecedented.  The  
          Committee may wish to consider whether AB 2395 will result  
          in future requests from other district to increase their  
          borrowing authority without a cap and maturity date on  
          promissory notes. 

          5.   Another solution  ?  If the District is constrained by  
          the $1 million dollar cap on promissory notes, another  
          solution would be to increase the borrowing cap and  
          maintain the existing terms on promissory notes, such as  





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          the maximum term of the debt and interest rate.  Consistent  
          with the existing statue governing harbor districts'  
          borrowing powers, the committee may wish to consider  
          amending the bill to increase Oxnard Harbor District's debt  
          limit for promissory notes from $1 million to $10 million. 

          6.   Special legislation  .  The California Constitution  
          prohibits special legislation when a general law can apply  
          (Article IV, §16).  AB 2395 contains findings and  
          declarations explaining the need for legislation that  
          applies only to the Oxnard Harbor District. 

          7.   Double-referral  .  Because some of AB 2395's provisions  
          fall into the jurisdiction of both the Senate Natural  
          Resources and Water Committee and the Senate Governance and  
          Finance Committee, Rules Committee ordered a double  
          referral. Senate Natural Resources and Water approved AB  
          2395 at its June 10 hearing by an 8-0 vote. 


                                 Assembly Actions
                                         
          Assembly Local Government:         9-0
          Assembly Floor:                   76-0 



                         Support and Opposition  (6/19/14)

           Support  :  Port of Hueneme; California Special Districts  
          Association. 

           Opposition  :  Unknown.