BILL ANALYSIS Ó
SB 602
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Date of Hearing: July 15, 2015
ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT
Brian Maienschein, Chair
SB
602 (Monning) - As Amended June 17, 2015
SENATE VOTE: 38-0
SUBJECT: Seismic safety: California Earthquake Authority.
SUMMARY: Authorizes the California Earthquake Authority to
enter into voluntary contractual assessments with property
owners to finance the instillation of seismic strengthening
improvements. Specifically, this bill:
1)Extends the authority granted to public agencies, cities, and
counties, to the California Earthquake Authority (CEA) to
enter into voluntary contractual assessments with property
owners to finance the installation of seismic strengthening
improvements that are permanently fixed to real property.
2)Makes changes to the definition of "public agency" to include
CEA and adds "governing body" to the authorization under
existing law related to contractual assessments granted to a
legislative body.
3)Authorizes the CEA, unless otherwise specified in a resolution
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of intention and a report pursuant to existing law, to enter
into voluntary contractual assessments with property owners to
finance the installation of seismic strengthening improvements
that are permanently fixed to real property throughout the
entire state.
4)Provides that the CEA is not required to designate, describe,
or provide a map of that area in the resolution of intention
or the report required under existing law, unless that area
covers an area smaller than the entire state.
5)Requires the CEA to publish notice of the hearing to create
the voluntary contractual assessment program to finance the
installation of seismic strengthening improvements solely in a
newspaper of general circulation within Sacramento County.
6)Provides that existing law that requires notification to water
and electric providers does not apply to a voluntary
contractual assessment program, which solely finances the
installation
of seismic strengthening improvements that are permanently fixed
to real property.
7)Requires that any voluntary contractual assessments entered
into with respect to a program established by CEA, be made
under the payment schedule set forth in the contract providing
for that voluntary contractual assessment, whether or not any
bonds secured by that voluntary contractual assessment have
been issued.
8)Adds the CEA to the definition of 'city' in the Improvement
Bond Act of 1915.
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EXISTING LAW:
1)Authorizes a public agency to enter into a contractual
assessment with a willing property owner to finance the
installation of seismic strengthening improvements.
2)Requires the governing body to adopt a resolution to use
voluntary contractual assessments, which would do the
following:
a) Determine that it would be convenient, advantageous, and
in the public interest to designate an area within which
officials and property owners may enter into contractual
assessments and make related financing arrangements;
b) Identify the kinds of public works, distributed
generation renewable energy sources, or energy or water
efficiency improvements which may be financed;
c) Describe the area where contractual assessments may be
used;
d) Describe the proposed financing arrangements, including
criteria for determining the creditworthiness of a property
owner;
e) State the time and place for a public hearing; and,
f) Direct an official to prepare a detailed report about
the contractual assessment program and consult with the
county auditor and county controller regarding fees.
3)Requires the report to contain the following:
a) A map of the area where contractual assessments will be
offered;
b) A draft contract specifying the terms and conditions
that would be agreed to by a property owner and the public
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agency;
c) A statement of public agency policies concerning
voluntary contractual assessments, including all of the
following:
i) A list of the types of facilities and improvements
which may be financed;
ii) The official authorized to enter into contractual
assessments on behalf of the county or city;
iii) The maximum aggregate dollar amount of contractual
assessments; and,
iv) A method for prioritizing requests from property
owners for financing;
d) Information about the county auditor's and county
controller's fees.
4)Authorizes a public agency to issue bonds and to repay the
principal and interest with the voluntary contractual
assessment.
5)Authorizes a public agency to advance its own funds to finance
work to be repaid through voluntary contractual assessment,
and from time to time, sell bonds to reimburse itself.
6)Allows a public agency to enter into a relationship with an
underwriter or financial institution that would allow the
sequential issuance of a series of bonds, issuing each bond as
the need arises to finance work to be repaid through the
voluntary contractual assessments.
7)Provides that assessments and the interest and penalties shall
constitute a lien against the lots and parcels of land on
which they are made, until they are paid.
FISCAL EFFECT: According to the Senate Appropriations
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Committee, minor, absorbable one-time costs to the Department of
Insurance (Special Fund). The Department of Insurance indicates
one-time costs of less than $5,000 to review and evaluate the
proposed financing programs. All costs for the retrofitting
program are paid from non-state sources through the CEA.
