BILL ANALYSIS                                                                                                                                                                                                    Ó

          |SENATE RULES COMMITTEE            |                       AB 2618|
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                                   THIRD READING 

          Bill No:  AB 2618
          Author:   Nazarian (D) 
          Amended:  5/2/16 in Assembly
          Vote:     21 

           SENATE GOVERNANCE & FIN. COMMITTEE:  6-1, 6/15/16
           AYES:  Hertzberg, Nguyen, Beall, Hernandez, Lara, Pavley
           NOES:  Moorlach

           ASSEMBLY FLOOR:  77-1, 5/12/16 - See last page for vote

           SUBJECT:   Community facilities districts:  powers

          SOURCE:    Author

          DIGEST:   This bill allows Mello-Roos community facilities  
          districts to finance improvements to bring real property into  
          compliance with seismic safety standards or regulations.

          ANALYSIS:    Existing law establishes two distinct statutory  
          frameworks under which local governments can implement and  
          administer property assessed clean energy (PACE) loan programs  
          that rely either on voluntary contractual assessments or parcel  
          taxes for repayment of the loans.

          This bill 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 (CFD) that is  
          formed through an alternative process that allows property  
          owners to voluntarily annex their property into the CFD. 


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          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  
          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,  
            Chapter 159, Statutes of 2008).

           Water efficiency improvements that are permanently fixed to  
            real property (AB 474, Blumenfield, Chapter 444, Statutes of  

           Electric vehicle charging infrastructure (SB 1340, Kehoe,  
            Chapter 649, Statutes of 2010).

           Seismic strengthening improvements (AB 184, Swanson, Chapter  


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            28, Statutes of 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 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, Chapter 493, Statutes of 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, 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 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  


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          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  


          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 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 CFD 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  


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            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 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  

          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  
            is used to pay for seismic strengthening improvements.

          FISCAL EFFECT:   Appropriation:    No          Fiscal  
          Com.:NoLocal:    No

          SUPPORT:   (Verified6/16/16)

          Ygrene Energy Fund


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          OPPOSITION:   (Verified6/16/16)

          None received
          ASSEMBLY FLOOR:  77-1, 5/12/16
          AYES:  Achadjian, Alejo, Arambula, Atkins, Baker, Bigelow,  
            Bloom, Bonilla, Bonta, Brough, Brown, Calderon, Campos, Chang,  
            Chau, Chávez, Chiu, Chu, Cooley, Cooper, Dababneh, Dahle,  
            Daly, Dodd, Eggman, Frazier, Beth Gaines, Gallagher, Cristina  
            Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez,  
            Gordon, Gray, Grove, Hadley, Harper, Roger Hernández, Holden,  
            Irwin, Jones, Kim, Lackey, Levine, Linder, Lopez, Low,  
            Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin,  
            Nazarian, Obernolte, O'Donnell, Olsen, Patterson, Quirk,  
            Ridley-Thomas, Rodriguez, Salas, Santiago, Steinorth, Mark  
            Stone, Thurmond, Ting, Wagner, Waldron, Weber, Wilk, Williams,  
            Wood, Rendon
          NOES:  Travis Allen
          NO VOTE RECORDED:  Burke, Jones-Sawyer

          Prepared by:Brian Weinberger / GOV. & F. / (916) 651-4119
          6/17/16 15:03:51

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