BILL ANALYSIS Ó
AB 656
Page 1
ASSEMBLY THIRD READING
AB
656 (Cristina Garcia)
As Amended May 4, 2015
Majority vote
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|Committee |Votes |Ayes |Noes |
| | | | |
| | | | |
|----------------+------+---------------------+---------------------|
|Local |9-0 |Maienschein, | |
|Government | |Gonzalez, Alejo, | |
| | |Chiu, Cooley, | |
| | |Gordon, Holden, | |
| | |Linder, Waldron | |
| | | | |
|----------------+------+---------------------+---------------------|
|Appropriations |14-1 |Gomez, Bigelow, |Gallagher |
| | |Bloom, Bonta, | |
| | |Calderon, Chang, | |
| | |Eggman, Eduardo | |
| | |Garcia, Holden, | |
| | |Quirk, Rendon, | |
| | |Wagner, Weber, Wood | |
| | | | |
| | | | |
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SUMMARY: Allows a mutual water company and a public agency to
enter into a joint powers agreement for the provision of insurance
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and risk-pooling. Specifically, this bill:
1)Allows a mutual water company and a public agency to enter into
a joint powers agreement (JPA) for the purpose of risk-pooling
and the provision of technical support, continuing education,
safety engineering, and operational and managerial advisory
assistance to be provided to the members of that JPA for the
purpose of reducing risk liabilities.
2)Allows a mutual water company and a public agency to form a JPA
to provide insurance by any or all of the following methods:
a) Self-insurance, which may be, but is not required to be,
funded by appropriations to establish or maintain reserves
for self-insurance purposes;
b) Insurance in any insurer authorized to transact such
insurance in this state; and,
c) Insurance secured in accordance with existing law
governing surplus line brokers.
3)Allows a mutual water company and a public agency to be
coinsured under a master policy and allows the total premium to
be prorated among those entities.
4)Specifies that, for the purposes of this bill, "mutual water
company" has the same meaning as the term does in existing law
governing mutual water companies.
EXISTING LAW:
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1)Specifies that any corporation organized for or engaged in the
business of selling, distributing, supplying, or delivering
water for irrigation purposes or for domestic use must be known
as a mutual water company.
2)Defines a "public water system" to mean a system for the
provision of water for human consumption through pipes or other
constructed conveyances that has 15 or more service connections
or regularly serves at least 25 individuals daily at least 60
days out of the year. A public water system includes the
following:
a) Any collection, treatment, storage, and distribution
facilities under control of the operator of the system that
are used primarily in connection with the system;
b) Any collection or pretreatment storage facilities not
under the control of the operator that are used primarily in
connection with the system; and,
c) Any water system that treats water on behalf of one or
more public water systems for the purpose of rendering it
safe for human consumption.
3)Requires each mutual water company operating as a public water
system to, no later than December 31, 2012, submit to the
Secretary of State and the local agency formation commission
(LAFCO) a map depicting the boundaries of the property that the
company serves.
4)Requires a mutual water company that operates a public water
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system, if the LAFCO or a county department requests
information, to provide within 45 days of a request all
reasonably available, non-confidential information and explain,
in writing, why any requested information is not reasonably
available.
5)Requires a mutual water company that operates a public water
system to maintain a financial reserve fund to be used for
repairs and replacements to its water productions, transmission
and distribution facilities at a level sufficient for continuous
operation of facilities in compliance with the federal Safe
Drinking Water Act.
6)Authorizes a LAFCO to approve with or without amendment, wholly,
partially, or conditionally or disapprove the annexation of
territory served by a mutual water company operating as a public
water system to a city or special district.
7)Authorizes a LAFCO, in conducting a service review, to include a
review of whether the agencies under review, including any
public water system, are in compliance with the California Safe
Drinking Water Act (SDWA).
8)Authorizes a LAFCO to request information, as part of a service
review, from identified public or private entities that provide
wholesale or retail supply of drinking water, including mutual
water companies and private utilities.
9)Requires each board member of a mutual water company operating
as a public water system to complete a four-hour course
regarding the duties of board members within six months of
taking office, as specified.
