BILL ANALYSIS                                                                                                                                                                                                    



          SENATE COMMITTEE ON GOVERNANCE AND FINANCE
                         Senator Robert M. Hertzberg, Chair
                                2015 - 2016  Regular 

                              
          
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          |Bill No:  |AB 2618                          |Hearing    | 6/15/16 |
          |          |                                 |Date:      |         |
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          |Author:   |Nazarian                         |Tax Levy:  |No       |
          |----------+---------------------------------+-----------+---------|
          |Version:  |5/2/16                           |Fiscal:    |No       |
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          |Consultant| Weinberger                                           |
          |:         |                                                      |
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                        Community facilities districts:  powers



          Authorizes Mello-Roos community facilities districts to finance  
          improvements to bring real property into compliance with seismic  
          safety standards or regulations


           Background 

           Property assessed clean energy (PACE) financing programs allow  
          local governments to offer loans to private property owners to  
          cover the initial costs of renewable energy, energy efficiency,  
          water efficiency, and other improvements to private property  
          that offer public benefits.  Property owners repay the loans  
          through voluntary assessments or parcel taxes, which are secured  
          by priority liens and appear annually on property tax bills  
          until the loans are repaid.  

          State law establishes two distinct statutory frameworks under  
          which local governments can implement and administer PACE loan  
          programs that rely on voluntary contractual assessments or  
          parcel taxes for repayment of the loans.  

          Voluntary Contractual Assessment PACE Financing.  A benefit  
          assessment is an involuntary charge that property owners pay for  
          a public improvement or service that provides a special benefit  
          to their property.  As an alternative to benefit assessments,  
          and only with the free and willing consent of affected property  







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          owners, state law lets public agencies use voluntary contractual  
          assessments to finance:
                 Renewable energy sources or energy efficiency  
               improvements that are permanently fixed to real property  
               (AB 811, Levine, 2008).

                 Water efficiency improvements that are permanently fixed  
               to real property (AB 474, Blumenfield, 2009).

                 Electric vehicle charging infrastructure (SB 1340,  
               Kehoe, 2010).

                 Seismic strengthening improvements (AB 184, Swanson,  
               2011).

          Mello-Roos Parcel Tax PACE Financing.  The Mello-Roos Community  
          Facilities Act allows counties, cities, special districts, and  
          school districts to levy special taxes (parcel taxes) to finance  
          a wide variety of public works, including parks, recreation  
          centers, schools, libraries, child care facilities, and utility  
          infrastructure.  A Mello-Roos Community Facilities District  
          (CFD) issues bonds against these special taxes to finance the  
          public works projects.  In addition to financing public works,  
          state law also allows CFDs to finance improvements to private  
          property that bring the property into compliance with seismic  
          safety standards or regulations.  State law establishes an  
          alternative process by which a local government can form a CFD  
          to finance only energy efficiency, water conservation, and  
          renewable energy improvements that are affixed to or on real  
          property and in buildings, whether the real property or  
          buildings are privately or publicly owned (SB 555, Hancock,  
          2011).  Under the alternative formation process, a CFD can  
          initially consist solely of territory proposed for future  
          annexation to the CFD, with the condition that a parcel or  
          parcels within that territory may be annexed to the CFD and  
          subjected to the special tax only with the unanimous approval of  
          the parcel owner or owners at the time of annexation.

          In 2010, the 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 Fannie Mae and Freddie Mac,  
          because PACE loans are a first-priority lien in the case of  
          foreclosure and outstanding PACE assessments would be paid  








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          before mortgage obligations.  As a result, Fannie Mae and  
          Freddie Mac stated that they would no longer purchase mortgage  
          loans secured by properties with outstanding PACE loans.

