BILL ANALYSIS Ó
AB 2618
Page 1
Date of Hearing: April 27, 2016
ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT
Susan Talamantes Eggman, Chair
AB 2618
(Nazarian) - As Amended March 17, 2016
SUBJECT: Community facilities districts: powers.
SUMMARY: Expands the authority granted to a Mello-Roos
community facilities district (CFD) formed to finance and
refinance energy efficiency, water conservation, and renewable
energy improvements to privately or publically owned property.
Specifically, this bill:
1)Authorizes a CFD, formed pursuant to the Mello-Roos Community
Facilities Act, to use power purchase agreements for the
purposes of financing and refinancing energy efficiency, water
conservation, and renewable energy improvements to privately
or publically owned property pursuant to existing law.
2)Authorizes a CFD, formed pursuant to an alternate procedure in
existing law, which authorizes private property owners to pay
Mello-Roos special taxes to finance specified energy
improvements, to also finance seismic safety improvements
necessary for compliance with seismic safety standards or
regulations.
FISCAL EFFECT: None
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COMMENTS:
1)Property Assessed Clean Energy (PACE) Programs. Utilizing the
legal authority to create a financing district as a charter
city, the City of Berkeley, in 2007, established a citywide
voluntary program to allow residential and commercial property
owners to install solar systems and make energy efficiency
improvements to their buildings and to repay the cost over 20
years via an assessment on the property tax bill. Since the
inception of PACE as a financing tool in Berkeley, the
Legislature has granted the authority to local governments to
provide up-front financing to property owners to install
renewable energy sources or energy efficiency improvements
that are permanently fixed to their properties, which is
repaid through the property tax system. Most PACE programs
are implemented and administered under two statutory
frameworks: AB 811 (Levine), Chapter 159, Statutes of 2008,
amended the Improvement Act of 1911 to allow for voluntary
contractual assessments to finance PACE projects, and SB 555
(Hancock), Chapter 493, Statutes of 2011, amended the
Mello-Roos Community Facilities District Act to allow for
Mello-Roos special taxes (parcel taxes) to finance PACE
projects.
The Legislature has expanded PACE for residential and
commercial property owners to pay for renewable energy
upgrades, energy or water efficiency retrofits, seismic
improvements, and other specified improvements for their homes
or buildings. Local agencies create PACE assessment districts
under AB 811 or establish a CFD under SB 555, 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 or
agree to annex their property into a CFD to re-pay the bonds
via an assessment or special tax (parcel tax), secured by a
priority lien, on their property tax bill. The intent of the
program is that the assessment or parcel tax remains with the
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property even if it is sold or transferred, and the
improvements must be permanently fixed to the property.
In California, there are several models available to local
governments in administering a PACE program. Only Sonoma and
Placer County administer their own PACE program.
The majority of local governments contract with a private
third-party or join a Joint Powers Authority (JPA) which
contracts with a private third-party to carry out their PACE
programs.
The cost of third-party administration is not borne by the
local agency, but is built into PACE loan financing. Some of
these programs focus on residential projects, others target
commercial projects, and some handle both residential and
commercial portfolios.
Only a few local governments have begun to use voluntary
contractual assessments for seismic improvements. For
example, the City of Berkeley and the City and County of San
Francisco began to offer financing for improvements to soft,
weak and open front (SWOF) buildings and additional voluntary
seismic retrofits by a voluntary contractual assessment
program administered by Alliance NRG.
2)PACE and Mello Roos. The Mello-Roos Community Facilities Act
authorizes local governments to form a CFD and levy special
taxes (parcel taxes) to finance a wide variety of facilities
and services. Current law establishes the process for the
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formation of a CFD, and requires two-thirds voter approval for
the Mello-Roos special tax. A CFD issues bonds secured by
these special taxes to finance the facilities and services.
SB 555 authorized the use of Mello-Roos taxes to help finance
renewable energy, water conservation, and energy efficiency
improvements on private property. The improvements financed
by a CFD must be affixed to or on real property and may only
be installed with the prior written consent of the owner or
owners of the building or real property. SB 555 also
prohibited a CFD from financing renewable energy, water
conservation, and energy efficiency improvements on privately
owned property in connection with the initial construction of
a residential building, unless the initial construction is
undertaken by the intended owner or occupant.
