BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 1121 HEARING: 4/24/14
AUTHOR: De Leon FISCAL: Yes
VERSION: 4/10/14 TAX LEVY: No
CONSULTANT: Grinnell
CALIFORNIA GREEN BANK ACT
Enacts the California Green Bank Act, which creates the
California Green Bank.
Background and Existing Law
When public agencies issue bonds, they essentially borrow
money from investors, who provide cash in exchange for the
agencies' commitment to repay the principal amount of the
bond plus interest in the future. Bonds are usually either
revenue bonds, which repay investors out of revenue
generated from the project the agency finances with bond
proceeds, like a parking garage, or general-obligation
bonds, which the public agency pays out of general revenues
and is guaranteed by its full faith and credit. State
law authorizes several authorities within the State
Treasurer's Office to issue conduit bonds, whereby a public
agency sells a bond, then loans the proceeds to a
nongovernmental borrower, such as a hospital or factory.
Only the nongovernmental borrower's loan repayments secure
the bond.
In addition to the above, the state authorizes the
California Infrastructure and Economic Development Bank
(I-Bank) to support economic development and public and
private infrastructure investments through its authority to
issue bonds, make loans and, provide credit enhancements.
The I-Bank manages several programs, including:
The Infrastructure State Revolving Fund Program
(ISRF) provides low-cost financing to local agencies
for public infrastructure projects.
The Industrial Development Bond Program (IDB)
provides tax-exempt revenue bond financing for
eligible manufacturing and processing companies.
The 501(c) (3) Revenue Bond Program offers
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tax-exempt revenue bond financing for certain
nonprofit, public benefit corporations.
The Exempt Facility Bond Program provides
tax-exempt financing for projects that are
government-owned or consist of private improvements
within publicly-owned facilities, such as private
airline improvements at publicly owned airports.
The Public Agency Revenue Bond Program provides
tax-exempt and taxable bond financing to specified
programs for state and local governmental agencies.
Housed in the office of the State Treasurer, the California
Alternative Energy and Advanced Transportation Financing
Authority (CAEATFA) provides financing through conduit or
revenue bonds, loan guarantees, loan loss reserves and a
sales and use tax exemption for facilities that use
alternative energy sources and technologies. While the
Legislature created CAEATFA in 1980, it didn't do much
until 2008, when Governor Arnold Schwarzenegger and State
Treasurer Bill Lockyer announced that CAEATFA would use its
existing authority to grant sales and use tax exemption for
normally taxable manufacturing equipment purchased by Tesla
Motors under a sale-leaseback agreement. Subsequently, the
Legislature directed CAEATFA to administer three new
programs, in addition to its conduit bond authority:
A $10 million loan loss reserve program that
directs the state to reimburse the original mortgage
lender for the costs associated with the Property
Assessed Clean Energy program assessments during a
foreclosure (SB 96, Committee on Budget and Fiscal
Review, 2013).
A $25 million loan loss reserve program to backstop
loans made by participating financial institutions for
energy efficiency improvements and distributed
generation technology (ABx1 14, Skinner, 2011).
Sales and use tax exemptions for manufacturers of
renewable technology (SB 71, Padilla, 2010), and
advanced manufacturing (SB 1128, Padilla, 2012).
Also housed in the office of the State Treasurer, the
California Pollution Control Financing Authority deploys
federal funds for commercial PACE projects, and a
collateral support program for business loans.
Proposed Law
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Senate Bill 1121 enacts the Green Bank Act, to provide
financial assistance to:
Otherwise commercially viable projects, which are
not currently able to obtain financing in capital
markets at reasonable cost with a reasonable rate of
return to a clean energy project developer, and
Evaluate and coordinate support for innovative
energy technology projects not currently able to
obtain financing to achieve commercialization.
The bill creates two divisions within the California Green
Bank:
The clean energy division which oversees all clean
energy projects, and
The innovative energy technology division, which
oversees the innovative energy technology project.
I. Financial Instruments. The Green Bank can issue
bonds, including structured, subordinated bonds or other
securities, loans, notes (including revenue, grant, and tax
anticipation notes), commercial paper, floating rate and
variable maturity securities, and any other evidences of
indebtedness or ownership, such as asset backed
certificates, lease-purchase or installment purchase
agreements, or certificates of participation, for clean
agriculture projects, clean energy infrastructure projects,
clean energy projects, demand response projects, energy
efficiency projects, innovative energy technology projects,
low-carbon transportation projects, renewable energy
projects, and system efficiency projects, as defined.