COMMENTS:
1)Voluntary Contractual Assessments. AB 811 (Levine), Chapter
159, Statutes of 2008, proposed to further the public interest
of addressing climate change through energy conservation
efforts by authorizing public agencies (cities and counties)
to provide up-front financing to property owners to install
renewable energy sources or energy efficiency improvements
that are permanently fixed to their properties through a
system of contractual assessments.
Many local governments utilize the authorization granted by AB
811 to do PACE (Property Assessed Clean Energy), a financing
tool that residential or commercial property owners can use to
pay for renewable energy upgrades, energy or water efficiency
retrofits, or electric vehicle charging stations for their
homes or buildings. Local agencies create PACE assessment
districts in their jurisdictions via a resolution of their
legislative body, allowing the local agency to issue bonds to
finance the up-front costs of improvements. In turn, property
owners enter into a voluntary contractual assessment agreement
with the local agency to re-pay the bonds via an assessment,
secured by a priority lien, on their property tax bill. The
intent of the program is that the assessment remains with the
property even if it is sold or transferred, and the
improvements must be permanently fixed to the property.
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In California, instead of local governments administering
their own PACE programs, the majority of local governments
partner with a third-party to carry out their PACE programs.
The cost of third-party administration is not borne by the
local agency, but is built into PACE loan financing. Some of
these programs focus on residential projects, others target
commercial projects, and some handle both residential and
commercial portfolios. Joint powers authorities (JPAs) also
administer PACE programs and/or are involved in issuing bonds
for third-party administrators.
The use of voluntary contractual assessments has been expanded
by the Legislature several times. AB 474 (Blumenfield),
Chapter 444, Statutes of 2009, added water efficiency
improvements, SB 1340 (Kehoe), Chapter 649, Statutes of 2010
added electric vehicle charging infrastructure, and most
recently, AB 184 (Swanson), Chapter 28, Statutes of 2011,
added seismic strengthening improvements that are permanently
fixed to real property to the list of improvements that can be
paid for through a contractual assessment between a willing
property owner and a public agency.
Only a few local governments have begun to use voluntary
contractual assessments for seismic improvements. For
example, the City of Berkeley and the City and County of San
Francisco began to offer financing for improvements to soft,
weak and open front (SWOF) buildings and additional voluntary
seismic retrofits by a voluntary contractual assessment
program administered by Alliance NRG.
2)Bill Summary. This bill extends the authority currently
granted to cities and counties to establish voluntary
contractual assessment programs for seismic improvements to
the CEA. Under this bill, the CEA can create a statewide
program, in which they are not subject to mapping and other
reporting requirements applied to local governments under
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current law. This bill also exempts the CEA from specified
reporting requirements for local governments, and instead,
requires the CEA to publish notification of a hearing to
establish a contractual assessment program in a newspaper of
general circulation within Sacramento County.
Additionally, this bill would expand the authorized uses of
funds in the Earthquake Loss Mitigation Fund within CEA to
include the seismic strengthening improvements authorized in
the statutes governing voluntary contractual assessments.
This bill also exempts voluntary contractual assessment
programs for seismic improvements from complying with
notification requirements to water and electric providers.
This bill is author-sponsored.
3)Author's Statement. According to the author, "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. Homeowners
can, however, greatly reduce their exposure to earthquake
damage by taking relatively simple, low cost steps to
strengthen their structures to better withstand earthquakes.
"Existing law establishes the Earthquake Loss Mitigation Fund
(ELMF) within the California Earthquake Authority to provide
grants or loans to dwelling owners who wish to retrofit their
homes. The ELMF is allocated five percent of CEA's investment
income, or $5 million, whichever is less, annually. The fund
currently has about $24 million available for mitigation loan
financing.
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"This bill will 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 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. Such seismic
retrofitting would reduce the likelihood of serious damage in
the event of a major earthquake, and make the property
eligible for earthquake insurance premium discounts."
4)CEA. The CEA was formed by the Legislature in 1995/96 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
homeowner's insurance. The CEA is a publicly managed,
privately funded entity with a governing board that provides
oversight of their operations. The governing board has three
voting members, the Governor, State Treasurer, and Insurance
Commissioner, and two non-voting members: the Speaker of the
Assembly and the Chair of the Senate Rules Committee.
