BILL ANALYSIS Ó
AB 2597
Page 1
Date of Hearing: April 21, 2014
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
AB 2597 (Ting) - As Amended: March 28, 2014
Majority vote. Fiscal committee.
SUBJECT : Energy: PACE program
SUMMARY : Modifies the California Alternative Energy and
Advanced Transportation Financing Authority's (CAEATFA)
underwriting standard for the Property Assessed Clean Energy
(PACE) program by provide that an assessment cannot exceed 15%
of the value of the property, and substitutes the term "loan"
with "assessment" within various parts of the PACE program.
Specifically, this bill :
1)Requires CAEATFA, when evaluating an application for
participation in the PACE reserve program, to ensure that
assessments made to property owners are less than 15% of the
value of the property.
2)Changes the term "PACE loan program" to "PACE assessment
program" within various parts of the PACE program.
EXISTING LAW :
1)Provides that the maximum amount of any ad valorem tax on real
property shall not exceed 1% of the full cash value of such
property. (Cal. Const., Art. VIII.)
2)Defines an "assessment" as any levy or charge upon real
property by an agency for a special benefit conferred upon the
real property. "Assessment" includes, but is not limited to,
"special assessment," "benefit assessment," "maintenance
assessment" and "special assessment tax." (Cal. Const., Art.
VIII.)
3)Allows public agencies and property owners to enter into
voluntary contractual assessments to finance the installation
of distributed generation renewable energy sources or energy
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or water efficiency improvements that are permanently affixed
on real property. (Streets and Highway Code (S&HC) Section
5898.2.)
4)Establishes a PACE program as a way to help homeowners and
small business owners finance voluntary energy and water
efficiency and clean energy improvements. (Public Resources
Code (PRC) Section 26050.)
5)Establishes a PACE Reserve Program designed to address the
Federal Housing Finance Agency's (FHFA) financial concerns by
making first mortgage lenders whole for any losses in a
foreclosure or a forced sale that are attributable to the PACE
program. (PRC Section 26060.)
FISCAL EFFECT : Unknown
COMMENTS :
1)The author states that the PACE program "is an innovative
financing tool that residential or commercial property owners
can use to pay for renewable energy upgrades, energy, or water
efficiency, or electric vehicle charging stations for their
homes or buildings. AB 2597 seeks to reinforce local
governments' authority to utilize PACE programs and brings the
benefits of clean energy financing to more Californians.
Specifically, it clarifies that PACE liens are special tax
assessments, rather than loans, and updates the PACE
underwriting standards to make PACE financing available for
more middle-income homeowners. By reinforcing local
government's authority to offer PACE, this bill protects an
innovative and affordable clean energy tool that achieves
tremendous reductions in greenhouse gas emissions and helps
California meet its AB 32 energy efficiency goals."
2)Supporters of this bill state "AB 2597 will clarify that PACE
assessments are special tax assessments rather than loans.
These special tax assessments are duly placed on property tax
bills by California local governments in accordance with
longstanding California law. AB 2597 will also make PACE
financing available for more middle-income homeowners, by
modifying the PACE underwriting standards outlined in
California law." Further, '[b]y amending California law, AB
2597 will clarify local governments authority to place special
PACE tax assessments on property and extend the benefits of
PACE financing to more California homeowners to help save
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California money, reduce our greenhouse gas emissions, promote
renewable energy, and support water efficiency.' "
3)Committee Staff Comments:
a) Background . The PACE program, which began in 2007, is a
financing tool that residential and commercial property
owners can use to pay for renewable energy upgrades, energy
or water efficiency retrofits, or electric vehicle charging
stations for their homes or buildings. Local agencies
create PACE assessment districts in their jurisdictions via
a resolution of their legislative body, allowing the local
agency to issue bonds to finance the up-front costs of
improvements. In turn, property owners enter into a
voluntary contractual assessment agreement with the local
agency to re-pay the bonds via an assessment on their
property tax bill. The assessment remains with the
property even if it is sold or transferred, and the
improvements must be permanently fixed to the property.
In 2010, the FHFA raised concerns that residential PACE
financing could pose a risk for federal mortgage
enterprises (Fannie Mae and Freddie Mac) because PACE loans
are a first-priority liens in the case of foreclosure and
lenders would have to pay outstanding PACE assessments
before paying mortgage costs. In August 2010, Fannie Mae
and Freddie Mac announced they would not purchase mortgages
for homes with first lien priority PACE obligations. The
FHFA's action triggered many local governments to suspend
their residential PACE programs.
To address this concern, the Legislature enacted SB 96
(Committee on Budget and Fiscal Review), Chapter 356,
Statutes of 2013. This budget trailer bill tasks CAEATFA
with administering a PACE loss reserve program that will
use a $10 million reserve fund to keep mortgage interests
whole during a foreclosure or a forced sale. In order to
receive the benefits of the state's PACE loss reserve
program, local PACE administrators must first apply and
meet a specified set of underwriting standards.
b) Distinguishing the Components of the Program . As noted
above, the PACE program is a financing tool that allows
property owners to pay for renewable energy upgrades. The
financing received by the property owner must be repaid to
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the local agency. Though the local agency runs a
preliminary check on the property owner's creditworthiness,
the loan is primarily secured and provided for because of
an assessment on the property. The property owner then
makes payments to satisfy the funding for the project,
which is paid through owner's property tax bill.
