BILL ANALYSIS Ó
AB 656
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CONCURRENCE IN SENATE AMENDMENTS
AB
656 (Cristina Garcia)
As Amended June 22, 2015
Majority vote
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|ASSEMBLY: | 68-1 | (May 22, |SENATE: |37-0 | (August 17, |
| | |2015) | | |2015) |
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Original Committee Reference: L. GOV.
SUMMARY: Allows a mutual water company and a public agency to
enter into a joint powers agreement (JPA) for the provision of
insurance and risk-pooling.
The Senate amendments:
1)Specify that the authority granted pursuant to this bill is in
accordance with existing law that 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.
2)Require the agreement authorized pursuant to this bill to
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ensure that no participating public agency becomes responsible
for the underlying debts or liabilities of the joint powers
agency, and shall indemnify any participating public agency
against those debts and liabilities.
3)Require a JPA established pursuant to this bill to solely
utilize any revenues it generates through the insurance
provided to its members under this bill for its necessary
operating expenses, and to provide technical support,
continuing education, safety engineering, operational and
managerial advisory assistance to its members for the purpose
of reducing risk liabilities and furthering the technical
managerial and financial capacity of those members.
AS PASSED BY THE ASSEMBLY, this bill:
1)Allowed a mutual water company and a public agency to enter
into a joint powers agreement 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)Allowed 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,
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c) Insurance secured in accordance with existing law
governing surplus line brokers.
3)Allowed 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)Specified 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.
FISCAL EFFECT: According to the Senate Appropriations
Committee, pursuant to Senate Rule 28.8, negligible state costs.
COMMENTS:
1)Bill Summary. This bill allows a mutual water company and a
public agency to:
a) Form a JPA to provide insurance, as specified;
b) Be coinsured under a master policy and to prorate the
total premium among themselves; and,
c) Form a JPA for the purpose of risk-pooling in accordance
with existing law, which 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.
This bill requires the agreement authorized pursuant to this
bill to: ensure that no participating public agency becomes
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responsible for the underlying debts or liabilities of the
JPA; and, indemnify any participating public agency against
those debts and liabilities.
A JPA established pursuant to this bill must solely utilize
any revenues it generates through the insurance provided to
its members under this bill for its necessary operating
expenses, and to provide technical support, continuing
education, safety engineering, operational and managerial
advisory assistance to its members for the purpose of reducing
risk liabilities and furthering the technical managerial and
financial capacity of those members.
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 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
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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). Local
Agency Formation Commissions (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.
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
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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 (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.
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 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
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the Association of California Water Agencies. The Association
[of California Water Agencies] 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
(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.
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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.
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
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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)Related Legislation. AB 1077 (Holden) of the current
legislative session, makes a number of changes to the Mutual
Water Company Open Meeting Act. AB 1077 is pending in on the
Senate Floor.
AB 617 (Perea) of the current legislative session, 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. AB 617 is pending in the Senate Natural Resources and
Water Committee.
9)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 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."
10)Arguments in Opposition. None on file.
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Analysis Prepared by:
Angela Mapp / L. GOV. / (916) 319-3958 FN:
0001172