BILL ANALYSIS
SENATE LOCAL GOVERNMENT COMMITTEE
Senator Patricia Wiggins, Chair
BILL NO: SB 613 HEARING: 5/6/09
AUTHOR: Harman FISCAL: No
VERSION: 4/14/09 CONSULTANT:
Weinberger
IRVINE RANCH WATER DISTRICT'S BONDS
Background and Existing Law
The Irvine Ranch Water District (IRWD) and the Santa
Margarita Water District (SMWD) are special districts,
formed under the California Water District Act, which
together provide water and sewer service to approximately
480,000 residents within a service area of over 177,000
acres in Orange County.
IRWD and SMWD can form improvement districts, which are
geographical subdivisions through which each district can
fund capital improvements that benefit those specific
geographic areas. With a 2/3-vote of the property owners
in an improvement district, IRWD and SMWD can finance
capital projects by issuing general obligation bonds, which
are secured by property tax revenues outside of the
standard 1% rate.
When issuing general obligation bonds for improvement
districts, IRWD and SMWD typically purchase credit
enhancement, like bond insurance or a letter of credit, to
provide additional security for the bonds. Credit
enhancement improves the bonds' credit rating and lowers
the districts' borrowing costs. Investors rely on the
higher rating of a third-party credit enhancement provider
rather than the issuer's rating, so that the investors will
demand a lower interest rate, more than paying for the cost
of the credit enhancement.
Recent turmoil in the credit markets is making it more
difficult for IRWD and SMWD to purchase affordable
third-party credit enhancement for their improvement
districts' general obligation bonds. District officials
want greater flexibility to provide their own direct credit
enhancement for their bonds.
SB 613 -- 4/14/09 -- Page 2
Proposed Law
Senate Bill 613 authorizes the Irvine Ranch Water District
and the Santa Margarita Water District to pledge and apply
all or any part of the districts' revenues to the payment
or security of the principal, redemption price, purchase
price, and interest of any general obligation bonds for
improvement districts or consolidated general obligation
bonds for improvement districts issued or carried by the
districts. The bill allows the districts to make that
pledge in the manner and upon terms that the districts'
boards deem advisable.
In connection with the pledge, SB 613 authorizes the board
of each district to provide, in the document in which the
pledge is provided for or created, any covenants, promises,
restrictions, and provisions that the district may deem
necessary or desirable, including, but not limited to,
covenants, promises, restrictions, and provisions relating
to:
The use of bond proceeds,
The maintenance, operation, and preservation of the
district's facilities,
Any rates and charges to be established and
collected by the district, including rates and charges
for the services or products furnished or provided by
the district's facilities,
The incurring of additional indebtedness payable
from the revenues, and
The establishment, maintenance, and use of reserve
funds, sinking funds, interest and redemption funds,
maintenance and operation funds, and other special
funds for the payment or security of any or all of the
principal, redemption price, purchase price, and
interest.
SB 613 allows the board of each district to exercise the
powers specified in the Revenue Bond Law of 1941 to carry
out the bill's provisions.
SB 613 specifies that pledges authorized by the bill are
governed by specified statutes relating to pledges of
collateral to secure bonds.
SB 613 states that the authority granted by the bill is in
SB 613 -- 4/14/09 -- Page 3
addition to any authority granted by other provisions of
law relating to the payment of the districts' general
obligation bonds from the proceeds of assessments to be
levied upon and collected from lands of any improvement
district or relating to the levy and collection of the
assessments. The bill states that it does not affect any
other law authorizing or providing for the issuance or
carrying of bonds by the districts. SB 613 declares that
it shall be deemed to provide a complete and supplemental
method for exercising the powers authorized by the bill,
and shall be deemed supplemental to the powers conferred by
other applicable laws.
Comments
1. Making credit more affordable . Recent volatility in
the credit markets and the financial industry has increased
bond issuers' costs of borrowing by dramatically increasing
the cost of purchasing third-party credit enhancements for
bonds. Credit enhancement costs can be particularly high
for the issuance of consolidated improvement district bonds
because the bond market tends to perceive the strength of
the consolidated bonds in terms of the weakest improvement
districts included in those bonds. Rather than relying
entirely on third-party credit enhancements, IRWD and SMWD
can use SB 613 to pledge their general revenues towards the
payment and security of their improvement districts'
general obligation bonds. By allowing IRWD and SMWD to use
their strong overall credit to support general obligation
bonds issued by their improvement districts, SB 613 will
significantly lower the districts' cost of borrowing and,
as a result, will save money for taxpayers and ratepayers.
2. Not a hybrid . Ad valorem property taxes outside the
standard 1% rate pay for general obligation bonds. The
language of SB 613 leaves open the possibility that a
district's pledge of revenues to back the general
obligation bonds of improvement districts could be co-equal
to the district's obligation to back the bonds with ad
valorem property tax revenues. To clarify that SB 613 does
not allow IRWD and SMWD to issue a new type of hybrid
general obligation/revenue bond, but only authorizes the
use of a revenue pledge as credit enhancement or liquidity
support for general obligation bonds, the Committee may
SB 613 -- 4/14/09 -- Page 4
wish to consider the following amendment:
On page 2, line 8, strike out "In" and insert "To
provide credit enhancement, liquidity support or both,
in"
3. Cut out the middle-man . As part of a credit
enhancement transaction, issuers and third-party credit
enhancement providers enter into a reimbursement agreement,
which specifies the issuer's obligations to repay the third
party if there are draws upon the credit or surety extended
to the issuer by the third party. IRWD asserts that it is
currently able to make a pledge of district revenues as a
part of a reimbursement agreement for its improvement
districts' general obligation bonds. As a result, IRWD
argues that SB 613 allows it to effectively "cut out the
middle-man" by pledging district revenues directly to
bondholders as a form of credit enhancement, rather than
pledging them to a third-party.
4. Oversight . Because SB 613 authorizes IRWD and SMWD to
use a new, direct form of bond credit enhancement,
legislators may wish to ensure oversight of the use of the
revenue pledges that the bill authorizes. The Committee
may wish to consider amending the bill to require the
districts to report back to the Legislature and State
Treasurer's Office on their use of SB 613's provisions.
5. Special legislation . The California Constitution
prohibits special legislation when a general law can apply
(Article IV, 16). SB 613 contains findings and
declarations explaining the need for legislation that
applies only to IRWD and SMWD.
Support and Opposition (4/30/09)
Support : Irvine Ranch Water District, California Special
Districts Association, Orange County Business Council.
Opposition : Unknown.