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10)Authorizes fines pursuant to the SDWA to be imposed on
directors of a mutual water company if the mutual water company
has received notice of a violation, as specified.
11)Establishes, pursuant to the Mutual Water Company Open Meeting
Act, increased transparency requirements for mutual water
companies that operate a public water system, and allows mutual
water companies to impose liens to collect unpaid charges.
12)Allows, pursuant to the Joint Exercise of Powers Act (JPA Act),
two or more public agencies by agreement to jointly exercise any
power common to the contracting parties, as specified, if
authorized by their legislative or other governing bodies.
13)Defines, for purposes of the JPA Act, public agency to mean
"the federal government or any federal department or agency,
this state, another state or any state department or agency, a
county, county board of education, county superintendent of
schools, city, public corporation, public district, regional
transportation commission of this state or another state, a
federally recognized Indian tribe, or any joint powers authority
formed pursuant to the JPA Act by any of these agencies."
14)Allows a mutual water company to enter into a JPA with any
public agency for the purpose of jointly exercising any power
common to the contracting parties.
15)Allows two or more local public entities, by a JPA, to provide
insurance coverage or self-insurance, or to obtain insurance
coverage by means of a reciprocal or inter-insurance exchange.
JPAs offer self-insurance coverage on a pooled basis for a
variety of purposes, including liability (malpractice and
officers and directors coverage), workers' compensation, health
insurance and property coverage.
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16)Allows a nonprofit hospital corporation affiliated with a
hospital district to participate in a self-insurance pool formed
by two or more hospital districts to pool their self-insurance
claims or losses.
17)Allows two or more local public entities having the same
governing board to be coinsured under a master policy and allows
the total premium to be prorated among those entities.
18)Provides that the pooling of self-insured claims or losses
among local public entities shall not be considered insurance
nor be subject to regulation under the Insurance Code.
19)Allows any liability or loss under a JPA for the pooling of
self-insured claims or losses to be reinsured to the same extent
and the same manner as insurance provided by an insurer.
20)Provides that, where a JPA provides for the pooling of
self-insured claims or losses among entities, if any peril
insured or covered under contract has existed, and the JPA or
other parties to the pool have been liable for any period,
however short, the agreement may provide that the party insured
or covered under contract is not entitled to the return of
premiums, contributions, payments, or advances so far as that
particular risk is concerned.
FISCAL EFFECT: According to the Assembly Appropriations
Committee, no state costs. Costs to local agencies to form JPAs
are not reimbursable.
COMMENTS:
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1)Bill Summary. This bill allows a mutual water company and a
public agency to:
a) Form a JPA for risk-pooling and the provision of technical
support, continuing education, safety engineering,
operational and managerial advisory assistance for the
purpose of reducing risk liabilities;
b) Form a JPA to provide insurance, as specified, and;
c) Be coinsured under a master policy and to prorate the
total premium among themselves.
This bill is sponsored by the California Association of Mutual
Water Companies.
2)Author's Statement. According to the author, "Over 400 mutual
water companies in California were once eligible for insurance
coverage provided by the Association of California Water
Agencies Joint Powers Insurance Authority (ACWA-JPIA). This
structure afforded mutual water companies relatively inexpensive
insurance, as well as resources through ACWA that were made
possible by residuals of revenue that are exempt from taxes, and
that would have otherwise been assessed through regular
market-based insurance. Due to IRS regulations, several years
ago, the ACWA-JPIA determined that mutual water companies were
no longer eligible to participate in ACWA-JPIA's insurance
programs, and thus mutual water companies were excluded from the
coverage and benefits they once enjoyed.
"Mutual water companies are not-for-profit public water systems
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organized under the state Corporations Code. The vast majority
of mutual water companies in California are small, with many
serving less than 3,000 connections and/or less than 3,000
residents. Many mutual water companies serve 'economically
disadvantaged' areas and do not have access to low cost
insurance and other services, such as those available to special
districts under ACWA-JPIA or other joint powers agency insurance
programs. Today, mutual water companies must purchase higher
cost insurance in the open market, and many are not provided the
opportunity to easily obtain other services that could assist
them in building operational and managerial capacity."