Additionally, SB 555 authorized an alternate procedure for
establishing a CFD that initially contains no parcels of land,
but consists only of territory from which parcels may
subsequently be annexed to the CFD with the unanimous approval
of parcel owners. This process allows a property owner to opt
into the PACE program by voting to annex their property into
the CFD, which authorizes the levy of the special tax and
special tax lien on their property.
3)Bill Summary. Existing law authorizes CFDs to finance seismic
safety work on buildings or real property, privately or
publicly owned, that must be done to comply with seismic
safety standards or regulations. The alternate procedure
established by SB 555 is the statutory authority used by third
party providers, like the sponsor of this bill, to administer
PACE programs. CFDs, formed pursuant to this alternate
procedure established by SB 555, are limited in the types of
facilities they can finance or refinance: energy efficiency,
water conservation, and renewable energy improvements. This
bill would add seismic safety improvements necessary for
compliance with seismic safety standards or regulations to the
list of improvements to facilities that can be financed by a
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CFD formed for the more specific purposes of allowing
voluntary participation by property owners to annex their
property into the CFD to utilize PACE financing to make these
types of improvements.
This bill also expands the authority granted by SB 555 by
allowing a CFD to use a power purchase agreement for the
purposes of financing and refinancing renewable energy, water
conservation, and energy efficiency improvements on privately
or publicly owned property. This bill is sponsored by Ygrene.
4)Author's Statement. According to the author, "According to
the United States Geological Survey, there is a 99.7% chance
that a major earthquake of 6.7 in scale will strike California
in the next 30 years. A major earthquake occurring is only a
matter of when - not if. Unfortunately, the number of
residential and commercial buildings lacking appropriate,
seismically safe features is far too high when considering the
level of seismicity in California. In Los Angeles alone,
nearly 1,500 older concrete buildings have been identified as
at-risk and the potential, statewide damage from the next big
earthquake could far exceed economic loss of past California
earthquakes.
"As more local jurisdictions begin to follow suit of San
Francisco and Los Angeles when considering mandating
retrofitting, innovative ways to accelerate compliance for
property owners are needed. Along with energy efficiency,
water conservation, and renewable energy projects, contractual
assessment districts and some types of community facilities
districts already allow for seismic safety improvements to be
financed through PACE programs. This bill clarifies that all
community facilities districts under the Mello-Roos Act may
finance seismic safety improvements. By creating financing
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mechanisms for commercial and residential property owners,
this bill provides property owners with another tool to make
the necessary investment to improve the safety of their home
or business before the inevitable "big one" strikes."
5)Federal Housing Finance Agency. In 2010, Federal Housing
Finance Agency (FHFA), which oversees the nation's largest
mortgage finance companies, Fannie Mae and Freddie Mac, raised
concerns that residential PACE financing could pose a risk for
federal mortgage enterprises (Fannie Mae and Freddie Mac),
because PACE loans are a first-priority lien in the case of
foreclosure and lenders would have to pay outstanding PACE
assessments before paying mortgage costs. In August of 2010,
Fannie Mae and Freddie Mac announced they would not purchase
mortgages for homes with first lien priority PACE obligations.
The FHFA's action triggered many local governments to suspend
their residential PACE programs.
SB 96 (Committee on Budget and Fiscal Review), Chapter 356,
Statutes of 2013, addressed this concern. This budget trailer
bill tasks the California Alternative Energy and Advanced
Transportation Financing Authority (CAEATFA) with
administering a PACE loss reserve program of $10 million to
keep mortgage interests whole during a foreclosure or a forced
sale. CAEATFA recently filed its regulations for the program,
and is now accepting applications from PACE administrators.
The PACE Loss Reserve Program will compensate first mortgage
lenders for losses resulting from the existence of a PACE lien
in a foreclosure or forced sale. The program will cover PACE
payments made during foreclosure, if a mortgage lender
forecloses on a home that has a PACE lien, and any losses to a
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first mortgage lender up to the amount of outstanding PACE
payment, if a county conducts a forced sale on a home for
unpaid taxes. The intent of the Program is to put the first
mortgage lender in the same position it would be in without a
PACE lien.