          Unlike the statutes allowing local government to offer PACE  
          loans that are secured with voluntary contractual assessments,  
          which can be used to finance seismic improvements to private  
          property, the Mello-Roos Act's alternative process for allowing  
          parcels to annex into a CFD and be subject to a voluntary parcel  
          tax can only be used to finance energy efficiency, water  
          conservation, and renewable energy improvements.  Some advocates  
          for PACE financing programs want the Legislature to allow local  
          governments to use the Mello-Roos PACE financing framework to  
          provide loans for improvements to private property that bring  
          the property into compliance with seismic safety standards or  
          regulations.  


           Proposed Law

           Assembly Bill 2618 adds seismic improvements, as specified, to  
          the types of improvements that can be financed on publicly or  
          privately owned property by a community facilities district that  
          is formed through an alternative process that allows property  
          owners to voluntarily annex their property into the CFD.


           State Revenue Impact

           No estimate.


           Comments

           1.  Purpose of the bill  .  Millions of California's residents live  
          in close proximity to some of the most active earthquake faults  
          in the United States.  To save lives and improve the resiliency  
          of their communities, many local governments are requiring  
          property owners to make seismic strengthening retrofits to  
          structures that are likely to suffer severe damage in a strong  
          earthquake, including "soft first-story" buildings and concrete  
          structures built before the 1980s.  Some communities have  
          adopted financing programs based on the voluntary contractual  
          assessment model authorized by the 2011 Swanson bill.  To make  








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          more seismic retrofit financing options available to local  
          governments and property owners, AB 2618 adds seismic safety  
          improvements to the types of projects that can be financed by  
          annexing a parcel to a community facilities district that  
          imposes a parcel tax to repay the loan.  With communities across  
          California passing ordinances requiring seismic retrofits, it is  
          essential the property owners have options when considering how  
          to finance these improvements.  Expanding the Mello-Roos parcel  
          tax PACE statutes to cover seismic improvements will make this  
          financing option available to more property owners across the  
          state while making the two state-authorized PACE models more  
          consistent with each other.

          2.   Premature  ?  Despite the best efforts of the California  
          Legislature and local governments to support the development and  
          implementation of innovative PACE financing programs, the  
          programs still raise some questions that have yet to be  
          resolved.  For example, federal officials' ongoing concerns  
          about the priority of PACE financing liens raise concerns about  
          the effect of PACE financing on residential mortgages.  Some  
          real estate finance stakeholders and public officials raise  
          concerns about inadequate disclosure provided to consumers by  
          PACE financing providers.  Additionally, the California  
          Alternative Energy and Advanced Transportation Financing  
          Authority (CAEATFA) is still in the process of developing  
          criteria for comparative assessment of energy efficiency  
          financing programs.  It may be premature to expand the allowable  
          uses of PACE financing before some of these outstanding concerns  
          have been resolved and a comparative assessment of PACE  
          financing's effectiveness has been conducted.

          3.   Are seismic improvements different  ?  Despite the concerns  
          that federal regulators generally raise about the interactions  
          between residential mortgages and priority PACE liens, using  
          PACE financing for seismic improvements may be different.   
          Unlike the installation of photovoltaic panels or low-flow  
          plumbing fixtures, seismic improvements that are paid for with  
          PACE loans make it less likely that the real property that is  
          being improved will be damaged or destroyed in an earthquake.   
          As a result, the improvements may directly benefit insurance  
          providers by reducing claims and mortgage lenders by helping to  
          protect the real property that serves as security for the  
          mortgage.  Concerns about the priority of PACE liens on  
          residential property may be less justified when PACE financing  








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          is used to pay for seismic strengthening improvements.

          4.   Related legislation  .  AB 2693 (Nazarian) amends statutes  
          governing Property Assessed Clean Energy (PACE) financing to add  
          consumer notice requirements and tighten financing standards for  
          PACE loans for residential properties.


           Assembly Actions

           Assembly Local Government Committee:      9-0
          Assembly Floor:                    77-1      


           Support and  
          Opposition   (6/9/16)


           Support  :  Ygrene Energy Fund.


           Opposition  :  Unknown.



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