BILL ANALYSIS
SENATE LOCAL GOVERNMENT COMMITTEE
Senator Patricia Wiggins, Chair
BILL NO: SB 613 HEARING: 1/6/10
AUTHOR: Harman FISCAL: No
VERSION: 12/15/09 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 -- 12/15/09 -- Page 2
Proposed Law
Senate Bill 613 authorizes the Irvine Ranch Water District
and the Santa Margarita Water District to provide credit
enhancement, liquidity support, or both, by pledging and
applying 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 -- 12/15/09 -- Page 3
SB 613 requires the board of each district to adopt
criteria to govern its determinations to use the general
revenue pledge. The criteria may include evaluating the
use of a pledge in lieu of, or in combination with, other
available credit enhancement and liquidity options.
SB 613 states that the authority granted by the bill is in
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. Oversight . SB 613 responds to the unprecedented
scarcity and expense of credit enhancement for bonds over
the last two years. However, it is possible that improved
credit market conditions, within a few years of the bill's
SB 613 -- 12/15/09 -- Page 4
January 1, 2011 effective date, could eliminate these
credit enhancement cost and availability problems. Because
SB 613 authorizes IRWD and SMWD to use a new form of bond
credit enhancement, and because future credit market
conditions could change dramatically, legislators may wish
to ensure oversight of the use of the revenue pledges that
the bill authorizes. The Committee may wish to consider
amending SB 613 to require the districts to report back to
the Legislature and State Treasurer's Office on their use
of the bill's provisions by January 1, 2014.
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. Not a hybrid . Ad valorem property taxes outside the
standard 1% rate pay for general obligation bonds. By
specifying that the use of a revenue pledge would function
only as credit enhancement or liquidity support for IRWD
and SMWD's general obligation bonds, the December 15
amendments clarify that SB 613 does not allow IRWD and SMWD
to issue a new type of hybrid general obligation/revenue
bond.
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 (12/22/09)
SB 613 -- 12/15/09 -- Page 5
Support : Irvine Ranch Water District, California Special
Districts Association, Orange County Business Council,
Santa Margarita Water District.
Opposition : Unknown.