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  







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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  








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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  








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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  








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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  








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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.









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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:








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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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