BILL ANALYSIS Ó SENATE COMMITTEE ON ENVIRONMENTAL QUALITY Senator Wieckowski, Chair 2015 - 2016 Regular Bill No: AB 450 ----------------------------------------------------------------- |Author: |McCarty | ----------------------------------------------------------------- |-----------+-----------------------+-------------+----------------| |Version: |2/23/2015 |Hearing | 7/1/2015 | | | |Date: | | |-----------+-----------------------+-------------+----------------| |Urgency: |No |Fiscal: |No | ------------------------------------------------------------------ ----------------------------------------------------------------- |Consultant:|Rebecca Newhouse | | | | ----------------------------------------------------------------- SUBJECT: Greenhouse gas: energy efficiency: financing. ANALYSIS: Existing law: 1) Defines a Property Assessed Clean Energy (PACE) bond as a bond that is secured by a voluntary contractual assessment or a voluntary special tax on property to finance the installation of distributed generation renewable energy sources, electric vehicle charging, infrastructure, or energy, or water efficiency improvements that is levied pursuant to a chartered city's constitutional authority. 2) Establishes the California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA), which is authorized to support alternative energy projects by issuing revenue bonds, making loans, and authorizing sales tax exemptions. 3) Requires CAEATFA to develop and administer a PACE Reserve program to reduce overall costs to the property owners of PACE bonds issued by an applicant, as defined, by providing a reserve of no more than 10% of the initial principal amount of the PACE bond, and requires CAEATFA to develop and administer a PACE risk mitigation program for PACE financing to increase acceptance in the market place and protect against the risk of default and foreclosure. 4) Under the California Global Warming Solutions Act of 2006 AB 450 (McCarty) Page 2 of ? (also known as AB 32) (Health and Safety Code §38500 et seq.), requires the California Air Resources Board (ARB) to determine the 1990 statewide GHG emissions level and approve a statewide GHG emissions limit that is equivalent to that level, to be achieved by 2020. AB 32 authorizes the ARB to adopt a regulation that establishes a market-based mechanism with declining annual aggregate emission limits for sources that emit GHGs. 5) Establishes the (Greenhouse Gas Reduction Fund) in the State Treasury, requires all moneys, except for fines and penalties, collected pursuant to a market-based mechanism be deposited in the fund, and requires the Department of Finance, in consultation with the ARB and any other relevant state agency, to develop, as specified, a three-year investment plan for the moneys deposited in the GGRF. (Government Code §16428.8) 6) Requires moneys from the GGRF be used to facilitate the achievement of reductions of GHG emissions in this state consistent with AB 32, and authorizes the use of GGRF moneys for, among other things, funding to reduce greenhouse gas emissions through energy efficiency, clean and renewable energy generation, distributed renewable energy generation, transmission and storage, at public buildings and industrial and manufacturing facilities. (Health and Safety Code §39712) This bill authorizes the use of GGRF moneys for the implementation of the PACE Reserve Program and a PACE risk mitigation program. Background 1) PACE. PACE is a 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. 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 AB 450 (McCarty) Page 3 of ? 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. PACE programs typically are more attractive to borrowers and lenders because they can offer a longer pay-back period (up to 20 years) with smaller payments than other types of loans. In addition, the contractual assessment can get lower interest rates on bond issues and, in turn, this is extended to the consumer. Property owners own the improvements, allowing them to claim tax benefits and rebates. In 2010, SB 77 (Pavley, Chapter 15, Statutes of 2010) appropriated $50 million from the Renewable Resource Trust Fund to the CAEATFA for the purpose of creating a PACE Bond Reserve Program, which would assist local jurisdictions in financing the installation of energy efficiency and renewable energy upgrades for residential and commercial properties. While the CAEATFA began the initial administration and outreach in 2010 to develop the PACE Bond Reserve Program, the development was stalled by challenges at the federal level. In 2010, the Federal Housing Finance Agency (FHFA) raised concerns that residential PACE financing could pose a risk for Fannie Mae and Freddie Mac, because PACE assessments are a first-priority lien in the case of foreclosure and lenders would have to pay outstanding PACE assessments before paying mortgage costs. The FHFA's action triggered many local governments to suspend their residential PACE programs. Subsequently, the money was reappropriated by AB 1X 14 (Skinner, et. al, Chapter 9, Statutes of 2011) to develop and implement the Clean Energy Upgrade Financing Program, with similar energy efficiency financing goals to the PACE program. As a result, the PACE Bond Reserve Program, established pursuant to SB 77 was never developed by CAEATFA. In response to concerns from the federal government, in 2013, Senate Bill 96 (Budget Committee, Chapter 356, Statutes of 2013) directed CAEATFA to administer a PACE risk mitigation program to increase acceptance in the market place and protect against the risk of default and foreclosure. CAEATFA was appropriated $10 million for that purpose and developed the PACE Loss Reserve Program to mitigate the potential risk to AB 450 (McCarty) Page 4 of ? mortgage lenders associated with residential PACE financing. The $10 million loss reserve is intended to make first mortgage lenders whole for any losses in a foreclosure or a forced sale that are