The overall PACE program can be broken down, for purposes
of this bill, into three parts: the PACE program, the PACE
reserve program, and the authority for local governments to
enter into voluntary contractual assessments.
Unfortunately, an assessment, as it relates to the PACE
program, applies only to the provision allowing local
governments with the authority to enter into a voluntary
contractual assessments. Using the term "assessment" in
other parts of the program will likely cause confusion,
especially as it relates to property tax law.
Specifically, the PACE reserve program, which this bill
attempts to amend, makes mortgage interests whole in case
of foreclosure, and is completely separate from the
assessments that are placed on properties to secure payment
of the financing provided for projects. The PACE reserve
program provides assistance to local PACE districts by
prescribing underwriting standards for the financing of the
improvement projects. The securing of the debt with an
assessment and the underwriting standards required for the
PACE reserve program are two distinctly different things.
In order to eliminate confusion, the author may wish to
replace the term "loan" with "financing."
c) Increase to 15% . This bill increases the financing
available for eligible improvements to no more than 15% of
the value of the property. This will likely encourage
property owners and local agencies to finance larger
projects and, as explained by the author, the increase
would make PACE financing available to more middle-income
homeowners. The PACE reserve program currently has a
reserve amount of $10 million, and increasing the financing
for eligible improvements also increases the liability on
the reserve fund. It seems financially imprudent to
increase the financing amount for eligible projects without
at the same time increasing the reserve amount. In order
to reduce the burden on the state's reserve fund, the
author may wish to limit the 15% threshold to the first
$700,000 of the property's value. The 10% threshold would
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apply to any remaining value.
d) Proposition 218 . Do "assessments" to finance the
installation of renewable energy sources or energy
efficiency improvements under S&HC Section 5898.2 trigger
Proposition 218 requirements? Prop. 218 requirements are
not triggered because assessments under the PACE program
are voluntary. Proposition 218 defines an "assessment" as
any levy or charge upon real property by an agency for a
special benefit conferred upon the real property. In
general, the assessment must be imposed on property in
order to trigger Proposition 218 requirements. The
underlying purpose of Proposition 218 is to protect
"taxpayers by limiting the methods by which local
governments exact revenue from taxpayers without their
consent." Proposition 218, therefore, is not a grant of
authority to local agencies, but a restriction on the
methods by which government may impose assessments.
Proposition 218 only applies to instances where a local
government is imposing an assessment without the consent of
the taxpayer. In Richmond v. Shasta Community Services
District, the court held that a charge on property that is
"contingent on some voluntary action by the property owner
is not an assessment within the meaning of [Prop. 218]."
(32 Cal.4th 409.) The taxpayer's voluntary action can
satisfy the purpose of Prop. 218: to obtain the taxpayer's
consent before imposing a fee or assessment. (Id.) There
are a number of reasons to believe that the PACE program is
legitimately voluntary. First, property owners must take
the first step in the process and apply to the local agency
in order to receive funding for the project. Second, local
PACE programs, in many cases, inform the property owner of
other financing options that are available in the private
sector (e.g., banks and credit unions). Third, the
assessment is not placed on multiple homes in a designated
geographical area; it is placed only on the parcel of land
where PACE program improvements have been made, and only
after the property owner has accepted the property
improvements. Therefore, because local governments have
the ability to enter into voluntary contractual assessments
under S&HC Section 5898.2 and because Proposition 218 only
applies to instances where local governments are imposing
an assessment without taxpayer consent, voluntary
contractual assessments under the PACE program do not
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trigger Prop. 218 requirements.
e) Related Legislation: SB 96 (Committee on Budget and
Fiscal Review), Chapter 356, Statutes of 2013, created a
PACE loss reserve program with a $10 million reserve fund
to keep mortgage interests whole during a foreclosure or a
forced sale, to be administered by CAEATFA.
f) Prior Legislation:
i) SB 1340 (Kehoe), Chapter 649, Statutes of 2010,
expanded the use of voluntary contractual assessments to
finance electric vehicle charging infrastructure and
correspondingly expanded the PACE bond reserve program.
ii) SB 77 (Pavley), Chapter 15, Statutes of 2010,
authorized CAEATFA to develop and administer a state PACE
bond reserve program to pay bondholders in the event a
PACE program had insufficient funds, which would reduce
risk to bondholders and facilitate smaller interest
rates. CAEATFA has suspended development of this program
pending resolution of FHFA's concerns described above.
iii) AB 44 (Blakeslee), Chapter 564, Statutes of 2010,
expanded the use of voluntary contractual assessments to
include financing of power purchase agreements, and
prohibited contractual assessments if the total amount of
the assessments and taxes on the property exceeds 5% of
the property's market value.
iv) AB 474 (Blumenfield), Chapter 444, Statutes of 2009,
expanded local agencies' PACE authorization to include
water efficiency projects.
v) AB 811 (Levine and Beall), Chapter 159, Statutes of
2008, authorized all cities and counties in California to
create PACE programs by designating areas within which
the local agency and willing property owners may enter
into contractual assessments to finance the installation
of distributed generation renewable energy sources and
energy efficiency improvements.
REGISTERED SUPPORT / OPPOSITION :
Support
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Renewable Funding (Sponsor)
Sonoma County Energy Independence Program (Sponsor)
Western Riverside Council of Governments (Sponsor)
Opposition
None on file
Analysis Prepared by : Carlos Anguiano / REV. & TAX. / (916)
319-2098