3)Background. Public water systems that deliver domestic water
generally fall into three categories:
a) Local agencies (cities and special districts). LAFCOs
control the cities and special districts' boundaries and
local officials are responsible to their voters for their
water rates;
b) Investor-owned public utilities. The California Public
Utilities Commission (PUC) controls the companies' service
areas and their water rates; or,
c) Mutual water companies. These private entities, formed
under statutes governing corporations, respond to their
shareholders, usually the landowners who receive water
service. Neither LAFCOs nor the PUC regulate mutual water
companies.
The State Department of Public Health and some county health
departments monitor the quality of drinking water delivered to
most households, regardless of the type of public water system
that delivers the water.
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Most mutual water companies are organized pursuant to the
General Corporation Law or the Nonprofit Mutual Benefit
Corporation Law. Shareholders in a mutual water company hold a
right to purchase water from the company. Stock in a company is
usually linked to the ownership of a parcel served by the
company and transfers with the land when the parcel is sold to
successive owners. This type of corporate structure allows
landowners to establish, essentially, a customer-owned water
provider to serve their properties.
Governance of a mutual water company is generally limited to
shareholders, or members, of the company. While the details of
any particular company's governing structure are determined by
its articles and bylaws, most mutual water companies allow only
shareholders and members to vote on organizational matters and
serve on the company's governing board.
4)Joint Exercise of Powers Act. JPAs have existed in California
for nearly 100 years, and were originally created to allow
multiple local governments in a region to pool resources to meet
common needs. The Act authorizes federal, state and local
agencies to create and use a JPA, which is a legal document that
allows the contracting parties to exercise powers that are
common to all of the contracting parties. A JPA can be
administered by one of the contracting agencies, or it can be
carried out by a new, separate public entity called a joint
powers authority (JPA).
JPAs are an attractive tool for local governments because they
facilitate more efficient service provision through
collaboration, and they allow local entities to issue bonds
without voter ratification. Public officials have created about
700 JPAs statewide. There are a few, limited instances in JPA
law allowing non-governmental entities (private hospitals or
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tribes) to join a JPA with a public agency partner. There are
no instances of JPAs with only private entities as members.
5)JPAs and Mutual Water Companies. Existing law allows a mutual
water company to enter into a JPA with any public agency for the
purpose of jointly exercising any power common to the
contracting parties. This authority was established by AB 2014
(Cortese), Chapter 250, Statutes of 1994. According to the
Assembly concurrence analysis, "The (bill is) sponsored by the
Association of California Water Agencies. The Association feels
this authority will facilitate arrangements among water entities
to improve the management of the state's water resources, such
as groundwater management, development of water conservation or
reclamation programs, or compliance with water quality
regulatory requirements."
At that time, the proposal was considered unusual. According to
an analysis of AB 2014 by the Senate Agriculture and Water
Committee, "The proposed joint powers agreements between public
and private entities appear to be without substantial precedent
and may raise uncertain issues regarding access to public moneys
by private companies and the applicability of open meeting laws
which, in general, do not apply to private concerns."
Nonetheless, AB 2014 became law, and mutual water companies have
the authority to form a JPA with any public agency for the
purpose of jointly exercising any power common to the
contracting parties.
6)Insurance/Risk-Pooling, JPAs and Local Agencies. Existing law
allows two or more local public entities, by a JPA, to provide
insurance coverage or self-insurance, or to obtain insurance
coverage by means of a reciprocal or inter-insurance exchange
(risk-pooling). JPAs offer self-insurance coverage on a pooled
basis for a variety of purposes, including liability
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(malpractice and officers and directors coverage), workers'
compensation, health insurance and property coverage.
The law also allows a nonprofit hospital corporation affiliated
with a hospital district to participate in a self-insurance pool
formed by two or more hospital districts to pool their
self-insurance claims or losses. In addition, two or more local
public entities having the same governing board may be coinsured
under a master policy, with the total premium to be prorated
among those entities.
Any liability or loss under a JPA for the pooling of
self-insured claims or losses can be reinsured to the same
extent and the same manner as insurance provided by an insurer.