attributable to a PACE lien covered under the Loss Reserve Program. The goal is to put first mortgage lenders in the same position they would be in without a PACE lien. Last year, AB 2597 (Ting, Chapter 614, Statutes of 2014) clarified that PACE assessments are special tax assessments, rather than loans, and updated the value of eligible improvements financed through PACE to up to 15% of the home value. The loss reserve currently supports over 24,000 PACE financings valued at nearly $499 million. The Loss Reserve Program's largest participating PACE administrator expects to enroll an additional $600 million worth for its 2015 activity, which in turn will increase the program's liability. To date, no claims on the loss reserve have been made. During Program development, CAEATFA staff initially estimated that the loss reserve would last between eight to twelve years. According to CAEATFA, they are currently working with financial advisors to help determine the Loss Reserve Program's potential long-term liability and longevity. 2) Cap-and-trade auction revenue. ARB has conducted 11 cap-and-trade auctions. The first 10 have generated almost $1.6 billion in proceeds to the state. Several bills in 2012, and one in 2014, provided legislative direction for the expenditure of auction proceeds including: SB 535 (de León, Chapter 830, Statutes of 2012) requires that 25% of auction revenue be used to benefit disadvantaged communities and requires that 10% of auction revenue be invested in disadvantaged communities. AB 1532 (J. Pérez, Chapter 807, Statutes of 2012) directs the Department of Finance to develop and periodically update a three-year investment plan that identifies feasible and cost-effective GHG emission AB 450 (McCarty) Page 5 of ? reduction investments to be funded with cap-and-trade auction revenues. AB 1532 specifies that reduction of greenhouse gas emissions through strategic planning and development of sustainable infrastructure projects, are eligible investments of GGRF. SB 1018 (Budget Committee, Chapter 39, Statutes of 2012) created the GGRF, into which all auction revenue is to be deposited. The legislation requires that before departments can spend moneys from the GGRF, they must prepare a record specifying: (1) how the expenditures will be used, (2) how the expenditures will further the purposes of AB 32 (Nuñez, Pavley) Chapter 488, Statutes of 2006, (3) how the expenditures will achieve GHG emission reductions, (4) how the department considered other non-GHG-related objectives, and (5) how the department will document the results of the expenditures. SB 862 (Budget Committee, Chapter 36, Statutes of 2014) requires the ARB to develop guidelines on maximizing benefits for disadvantaged communities by agencies administering GGRF funds, and guidance for administering agencies on GHG emission reduction reporting and quantification methods. Legal consideration of cap-and-trade auction revenues. The 2012-13 Budget analysis of cap-and-trade auction revenue by the Legislative Analyst's Office noted that, based on an opinion from the Office of Legislative Counsel, the auction revenues should be considered mitigation fee revenues, and their use requires that a clear nexus exist between an activity for which a mitigation fee is used and the adverse effects related to the activity on which that fee is levied. Therefore, in order for their use to be valid as mitigation fees, revenues from the cap-and-trade auction must be used to mitigate GHG emissions or the harms caused by GHG emissions. In 2012, the California Chamber of Commerce filed a lawsuit against the ARB claiming that cap-and-trade auction revenues constitute illegal tax revenue. In November 2013, the superior court ruling declined to hold the auction a tax, concluding that it is more akin to a regulatory fee. The plaintiffs filed an appeal with the 3rd District Court of AB 450 (McCarty) Page 6 of ? Appeal in Sacramento in February of last year. AB 32 auction revenue investment plan. The first three-year investment plan for cap-and-trade auction proceeds, submitted by Department of Finance, in consultation with ARB and other state agencies in May of 2013, identified sustainable communities and clean transportation, clean energy and energy efficiency, and natural resources and waste diversion, as the three key sectors that provide the best opportunities for achieving the legislative goals and supporting the purposes of AB 32. The plan recommended the aforementioned sector receive the largest allocation of funds from the GGRF, but did not specify a monetary amount. Budget allocations. The 2014-15 Budget allocates $832 million in GGRF revenues to a variety of transportation, energy, and resources programs aimed at reducing GHG emissions. Various agencies are in the process of implementing this funding. SB 862 (Committee on Budget and Fiscal Review), a budget trailer bill, established a long-term cap-and-trade expenditure plan by continuously appropriating portions of the funds for designated programs or purposes. The legislation appropriates 25% for the state's high-speed rail project, 20% for affordable housing and sustainable communities grants, 10% to the Transit and Intercity Rail Capital Program, and 5% for low-carbon transit operations. The remaining 40% is available for annual appropriation by the Legislature. Of the 40% available for annual appropriation, $75 million was appropriated for energy efficiency and weatherization upgrades in disadvantaged communities to be administered by the Department of Community Services and Development and $20 million was appropriated to the California Energy Commission (CEC) for energy efficiency projects in public buildings. The Governor's proposed budget for 2015-16 increases those appropriations to $140 million and $40 million respectively, and adds additional appropriations of $60 million for renewable energy and energy efficiency projects at the University of California and California State University campuses. Comments 1) Purpose of Bill. According to the author, "The Property AB 450 (McCarty) Page 7 of ? Assessed Clean Energy Program is a win-win-win for Californians. It is a win for the environment by increasing energy efficiency, it is a win for ratepayers by reducing monthly electricity costs and it is a win for economy. It is a prime example of the opportunity created when we invest in the green economy. I can think of no better place to invest Cap & Trade funds, than to expand and strengthen the PACE program." 