BILL ANALYSIS Ó SB 602 Page 1 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. SB 602 Page 2 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. SB 602 Page 3 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 SB 602 Page 4 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 SB 602 Page 5 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 SB 602 Page 6 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: SB 602 Page 7 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 SB 602 Page 8