BILL ANALYSIS Ó
SENATE COMMITTEE ON INSURANCE
Senator Roth, Chair
2015 - 2016 Regular
Bill No: SB 602
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|Author: |Monning |
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|Version: |February 27, 2015 |Hearing |April 8, 2015 |
| | |Date: | |
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|Urgency: |No |Fiscal: |Yes |
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|Consultant|Erin Ryan |
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Subject: Seismic safety: California Earthquake Authority
SUMMARY Adds the California Earthquake Authority (CEA) to the list of
public entities authorized to utilize property assessment
districts, impose liens and issue bonds for the purpose of
creatinge a statewide earthquake mitigation assessment district
to fund voluntary residential seismic strengthening
improvements.
DIGEST
Existing law
1. Establishes the Earthquake Loss Mitigation Fund (ELMF) within
the CEA to provide grants or loans to dwelling owners who wish
to retrofit their homes; (Insurance Code § 10089.37 et seq.)
2. Allocates to the ELMF five percent of CEA's investment income,
or $5 million, whichever is less, annually;
3. Allows local agencies to create assessment financing districts
for capital projects using liens imposed upon real property;
(Streets and Highways Code §§ 5000 et seq., 8500 et seq. and
10000 et seq.)
4. Defines local agencies for this purpose as cities, counties,
cities and counties, and public corporations, districts and
agencies;
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5. Allows the public agencies to enter into voluntary contractual
assessment financing available to property owners for
improvements in the public interest;
6. Declares the intent of the Legislature to utilize this
mechanism to finance voluntary individual efforts to improve the
seismic safety of homes and buildings, and make those efforts
more affordable; (S&H Code §5899)
7. Requires the legislative body of the public agency to make
specified findings, and adopt a resolution of intention
identifying the kinds of seismic strengthening improvements that
may be financed through contractual assessments;
8. Provides authority for the legislative body of any city or
municipality, as defined, to determine that bonds may be issued
to pay for specified works of improvement.
This bill
1. Adds the CEA to the list of public entities authorized to
utilize property assessment districts, impose liens and
issue bonds for the purpose of creatinge a uniform statewide
earthquake mitigation assessment district funding
residential seismic strengthening improvements;
2. Exempts the CEA from specified requirements in the statute
applying to actions of the legislative bodies of a city or
county, as specified;
3. Provides the CEA may use its Earthquake Loss Mitigation
Fund to fund seismic improvements authorized in in #1, and
acquire debt obligations for that purpose.
COMMENTS
1. Purpose of the bill To allow the CEA to create a new
voluntary financing tool for homeowners to mitigate and
retrofit their homes. The Property Secured Mitigation
Program (PSMP) would allow the CEA to provide 100% financing
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for residential mitigation projects that meet approved
engineering guidelines. The loan would become a lien on the
property and allow homeowners to pay for the costs in
installments in the form of debt service payments collected
through existing property tax collection mechanisms. The
lien would "run with the land," staying with the property
upon sale.
2. Background Currently, fewer than 11% of California
homeowners purchase earthquake insurance, despite
predictions that the state will experience a major
earthquake sometime in the next 30 years. The low frequency
of earthquake disasters, compared to other natural
catastrophes, tends to shape the perception that earthquake
risk is much lower than it actually is, even in places where
there have been very deadly and damaging events like
California. In addition, earthquake insurance policies can
be expensive and carry large deductibles, making them
unattractive to homeowners who are not mandated to carry
such coverage by their lenders.
The recent earthquake in Napa provided important data on the
importance of retrofitting. Although just a moderate M 6.0
quake, homes in Napa were thrown from their foundations, and
unreinforced masonry collapsed. Buildings that had not been
retrofitted or built to modern standards are now closed and
are unlikely to reopen without extensive repairs. Few had
earthquake insurance to cover the damages. Buildings that
were retrofitted performed well, however, and were able to
reopen almost immediately.
Homeowners can greatly reduce their exposure to earthquake
damage by taking relatively simple, low cost steps to
strengthen their structures to better withstand earthquakes.
An additional benefit to homeowners of seismic retrofitting
is the availability of discounts on earthquake insurance
premiums as a result of the lower risk of damage to their
home.
The magnitude 6.7 Northridge Earthquake in 1994 was the
costliest natural disaster in the history of California,
with more than $25 billion in property damage, and $49
billion in economic losses to the region and state.
Modelling by risk experts has shown that a major earthquake
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in the San Francisco Bay Area or in southern California
could have an even greater impact on homeowners, businesses,
employees, and payrolls in the area than Hurricane Katrina
had in Louisiana and Mississippi. These disasters show that
if communities are inadequately prepared, disasters of
similar severity, paired with our low level of insured risk,
could cripple California's economy.