2) PACE Loss Reserve. As noted in the background, the PACE Loss Reserve Program was established to address concerns from FHFA regarding PACE financing threatening the first-lien status of single-family loans owned or guaranteed by Fannie Mae and Freddie Mac and exists to ensure that mortgage lenders are whole for any losses in a foreclosure or a forced sale that are attributable to a PACE lien covered under the Program. AB 450 would authorize GGRF moneys to be used for the PACE Loss Reserve Program administered by CAEATFA. GGRF moneys are required to facilitate the achievement of GHG emission reductions and advance the regulatory purposes of AB 32. While many energy efficiency improvements covered by PACE loans may meet this requirement, the nexus is more tenuous for moneys that sit in the loss reserve, as proposed by AB 450, since these are only tapped in the case of a foreclosure. In general, those moneys serve a much more indirect role in emissions reductions, since their purpose is to provide some level of risk mitigation for mortgage lenders, and therefore allay previously articulated concerns from the FHFA, which in turn would hopefully encourage cities and counties to set up these PACE programs. Ultimately, if there are minimal defaults on homes with PACE liens, the GGRF moneys will simply be sitting in the loss reserve. If there is a downturn in the housing market, the loss reserve could be exhausted quickly, and those moneys ensure first mortgage lenders are made whole for any losses due to a PACE lien. In either case, since GGRF moneys would only be indirectly linked to GHG emissions reductions, is the PACE Loss Reserve an appropriate expenditure from the GGRF? 3) GHG emissions reductions. Statute specifies, in order to be covered under the state's PACE Loss Reserve Program, that PACE AB 450 (McCarty) Page 8 of ? programs are required to finance qualified energy and water efficiency, electric vehicle charging infrastructure, and clean energy improvements. The PACE administrator determines which projects within the categories established by statute are eligible under their individual programs. Depending on which projects are included under individual PACE programs, not all projects may result in clear GHG emissions reductions. Additionally, although individual programs may require some level of tracking, there is no statutory requirement for the tracking or reporting of GHG emissions reductions achieved through PACE programs in order to be eligible to qualify for the state's PACE Loss Reserve Program. 4) Is this bill necessary? CAEATFA staff recently finished an analysis of the Loss Reserve Program's liability and longevity, and estimates that the existing loss reserve of $10 million, using real estate data from the current economic climate, will last through 2025. As there is no imminent need to augment the loss reserve, and there is not a clear and direct nexus between the PACE loss reserve and GHG emissions reductions, the authorization of GGRF moneys for the implementation of the PACE Reserve Program does not appear necessary or prudent at this time. Instead, an amendment is needed to require CAEATFA, by March 2017, to report on various strategies through which the state can support, encourage, or expand participation in PACE programs throughout the state, and provide recommendations for appropriate funding sources for those strategies. Related/Prior Legislation SB 77 (Pavley, Chapter 15, Statutes of 2010) appropriated $50 million from the Renewable Resource Trust Fund to CAEATFA for the purpose of creating a PACE Bond Reserve Program. AB X1 14 (Skinner, et al., Chapter 9, Statutes of 2011) required the CAEATFA to develop and administer the Clean Energy Upgrade Financing Program to assist in reducing the costs to property owners making energy efficiency and renewable energy upgrades to their homes. AB 450 (McCarty) Page 9 of ? SB 96 (Budget Committee, Chapter 356, Statutes of 2013) directed CAEATFA to administer a PACE risk mitigation program to increase acceptance in the market place and protect against the risk of default and foreclosure. AB 2597 (Ting, Chapter 614, Statutes of 2014) clarified that PACE assessments are special tax assessments, rather than loans, and updated the value of eligible improvements financed through PACE to up to 15% of the home value. SOURCE: Author SUPPORT: Building Owners and Managers Association of California California Business Properties Association California Energy Efficiency Industry Council California State Association of Counties International Council of Shopping Centers Commercial Real Estate Development Association, NAIOP of California Renewable Funding Renovate America Sacramento Municipal Utility District TRANE Vote Solar OPPOSITION: None received. ARGUMENTS IN SUPPORT: Supporters state that this bill will expand an already successful program by allowing cap-and-trade auction revenue to be allocated to the PACE program and specifically the reserve fund. They also note that expanding PACE would assist property owners in being part of the solution to reduce GHGs and create high paying jobs for the workers who install the clean energy upgrades. ARGUMENTS IN OPPOSITION: N/A DOUBLE REFERRAL: AB 450 (McCarty) Page 10 of ? If this measure is approved by the Senate Environmental Quality Committee, the do pass motion must include the action to re-refer the bill to the Senate Appropriations Committee. -- END --