The FHFA issued clarity to their position following the
creation of the PACE Loss Reserve Program, in a letter to the
Governor dated May 1, 2014, which reads, "I am writing to
inform you that FHFA is not prepared to change its position on
California's first-lien PACE program and will continue to
prohibit the Enterprises from purchasing or refinancing
mortgages that are encumbered with first-lien PACE loans?In
making this determination, FHFA has carefully reviewed the
Reserve Fund created by the State of California and, while I
appreciate that it is intended to mitigate these increased
losses, it fails to offer full loss protection to the
Enterprises. The Reserve Fund is not an adequate substitute
for Enterprise mortgages maintaining a first lien position and
FHFA also has concerns about the Reserve Fund's ongoing
sustainability. "
6)Federal Housing Administration. In August 2015, the Federal
Housing Administration (FHA) announced the development of
Single Family FHA PACE guidance. "The Single Family FHA
guidance will address the impact of PACE assessment on
purchases, refinances and loan modification options available
to borrowers experiencing distress and will require the
subordination of PACE financing to the first lien FHA
mortgage. The guidance will address the eligible methods of
subordination of existing PACE liens."
The FHFA has not issued anything further following the
announcement from FHA regarding the development of guidelines.
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7)CAEATFA. As part of the 2015-16 Budget, the Legislature
tasked CAEATFA, in consultation with the California Public
Utilities Commission, to create a working group with
stakeholders to develop criteria for the comparative
assessment of energy efficiency financing programs in
California, including PACE financing. CAEATFA has created a
public process to ensure stakeholder participation and draft
criteria for the comparative assessment of energy efficiency
financing programs for public comment. The draft criteria,
includes energy saving attributable to program financing,
cost-effectiveness, and customer experience, which includes
customer satisfaction and customer protections.
8)Related Legislation. AB 2693 (Dababneh), currently pending in
the Assembly Banking and Finance Committee, is double referred
to this Committee. AB 2693 seeks to address a number of
issues raised since the creation of PACE regarding consumer
protection and disclosures, and the lien status.
9)Committee Amendments. The Committee may wish to ask the
author to remove Section 1 from the bill regarding power
purchase agreements in consideration of the following:
The Committee may wish to consider the value of authorizing a
CFD to use power purchase agreements to finance energy
improvements. The concept of a power purchase agreement is to
offer consumers another option, if they cannot afford up-front
costs to purchase and install energy saving improvements like
solar panels. Under the authority granted by this bill,
property owners would make payments with special taxes on a
property tax bill, instead of on a utility bill, which
provides more security because of the lien priority of special
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taxes. The Committee may wish to consider what benefits a
PACE power purchase agreement would offer consumers that is
not already available under existing law.
AB 44 (Blakeslee), Chapter 564, Statutes of 2010, expanded the
use of voluntary contractual assessments to include financing
electricity purchase agreements. AB 44 also required an
electricity purchase agreement to contain specified
qualifications, conditions, and protections for property
owners. The Committee may wish to note that this bill does
not include any of those same requirements.
Given the current discussions regarding data collection and
performance of PACE financing at CAEATFA, the outstanding
issues regarding lien priority, and concerns expressed over
the lack of disclosure provided by third party PACE providers
the Committee may wish to consider the timeliness of expanding
any PACE programs at this time. Additionally, the Committee
may wish to consider beyond the scope of this individual bill,
if it is time to take a closer look at PACE programs and the
involvement of local governments in both the implementation
and oversight of programs at the local level.
10)Arguments in Support. Ygrene argues, "There are currently at
least 10 statewide and regional PACE programs in the State,
most of which have been formed based on the AB 811 statute.
There are also two known programs based on the SB 555 statute.
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On behalf of the Golden State Finance Authority, Ygrene
operates a SB 555 based program in approximately 200 counties
and incorporated cities, including Los Angeles, San Jose,
Oakland and other jurisdictions where there are mandates and
strong demand for seismic retrofits to 'soft-story'
multi-family residential, commercial and other properties.
Given these facts it is imperative that as much private
capital and program choice as possible - this bill would
result in an increase to the available capital and choices for
property owners."
11)Arguments in Opposition. None on file.
REGISTERED SUPPORT / OPPOSITION:
Support
Ygrene Energy Fund [SPONSOR]
Opposition
None on file.
Analysis Prepared by:Misa Lennox / L. GOV. / (916) 319-3958
AB 2618
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