Current statute allows cities and counties to create
property assessment districts for local public purposes,
including seismic mitigation. San Francisco, Berkely and
Oakland are in the process of setting up districts for the
purpose of financing earthquake mitigation, largely focusing
on commercial soft-story and multiple family buildings.
In August 2011, the California Residential Mitigation
Program (CRMP) was established as a joint-exercise-of-powers
entity by the CEA and the Governor's Office of Emergency
Services, (Cal OES) to carry out mitigation programs to
assist California homeowners who wish to seismically
retrofit their houses. CRMP's goal is to provide grants and
other types of assistance and incentives for these
mitigation efforts. The CRMP's first program, launched in
2013 is the "Earthquake Brace and Bolt" (EBB) program,
providing grants of up to $3,000 for homeowners who have
qualifying homes and meet specified building code
requirements. According to the CEA, 16 homes have qualified
and completed retrofits under the program, and 650 retrofits
are planned in 2015. CEA estimates that there are
approximately 1.6 million owner-occupied houses in
California that have meet the criteria of the EBB-1.2
million of those are in higher-hazard areas. Those numbers
do not include other, non-EBB types of homes that would
benefit from seismic retrofits.
The cost of EBB retrofits is coming in between $3,000 and
$6,000 for the single-family dwellings presently
eligible-the cost seems to be lower in Southern California
than in the Bay Area. But the more complicated the retrofit
(e.g., for "soft-story" and hillside houses), the more
expensive the project will be. Loans provided under the
program created by this bill could be used for projects
similar to the EBB as well as for retrofitting houses with
soft first-stories (e.g., living space over the garage),
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which can cost $10,000 to $20,000. The program benefit would
be flexible, financing both larger and smaller residential
projects. The roughly $25 million available today through
the CEA Loss Mitigation Fund is projected to accommodate
about 6,000 homes in the next six years.
The PSMP would not draw on CEA's capital or affect the CEA's
claim-paying capacity. Once the new program reaches
appropriate scale, the initial CEA-owned loan portfolio (and
the property-assessment liens that provide debt-service
payments) can be securitized through the CEA's issuance of
revenue bonds. CEA says it has recent, relevant experience
with all of the mechanisms involved in accessing the debt
market and presently has over $600 million in
investment-grade debt outstanding. At the point of bond
issuance, the CEA would be repaid in full-and the loan
portfolio would be owned by the investors who purchased the
bonds. CEA would then continue to act as initial lender on
subsequent loans.
The Property Assessed Clean Energy program has used this
same mechanism to facilitate energy efficiency upgrades or
renewable energy installations. Under that program, however,
counties and cities must establish local programs and set up
their own financing mechanisms.
3. Support According to the author, a major earthquake will
impact each and every Californian, even if they do not live
in a high risk earthquake zone. Seismic experts say
California is almost certain to experience a major
earthquake in the next 30 years, and they now estimate
damage from a major northern or southern California
earthquake could total more than $200 billion.
Unfortunately, too many people continue to believe that the
federal government will somehow come in and save the day and
so do not take appropriate steps to protect themselves from
the physical and financial impact of such a disaster.
Earthquake retrofitting is a relatively low cost option that
can reduce the damage from the inevitable major earthquake,
no matter where it hits, before the fact, and also increase
the value of the home. This bill will provide a simple low
cost way for homeowners to do just that. The CEA is already
a leader in our state and the nation in offering earthquake
insurance and in developing earthquake retrofitting
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engineering expertise. We must give the CEA the authority it
needs to fulfill its intended goals of increasing
mitigation, awareness, and hopefully increased rates of
insurance as we prepare for the next major earthquake.
The CEA helped develop this bill because the Loss Mitigation
Fund that provides grant subsidies for EBB projects is
simply unable to accumulate enough money to meet the full
need that exists. The EBB program will get the ball rolling
and be a tool to increase awareness of seismic retrofit
benefit, whether homes with today's EBB characteristics or
other vulnerable structures. The proposed PSMP could provide
funding for (1) homes that meet current plan-set criteria,
(2) homes that will meet future requirements now under
development, and (3) homes retrofitted with individually
engineered plans. While CRMP's $3,000 grant is adequate to
pay for or incentivize certain retrofits (small to moderate
brace/bolt projects), larger houses and bigger projects
(living space over garage, hillside homes, etc.) will
require richer, more flexible funding options.
4. Opposition None received
POSITIONS
Support
California Earthquake Authority
California Department of Insurance
Personal Insurance Federation of California
Association of Bay Area Governments
Oppose
None received
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