According to CEA, they are the largest earthquake insurer in
California, with over 75% of the
residential-earthquake-insurance marker. Additionally, CEA
participating insurers are responsible for almost 80% of
California's residential property insurance. The CEA also
offers seismic retrofit incentives to homeowners through the
ELMF in the form of grants, loans, and loan guarantees for
homeowners to protect their homes against earthquake damage.
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
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OES), to carry out mitigation programs to assist California
homeowners 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. In the Budget, the EBB Program received a $3
billion allocation for the 2015-16 Fiscal Year to expand the
program. 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.
The cost of EBB retrofits is between $3,000 and $6,000 for the
single-family dwellings presently eligible. However, more
complicated retrofits (e.g., for "soft-story" and hillside
houses), are more expensive. Proponents of this bill argue
that 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 CEA ELMF has
$25 million available today and is projected to accommodate
about 6,000 homes in the next six years.
5)Federal Housing Finance Agency Concerns with Residential PACE.
The authority granted by this bill is specific to seismic
improvements, not energy efficiencies, however, absent any
direction from Federal Housing Finance Agency (FHFA) on their
position to distinguish PACE from the authority granted by
this bill, concerns expressed over residential PACE may extend
to the voluntary contractual assessment program established by
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CEA.
In 2010, 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 federal
mortgage enterprises (Fannie Mae and Freddie Mac), because
PACE loans are a first-priority lien in the case of
foreclosure and lenders would have to pay outstanding PACE
assessments before paying mortgage costs. In August of 2010,
Fannie Mae and Freddie Mac announced they would not purchase
mortgages for homes with first lien priority PACE obligations.
The FHFA's action triggered many local governments to suspend
their residential PACE programs.
To address this concern, the Legislature enacted SB 96
(Committee on Budget and Fiscal Review), Chapter 356, Statutes
of 2013. This budget trailer bill tasks the California
Alternative Energy and Advanced Transportation Financing
Authority (CAEATFA) with administering a PACE loss reserve
program of $10 million to keep mortgage interests whole during
a foreclosure or a forced sale. CAEATFA recently filed its
regulations for the program, and is now accepting applications
from PACE administrators.
The PACE Loss Reserve Program will compensate first mortgage
lenders for losses resulting from the existence of a PACE lien
in a foreclosure or forced sale. The program will cover PACE
payments made during foreclosure, if a mortgage lender
forecloses on a home that has a PACE lien, and any losses to a
first mortgage lender up to the amount of outstanding PACE
payment, if a county conducts a forced sale on a home for
unpaid taxes. The intent of the Program is to put the first
mortgage lender in the same position it would be in without a
PACE lien.
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The FHFA issued clarity to their position following the
creation of the PACE Loss Reserve Program, in a letter to the
Governor dated May 1, 2014, which reads, "I am writing to
inform you that FHFA is not prepared to change its position on
California's first-lien PACE program and will continue to
prohibit the Enterprises from purchasing or refinancing
mortgages that are encumbered with first-lien PACE loans?In
making this determination, FHFA has carefully reviewed the
Reserve Fund created by the State of California and, while I
appreciate that it is intended to mitigate these increased
losses, it fails to offer full loss protection to the
Enterprises. The Reserve Fund is not an adequate substitute
for Enterprise mortgages maintaining a first lien position and
FHFA also has concerns about the Reserve Fund's ongoing
sustainability. "
6)Policy Considerations: The Committee may wish to consider the
following:
a) Intent of Voluntary Contractual Assessments. The
Committee may wish to consider
if the authorization granted by this bill continues to push
the statutes governing voluntary contractual assessments
further away from their original intent. Very few local
governments have taken advantage of the authorization to do
seismic improvements and the majority of local governments
do not administer their own PACE programs, but rather
contract with a third-party.
The Committee may wish to consider, given outstanding and
unresolved issues with FHFA and the evolution of other
voluntary contractual assessment programs, if this is an
appropriate time to further expand the authority to
administer voluntary contractual assessments to entities
beyond local governments.
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b) Priority Lien. The California Association of Realtors
in opposition, argues, "In light of the ongoing harsh
policy rhetoric from the FHFA in regard to PACE
assessments, we are concerned that encouraging the same
super-lien priority of seismic funding will endanger the
availability of mortgage financing for the property. It
would be a cruel irony for a homeowner to strengthen the
home to protect his or her equity from earthquake, only to
find that the very mechanism to protect it makes the home
unmarketable." Further, opposition, in a joint letter,
states "The consequences are substantial and may preclude a
borrower from completing a necessary transaction.