Bonds can be in any form, denomination, or interest rate
the Bank determines, but cannot have a maturity of more
than 50 years. Bond repayment is solely the responsibility
of the bank, and is not backed by the full faith and credit
of the state. Each bond must have on its face a notice to
that effect, in addition to the aggregate face amount. The
Bank must issue bonds according to a competitive bidding
process that encourages aggressive bidding.
The Bank must establish a competitive program for loans,
loan guarantees, securitization, insurance, portfolio
insurance, and other financial assistance, for clean energy
projects. As part of the process, the Board may set
lending guidelines such as maturities and interest rates.
Any public or private entity can apply, and the Board shall
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establish guidelines and criteria to choose projects for
financial support that comply with the following criteria:
Maximizing economic, environmental, and public
health benefits to the state,
Fostering job creation by promoting the reduction
of greenhouse gas emissions by California workers and
businesses,
Complementing efforts to improve air quality,
Directing investment toward the most disadvantaged
communities and households in the state,
Providing opportunities for business, public
agencies, nonprofits, and other community institutions
to participate in and benefit from statewide efforts
to reduce greenhouse gas emissions,
Lessening the impacts and effects of climate change
on the state's communities, economy, and environment,
Funding to reduce greenhouse gas emissions through
energy efficiency, clean and renewable energy
generation, clean and renewable energy generation,
distributed renewable energy generation, energy
transmission and storage,
Funding to reduce greenhouse gas emissions through
the development of state-of-the-art systems to move
goods and freight, advanced technology vehicles and
vehicle infrastructure, advanced biofuels, and
low-carbon and efficient public transportation,
Funding to reduce greenhouse gas emissions
associated with water use and supply, land, and
natural resource conservation and management,
forestry, and sustainable agriculture,
Funding to reduce greenhouse gas emissions through
strategic planning and development of sustainable
infrastructure projects, including, but not limited
to, transportation and housing,
Funding to reduce greenhouse gas emissions through
increased diversion of municipal solid waste from
disposal through waste reduction, diversion, and
reuse,
Funding to reduce greenhouse gas emissions through
investments in programs implemented by local and
regional agencies, local and regional collaboratives,
and nonprofit organizations coordinating with local
governments,
Funding in research, development, and deployment
of innovative technologies, measures, and practices
related to programs and projects funded pursuant to
SB 1121 (De Leon) - 2/19/14 -- Page 5
this part,
Creating robust private markets for low-carbon
technologies.
The Bank shall only provide financial assistance if the
project is:
Located inside the state,
Can support a commercial rate of debt adjusted for
the bank's lower costs (except in the case of an
innovative energy technology project),
The requested financing support is secured as the
chief executive officer of the bank determines
appropriate for the sector and the project,
The project satisfied the terms of the Greenhouse
Gas Reduction Fund Investment Plan and Communities
Revitalization Act, and
The project is consistent with any criteria,
priorities, and guidelines issued by the bank.
The Bank also must determine one or more of the following
to fund a project:
The bank's participation enables otherwise
creditworthy and commercially viable entities to
deploy clean energy projects at a reasonable cost with
a reasonable rate of return to the project developer.
The financing will facilitate deployment of a clean
energy project at an accelerated rate.
The financing support will stimulate, aid, or
otherwise support manufacturing of finished products
or component parts used in an innovative energy
technology project located within the state.
The financing support is necessary to create liquid
markets for energy securities.
The financing support otherwise addresses barriers
that have prevented adequate commercial financing of
clean energy projects.
The Bank shall allocate between 15% and 30% of its capital
to fund innovative energy technology projects. The bank
can provide convertible debt or warrants for these
projects, including nonvoting equity or membership interest
in projects or developers. In the event of default, the
bank can complete, maintain, operate, lease, or otherwise
dispose of any property it acquires pursuant to a guarantee
or related agreement, and direct the sponsor or developer
to continue to pursue the purposes of the project if the
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bank determines it to be in the public interest. The bank
may fix and collect insurance premiums and loan loss
reserve contributions adequate to cover the financial risks
associated with the bank's financing support programs.
The Bank must use clean energy development networks to
identify projects, including creating advisory committees
of public and private stakeholders. The Bank will endeavor
to coordinate with existing clean energy research,
development, and deployment programs. The bank also can
facilitate financing transactions in the tax equity market.
Any recipient of funds from the Bank shall certify that its
contractors are properly licensed, and apply for financial
assistance in the form and manner required by the board.
