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. AB 2395 -- 5/8/14 -- Page 2 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 AB 2395 -- 5/8/14 -- Page 3 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 AB 2395 -- 5/8/14 -- Page 4 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 AB 2395 -- 5/8/14 -- Page 5 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.