When a JPA provides for the pooling of self-insured claims or
losses, if any peril insured or covered under contract has
existed, and the JPA or other parties to the pool have been
liable for any period, the agreement may provide that the party
insured or covered under contract is not entitled to the return
of premiums, contributions, payments, or advances so far as that
particular risk is concerned.
Pooling of self-insured claims or losses among local public
entities is not considered insurance and is not subject to
regulation under the Insurance Code.
This bill asks for the same authority for mutual water companies
with a public agency partner. According to the sponsor, a JPA
is not subject to insurance regulations or premium taxes so it
can set more competitive premiums and offer expanded coverage.
Funds that would otherwise pay for insurance regulatory
compliance and taxes would remain as "residuals" to be used for
support services for the JPA's members.
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7)Recent Legislative History: Mutual Water Companies. In response
to concerns that some mutual water companies lacked capital to
pay for needed water quality improvements and the managerial
capacity to operate successful public water systems, the
Legislature passed AB 54 (Solorio), Chapter 512, Statutes 2011.
AB 54 established training requirements for mutual water
districts' board members regarding the duties of board members,
made mutual water companies liable for specified fines and
penalties for violating the California Safe Drinking Water Act,
and expanded LAFCOs' authority to review matters related to
mutual water companies.
More recently, AB 240 (Rendon), Chapter 633, Statutes of 2013,
increased transparency requirements for mutual water companies
by enacting the Mutual Water Company Open Meeting Act. AB 240
also allowed mutual water companies to impose liens to collect
unpaid charges. While AB 240's requirements opened the meetings
of mutual water companies to "eligible persons," these
requirements are far more limited than the requirements of the
Ralph M. Brown Act (Brown Act).
8)Recent Legislative History: JPAs. AB 2046 (Gomez) of 2014 would
have authorized a JPA to issue bonds and enter into loan
agreements for the financing or refinancing of a private project
located outside of the state under specified conditions, until
January 1, 2021. This bill raised a number of concerns
regarding the appropriate purposes and activities of JPAs, such
as allowing the issuance of tax-exempt bonds for private
projects outside of the state, severing the geographical nexus
between a bond-issuing JPA and the jurisdiction in which a local
agency project is located, and others. AB 2046 was held in the
Senate Appropriations Committee.
9)Policy Considerations. The Legislature may wish to consider the
following:
a) Insurance Services. This bill allows mutual water
companies to get into the business of insurance, without
regulation under the Insurance Code. The Legislature may
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wish to consider whether this is an appropriate activity for
mutual water companies.
b) Necessity. Existing law allows mutual water companies to
form a JPA with any public agency for the purpose of jointly
exercising any power common to the contracting parties. It
is not clear that this authority is insufficient to allow
mutual water companies to achieve the purposes of this bill.
In addition, as private corporations, mutual water companies
can already join together and pool their resources and
expertise to effect whatever legal purposes they devise. The
Legislature may wish to consider whether this bill is
necessary.
10)Related Legislation. AB 1077 (Holden) of the current
legislative session pending in the Assembly, makes a number of
changes to the Mutual Water Company Open Meeting Act.
AB 617 (Perea) of the current legislative session, pending in
the Assembly, modifies portions of last year's Sustainable
Groundwater Management Act (SGMA), including, among other
things, provisions that allow mutual water companies to join
Groundwater Sustainability Agencies (GSA) formed by one or more
public agencies pursuant to a JPA, and to exercise all of the
GSA powers provided by SGMA.
11)Arguments in Support. The California Association of Mutual
Water Companies, the sponsor of this bill, states, "Under the
proposed legislation?the liability protection product would not
be considered 'insurance' and, thus, would not be subject to
taxation. The residuals from sales of that product would then
revert to the (JPA) to be put to use in providing management,
technical and operational assistance, including grant writing,
legal compliance and financial management training, to the
participating mutual water companies. While we are grateful for
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greater levels of public aid for small water systems that have
been provided recently, this is a novel measure that will
further help mutual water companies use our own resources to
help each other."
12)Arguments in Opposition. None on file.
Analysis Prepared by:
Angela Mapp / L. GOV. / (916) 319-3958 FN:
0000469