Ultimately, a borrower needing to refinance or sell their
property will be forced to pay the entirety of the balance
of the seismic strengthening improvements. Depending on
the amount financed for the seismic strengthening
improvement loan and the borrower's financial condition,
they may not have the ability to achieve payoff."
c) Notification to Homeowners. One of the concerns
previously expressed in an FHFA statement included a
concern that PACE loans lack adequate consumer protections,
including those provided under the federal Truth-in-Lending
Act. The Press Enterprise reported in June that the
Riverside County District Attorney's office is
investigating the HERO program and the way consumers are
being sold energy efficient products, which includes an
examination of current disclosure practices.
In light of these concerns relative to existing residential
PACE programs and the potentially statewide nature of the
CEA program authorized by this bill, the Committee may wish
to ask the author to accept amendments that would require
additional notification to homeowners prior to entering
into voluntary contractual assessments for seismic
improvements, which identify not only the terms and
conditions, but also the impact of the assessments on
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existing mortgages and the property owner's ability to sell
or refinance their home.
d) Requirements for Public Agencies. Current law
establishes a number of requirements for a local agency
upon passage of a resolution to authorize voluntary
contractual assessments. One of these requirements is a
report which must include specified information regarding
the contractual assessment program. For example, the
report must include a brief description of criteria for
determining the underwriting requirements and safeguards
that will be used to ensure that the total annual property
tax and assessments on the property will not exceed 5% of
the property's market value, and a plan for raising a
capital amount required to pay for work performed pursuant
to contractual assessments. This bill explicitly exempts
CEA from a number of requirements, based on the statewide
nature of the proposed program. The bill does not
explicitly require CEA to comply with a number of other
requirements, as mentioned above.
The Committee may wish to ask the author to accept an
amendment to make it clear that a legislative body and a
governing body (CEA) must comply with the requirements to
establish a voluntary contractual assessment program for
seismic strengthening improvements under existing law.
e) Stop-Gap. The PACE Loss Reserve Program does not apply
to seismic improvements, therefore, the Committee may wish
to ask the author to accept an amendment for the CEA to
create its own internal loss reserve program at an amount
relative to its program.
f) Qualified Property Owners. Due to its enabling
legislation, the CEA would only be able use the authority
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granted by this bill for residential seismic improvements.
The Committee may wish to ask the author to narrow the
scope of the authority granted by this bill to homes that
require seismic improvements in order to comply with
building code requirements.
7)Arguments in Support. Supporters argue that this bill is
imperative to ensure that California infrastructure is
prepared for the next big earthquake that will inevitably
occur within the state. This bill will provide funding to
allow retrofitting of California infrastructure to defend
against an earthquake. The R Street Institute argues,
"Concerns about the impact of PACE-like programs have been
expressed by federal lending authorities in the past. Their
concerns, centered on the seniority of PACE liens, have proven
to be illusory?To date, 31 states have enabled PACE programs
and California's approach has been a terrific success.
Applying a similar principle to seismic retrofitting would be
both a national first and a step toward addressing
California's urgent vulnerability to earthquakes."
8)Arguments in Opposition. Opposition argues that while this
bill relates to seismic strengthening improvements and not
clean energy, the methodology for funding the seismic
strengthening improvements is identical and contained within
the same body of law. Specifically, opposition points to the
following concerns: 1) PACE lending dries up liquidity for
making loans; 2) PACE lending hurts consumers; 3) PACE lending
methods increase the risk of loss to taxpayers; and, 4) a lack
of underwriting standards. Therefore, because of the concerns
and issues surrounding the FHFA and treatment of PACE liens,
opposition argues that an expansion of tax lien-based funding
mechanisms are anti-consumer for unwary homeowners and
potentially have a negative impact on California's real estate
economy.
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9)Double Referral. This bill was heard by the Insurance
Committee on June 24, 2015, where it passed with a 13-0 vote.
REGISTERED SUPPORT / OPPOSITION:
Support
American Red Cross
Association of Bay Area Governments (ABAG)
Automobile Club of Southern California
California Department of Insurance
R Street Institute
Opposition
California Association of Realtors
California Bankers Association
California Credit Union League
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California Independent Bankers
California Land Title Association
California Mortgage Association
California Mortgage Bankers Association
Analysis Prepared by:Misa Lennox / L. GOV. / (916)
319-3958