BILL ANALYSIS Ó
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Date of Hearing: June 24, 2015
ASSEMBLY COMMITTEE ON INSURANCE
Tom Daly, Chair
SB
602 (Monning) - As Amended June 17, 2015
SENATE VOTE: 38-0
SUBJECT: Seismic safety: California Earthquake Authority.
SUMMARY: Allows the California Earthquake Authority (CEA) to
establish a statewide property assessment district to finance
seismic safety upgrades. Specifically, this bill:
1)Permits money from the Earthquake Loss Mitigation Fund (ELMF)
to be used to finance seismic retrofitting and to purchase
debt obligations issued to fund seismic retrofitting.
2)Permits the CEA to establish a statewide property assessment
district to allow a property owner to submit to a contractual
assessment to finance seismic retrofitting of their property.
Under the contractual assessment the property owner makes
regular payments as part of the property tax bill.
3)Modifies existing requirements for establishing property
assessment districts to conform to the unique, statewide role
of the CEA.
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EXISTING LAW:
1)Establishes the ELMF within the CEA to provide grants or loans
to dwelling owners who wish to retrofit their homes.
2)Allocates five percent of CEA's annual investment income (up
to $5 million) to the ELMF.
3)Allows local agencies to create assessment financing districts
for capital projects using liens imposed upon real property.
4)Allows the public agencies to enter into voluntary contractual
assessment financing available to property owners for
improvements in the public interest.
5)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.
6)Provides authority for the legislative body of any city or
municipality to determine that bonds may be issued to pay for
specified works of improvement.
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FISCAL EFFECT: Undetermined
COMMENTS:
1)Purpose . According to the author, this bill will allow the
CEA to create a new voluntary financing tool for homeowners to
mitigate and retrofit their homes. This bill would allow the
CEA to provide 100% financing 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. Up-front installation costs can deter
property owners from making seismic safety improvements, and
current law only authorizes "cities," "municipalities," and
"public agencies" to establish voluntary assessment programs
to finance seismic mitigation. Furthermore, homeowners in
cities without earthquake mitigation assessment programs lack
access to financing tools that would allow them to make
seismic retrofits to their homes. This bill will provide those
property owners with the opportunity to take advantage of this
type of financing.
2)Seismic Retrofits . The recent earthquake in Napa provided
important data on the importance of retrofitting. Although it
was a "moderate" quake, homes in Napa were thrown from their
foundations, and unreinforced masonry buildings collapsed.
Buildings that had not been retrofitted or built to modern
standards are now closed and are unlikely to reopen without
extensive repairs. Buildings that were retrofitted performed
well, however, and were able to reopen almost immediately.
Property owners can greatly reduce their exposure to
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earthquake damage by taking relatively simple, low cost steps
to strengthen their structures to better withstand
earthquakes.
In August 2011, the California Residential Mitigation Program
(CRMP) was established as a joint powers authority 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 meet the criteria of the EBB, and 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.
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), which can cost $10,000 to $20,000. The
program benefit would be flexible financing for both larger
and smaller residential projects. The roughly $25 million
available today through the ELMF is projected to fund the
retrofitting of approximately 6,000 homes in the next six
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years.
3)Contractual Assessments . Existing law permits local
governments to use benefit assessments (mandatory charges to
property owners for public improvements, that benefit an
owner's property) to finance public projects like flood
control, street improvement and public landscaping. As an
alternative to benefit assessments, cities and counties can
use "contractual assessments" to finance specific improvements
on individual parcels of private property. Contractual
assessments may be levied only with the consent of the
affected property owner, who pays the assessment through the
property tax roll. The assessment constitutes a lien against
the affected property.
Several cities use voluntary contractual benefit assessment
programs to incentivize residential energy efficiency upgrades
under California's Property Assessed Clean Energy (PACE)
program. The cities of San Francisco and Berkeley are in the
process of creating PACE-like contractual assessment programs
for seismic improvements, focused on commercial structures and
multi-family residential buildings. Current law also permits
public agencies to finance seismic safety work on private
property with a property owner's consent (AB 1700, Farr,
1992), and the Legislature has declared that contractual
benefit assessments for seismic retrofits would serve a public
purpose.
4)CEA . The CEA was formed through legislation in 1995 and 1996
to address an insurance-availability crisis that followed the
1994 Northridge earthquake. After that earthquake, many
homeowners found it difficult or impossible to find basic
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homeowner's insurance. Many others were faced with the
prospect of having their homeowners' insurance non-renewed as
insurance companies tried to shed their exposure to earthquake
risk. Because state law requires insurers to offer earthquake
insurance to their applicants and holders of residential
policies, the insurers' retreat from the California market
resulted in an availability crisis for both homeowners and
earthquake insurance. The Department of Insurance reported in
the summer of 1996, at the height of the crisis, that 95
percent of the homeowners' insurance market had either
stopped, or severely restricted, sales of new homeowners'
policies. After the CEA began operations in December 1996,
the California homeowners' insurance market recovered quickly.
A Department of Insurance report noted that at the peak of the
availability crisis, 82 insurers had restricted the sale of
new homeowners' insurance policies. By October 1997, only
three insurers were restricting the sale of new policies.
Since that time, the requirement to offer earthquake insurance
has not been a factor in restricting the availability of
homeowners' insurance.
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.
REGISTERED SUPPORT / OPPOSITION:
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Support
Automobile Club of Southern California (Auto Club)
Department of Insurance
R Street Institute
Opposition
None received
Analysis Prepared by:Paul Riches / INS. / (916)
319-2086
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