The bill exempts interest paid on bonds from state
taxation; however, federal taxes would still apply.
II. Bank Board. SB 1121 creates the Green Bank Board,
composed of:
Three members appointed by the Governor,
One member appointed by the Senate Committee on
Rules,
One member appointed by the Speaker of Assembly,
One member appointed by the State Treasurer,
One member appointed by the Director of Finance,
One member appointed by the California Public
Utilities Commission,
One member appointed by the California Energy
Commission,
One member appointed by the State Air Resources
Board,
One member appointed by the Department of Water
Resources,
Members appointed by the Governor, Senate Committee on
Rules, and Assembly Speaker must have private sector
financial experience. The measure directs the Bank to
stagger terms of two, three, and four years after the first
four-year term, provides that members can serve after their
terms expire under specified circumstances, and enacts
other provisions for appointments. The bill applies the
Political Reform Act to board members.
III. General Powers. SB 1121 creates the Green Bank as an
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independent entity within state government. The measure
also creates the California Green Bank Fund within the
State Treasury, which is continuously appropriated to the
Bank, which can draw on it for the purposes of the bill.
Additionally, the bill allows the Board to:
Adopt and amend bylaws,
Adopt an official seal,
Establish committees and subcommittees,
Sue or be sued in its own name.
Purchase insurance for itself or its fiduciaries
for acts or omissions, so long as it allows recourse
against the fiduciary for breach of obligation.
To receive a salary of an unspecified amount.
The bill also allows the Chair to place an item pertaining
to the policies and procedures of the Bank on the agenda at
the request of any two board members. Any item must be
discussed at a meeting of the board within 30 days of the
request.
The bank also can receive charitable gifts, grants, and
other conveyances from a variety of sources, so long as the
money isn't donated to support any specific project or
category of projects. The bank also can own or take
interest in property to the extent necessary to carry out
its activities. Additionally, the bank must assess
reasonable fees to cover its reasonable costs.
IV. Staff. SB 1121 directs the Board to select a Chief
Executive Officer (CEO), who shall manage and conduct the
Bank's affairs at the direction of the Board. The CEO must
have significant experience in management and
administration of a financial institution, or in the
financing and development of energy or infrastructure
projects. However, the CEO cannot have any financial
interest in any project considered by the board, or an
interest in an investment institution or its affiliates
that seek or are likely to seek financial assistance from
the bank, unless the interest is placed in a blind trust.
Interests in institutions seeking or likely to seek
assistance must be placed into a blind trust for the tenure
of the CEO's service, plus two years. The CEO shall be
compensated in an amount set by the Board commensurate with
private sector positions.
The CEO shall select an executive vice president to serve
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as CEO during his or her absence or disability, or a
vacancy. The CEO may appoint divisional vice presidents to
oversee each of its two divisions, and set compensation
amounts for the positions at amounts commensurate with
similar private sector financial positions. The CEO also
may employ staff as he or she determines necessary, except
as the Board determines otherwise.
The Bank may contract with banks, credit agencies, and
attorneys at customary commercial rates to provide
services, including administrative and operating functions,
consistent with the California Constitution's civil service
provisions. The Bank may compensate its employees at
prevailing rates of compensation for similar positions in
private industry. However, no director, officer, attorney,
agent, or employee shall participate in the deliberation or
determination of any question affecting his or her personal
interest. The bill doesn't apply these provisions to
persons or entities entering into contracts with the bank,
and also doesn't apply the Political Reform Act to its
staff.
V. Performance Measurement. The CEO must:
Require any entity receiving financial assistance
to report quarterly on its use of support and its
progress fulfilling its objectives. The CEO must make
these reports public.
Pursue a diversified portfolio of clean energy
projects,
Establish appropriate mechanisms to ensure
appropriate use and compliance with all terms of any
financing support made by the Bank,
Create and maintain a fully searchable database
accessible on the bank's Internet Website at no cost
to the public that contains specific information,
Assist in and ensure the development of
underwriting standards for financing of clean energy
projects consistent with good industry practices for
public and private financial institutions,
Establish a risk committee that develops and
publishes operational performance metrics including
operations, risk management, financial and market
metrics, and energy and environmental metrics.
Receive public comment.
The CEO may:
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Establish additional reporting and informational
requirements of any recipient of financing,
Withdraw financing support made to entities that
demonstrate insufficient performance, or wasteful or
fraudulent spending as defined in advance. The CEO
may award these funds competitively to a new or
existing project.
