BILL ANALYSIS
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
1550 (Nava)
Hearing Date: 06/29/2009 Amended: 04/15/2009
Consultant: Brendan McCarthy Policy Vote: BF&I 11-0
AB 1550 (Nava)
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BILL SUMMARY: This bill would provide the Department of Water
Resources additional authority to refinance bonds relating to
the energy crisis.
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Fiscal Impact (in thousands)
Major Provisions 2009-10 2010-11 2011-12 Fund
Bond debt service costsUnknown, likely long-term savingsSpecial
*
* Department of Water Resources Electric Power Fund
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STAFF COMMENTS:
During the energy crisis of 2000 and 2001, the Department of
Water Resources signed long-term energy contracts on behalf of
the state's utilities that were unable to acquire their own
power due to the financial consequences of the energy crisis. In
order to pay for those long-term power contracts, the Department
issued revenue bonds which are paid off by electricity ratepayer
funds.
Under current law, the amount of total bonds that the department
is authorized to issue is capped at $13.4 billion. Over the
years, the department has refinanced certain bonds, often to
reduce interest costs. According to the Attorney General,
refinancing of existing bonds will count against the total cap
of $13.4 billion unless the refinancing can be shown to
definitively reduce interest costs. This makes it impossible to
refinance bonds at variable interest rates, because future
interest rates are unknown, and so future savings are uncertain.
(The department currently has about $9.5 billion in outstanding
bonds, about evenly spilt between fixed and variable interest
rates, which will largely be paid off by 2022.)
Many of the bonds issued by the department have credit
enhancements provided by bond insurers or banks. However, due to
the turmoil in the credit markets, it may become necessary to
refinance some bonds that are backed by these credit
AB 1550 (Nava)
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enhancements. The department and the Treasurer's office are
concerned that if the bond markets require them to refinance
bonds and the best way to do so is using variable rate bonds,
the department and the Treasurer can not do that without
exceeding the total cap of $13.4 billion.
In addition, under certain circumstances, the department may be
required to pay off existing bonds at an accelerated pace when
credit enhancements are no longer in effect. Under those
conditions, the department would be forced to pay both principal
and interest at an accelerated pace, increasing costs to the
ratepayers or the state.
This bill would allow the department and the Treasurer to
refinance existing bonds when variable rate bonds are replaced
with fixed rate bonds or when the credit ratings of existing
bonds are reduced, withdrawn, or proposed to be reduced or
withdrawn by the rating agencies due to risks to the credit
enhancements on those bonds. Under these circumstances, the
existing bond cap would not apply.
In addition, the bill would provide that all refinancing of
bonds issued by the department prior to January 1, 2010 are
deemed to have been done under the provisions of existing law or
this bill and that these refinancing shall not be included in
the overall bond cap.
Because some of the bonds that would be refinanced under the
bill would be reissued with variable interest rates, it is
impossible to project the costs or savings from the measure.
However, because the bill would allow the department to reissue
bonds when credit enhancements are threatened, the bill should
allow the department to avoid the additional costs when credit
enhancements prove problematic.