BILL ANALYSIS                                                                                                                                                                                                    



                                                                  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