Redact any information regarding applicants and
borrowers to protect confidential business
information.
On February 1st of each year, the Bank shall report to the
Governor and the Joint Legislative Budget Committee
regarding:
A listing of applications received,
A specification of bonds sold and the interest
rates thereon,
The amount of public and private funds leveraged by
the assistance provided,
A report of revenues and expenditures, including
all the bank's costs, with specified contents,
Projection of the bank's needs and requirements for
the coming year, and
Recommendations for changes in state law.
An independent certified public accountant shall audit the
bank each year using generally accepted accounting
standards. The Board also must commission independent
comprehensive biennial evaluations of the bank's
performance. The evaluation shall assess the effectiveness
and cost-effectiveness of all the bank's activities.
The measure changes the Greenhouse Gas Reduction Fund
Investment Plan and Communities Revitalization Act to allow
proceeds of regulatory fee revenues from auction of
greenhouse gas allowances required by the California Global
Warming Solutions Act of 2006 through the Green Bank (AB
32, Pavley). The measure states legislative findings and
declarations to support its purposes, and sunsets its
provisions on January 1, 2036. SB 1121 also states
legislative intent relative to redacting confidential
business information of purposes of Section 3 of Article 1
of the California Constitution.
State Revenue Impact
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No estimate.
Comments
1. Purpose of the bill . A publicly funded Green Bank
would provide low-cost, long-term financing to support
clean, low-carbon projects. And it would leverage the
public funds through the use of financial mechanisms to
attract private investment so that each public dollar
supports multiple dollars of private investment. The
concept of a green bank is part of a long tradition of our
country supporting new energy transitions. In the 1800s,
states rallied to help new businesses exploit their coal
resources. In the early 1900s, tax and accounting benefits
helped to allow oil and gas development to proliferate. In
the mid-20th century, government programs including
insurance guarantees put the nuclear power industry on the
map. A California Green Bank can help low-carbon
industries get to scale, a critical point in a new
product's evolution. There are several "Valleys of Death" a
company has to survive before it produces its product at
scale. It has to get from concept to demonstration phase.
It has to get from demonstration to commercialization - the
ability to make not one but thousands of a product. Then
it has to make that product at scale - being able to
manufacture product as the market demands, at a price
competitive with the traditional alternative.
2. Dangerous business ? SB 1121 would inject the State of
California into the banking business and authorize it to
issue myriad highly complex securities outside of the
Treasurer's Office, a significant expansion over its
current operations far from its core competency.
Additionally, the measure would require state bank
officials to invest state money not in traditional lines of
business, but into clean technology companies, where the
financial sector's investment results have been mixed to
date because it's hard to tell with certainty whether many
firms in the space will make money. While wind and solar
energy finance is overflowing with capital, other clean
technology companies aren't there yet. Joseph Dear, former
CALPERS chief investment officer stated in 2013 that its
cleantech investments had not experienced the J-curve:
losses followed by steep gains. It's been "an L-curve, for
SB 1121 (De Leon) - 2/19/14 -- Page 11
'lose. This had been a noble way to lose money. Just
because it's a good idea doesn't make it a good
investment." Consulting firm McKinsey notes the following:
The sector has experienced a cycle of excitement
followed by high (and often inflated) expectations,
disillusionment, consolidation, and then stability as
survivors pick up the pieces. We've seen this before
with other once-emerging technologies, such as cars,
railroads, elevators, oil, and the Internet. Much of
cleantech is just leaving its disillusionment or
consolidation phase. For example, in transport, Tesla
Motors is looking good; Fisker Automotive went into
bankruptcy in 2013. In energy, SunPower is making
healthy margins and SolarCity raised $450 million in
2013, but over a hundred other solar companies are
gone. The shakeout is brutal-and typical. It has
weeded out weaker players, making the industry as a
whole more robust. Despite the rough patch, annual
growth is at double-digit rates.
Should the state expand its footprint to grant credit to a
sector of the economy where it's notoriously hard to assess
risk, especially given the CALPERS's warning? If so,
should they do so by issuing securities traditionally
reserved for sophisticated financial institutions and
investment banks, and allow issuance without the state
Treasurer, who usually serves as the state's intermediary
with capital markets? The Committee may wish to consider
SB 1121's risks.
