BILL ANALYSIS Ó
SENATE COMMITTEE ON ENVIRONMENTAL QUALITY
Senator Wieckowski, Chair
2015 - 2016 Regular
Bill No: AB 450
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|Author: |McCarty |
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|Version: |2/23/2015 |Hearing | 7/1/2015 |
| | |Date: | |
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|Urgency: |No |Fiscal: |No |
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|Consultant:|Rebecca Newhouse |
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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
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(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
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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
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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
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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
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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
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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
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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
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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
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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.
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