3. Overlap ? SB 1121 sets forth broad categories for
projects that the Green Bank should assist. However, the
California Public Utilities Commission, California Energy
Commission, California Air Resources Board, the California
Alternative Energy and Alternative Transportation Finance
Authority also deploy financial assistance that overlaps
with the bill's direction. These programs should be
consistent with each other, and advance the state's overall
goals. If some of the projects envisioned by the bill can
be assisted through other programs, why set up a new state
agency? While the bill also may be referred to the
Committee on Energy, Utilities, and Communication, the
Committee may wish to consider amending SB 1121 to select
an existing agency and grant it new powers, instead of
creating a new one.
SB 1121 (De Leon) - 2/19/14 -- Page 12
4. Capitalization ? Banks make money when their net
interest margin, or the interest paid on its loans over its
cost of capital. To generate net interest margin, it must
have access to capital to loan to individuals who will then
repay it over time with interest, price the interest rate
correctly, and avoid borrower defualt. However, it's
unclear whether the current rules attached to the measure's
proposed bank capital, AB 32 allowance auction proceeds,
can be used to fund the bill's programs. In a November,
2013 trial court opinion in California Chamber of Commerce
v. California Air Resources Board (#34-2012-80001313) , the
Court stated:
"Under the unique circumstances of this case, the
court is not persuaded that the amounts charged for
allowances must be closely linked to the payers'
burdens on the specific regulatory programs that will
be funded by them. Rather, all that is required is a
reasonable relationship between the charges and the
covered entities' (collective) responsibility for the
harmful effects of GHG emissions."
While the current standard set by the Courts is fairly
broad, appeals are expected and the standard could change
as higher courts consider the unique nature of AB 32
auction proceeds in the context of California's tax and fee
rules. Should a higher court find that the auction
proceeds are regulatory fees, or even taxes, the
Legislature's spending flexibility will be sharply
curtailed. The Committee may wish to consider whether it's
premature to direct AB 32 revenues towards uses without
resolution from the Courts regarding the use of the funds.
5. Other Issues . SB 1121 requires significant substantive
and technical amendments, including, among others:
The measure doesn't include consideration of the
bank's investment risk, return of capital, or return
on capital,
The measure doesn't provide a process for creditors
to repay it, and penalties or sanctions for failing to
do,
The proposed board includes representatives from
agencies (CPUC, DWR, CEC, CARB) when their Presidents
or Executive Directors generally serve on boards
instead of appointing individuals. Additionally, the
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Governor appoints directors of these agencies that SB
1121 allows to appoint to the Green Bank Board,
creating a potential conflict.
It's unclear that DWR is an appropriate agency to
select a Green Bank board member given their separate
charges,
Some members must have private sector financial
experience, but no specific knowledge of risk
assessment, capital markets, venture capital funding
of clean energy firms, etc.
The process for the CEO placing both direct
interests and institutional investments into a blind
trust isn't clear. Verification isn't required.
Additionally, direct investments can be removed from a
blind trust immediately after the CEO ceases working
for the Gren Bank, yet institutional investments
cannot be removed for two years, resulting in an
inconsistency.
It's unclear whether the bank's employees will be
state civil service. The bill requires them to be
paid at industry prevailing rates, but doesn't say
whether the state will pay benefits, or whether the
employees will be subject to recent pension reforms,
Conflict of interest provisions don't clearly apply
to all the bank's direct employees and contractors,
It's unclear why the Green Bank should issue tax or
revenue anticipation notes, floating rate and variable
rate securities, asset-backed certificates, bond
guarantees, securitization, loan warehousing, credit
enhancement, and other undefined financial instruments
given the risk involved and the understanding
necessary to accurately price these securities in
capital markets,
Provisions guarding the State's General Fund from
claims in case the Bank cannot pay its creditors
should be more robust, and more closely reflect
conduit bond authorities and the State Infrastructure
Bank,
The term "a competitive bidding process that
encourages aggressive bidding," is undefined, and it's
unclear what happens if the process is not
sufficiently competitive,
To exempt bond interest from income, the measure
needs a separate amendment so allowing in the Revenue
and Taxation Code, and it's unclear whether the bill
applies to capital gains from bond arbitrage.
SB 1121 (De Leon) - 2/19/14 -- Page 14
Support and Opposition (4/21/14)
Support : Agrion; Bernheim and Dean, Inc.; California Clean
Energy Fund; Clean TECH San Diego; Chargepoint; Coalition
for Green Capital Action Fund; DBL Investors; Environmental
Defense Fund; EV Communities Alliance; Natural Resources
Defense Council; Passive House Alliance US; Silicon Valley
Leadership Group; Strategy and Finance Center for Market
Innovation; Sungevity; SunRun.
Opposition : None received.