BILL ANALYSIS
SB 613
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Date of Hearing: June 30, 2010
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Felipe Fuentes, Chair
SB 613 (Harman) - As Amended: January 21, 2010
Policy Committee: Local
GovernmentVote:9-0
Urgency: No State Mandated Local Program:
Yes Reimbursable: No
SUMMARY
This bill provides new bond-related authority to the Irvine
Ranch Water District (IRWD) and the Santa Margarita Water
District (SMWD) to address the lack of affordable bond insurance
and credit enhancements in the municipal bond markets.
Specifically, the bill:
1)Authorizes the water districts to pledge their general
revenues (including property taxes and rate payments) as
backup security for general obligation bonds issued through
their improvement districts. Currently such bonds are secured
solely by property taxes generated from parcels located within
the geographical boundaries of the improvement districts.
2)Requires the districts to report to the State Treasurer and
Legislature on the use of the new authority granted by this
measure.
FISCAL EFFECT
1)No state costs. Local costs are not reimbursable.
2)Potential reduction in overall borrowing costs to IRWD and
SMWD, and potential redistribution of liability for debt
service payments within the districts.
COMMENTS
1)Background . 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
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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 are authorized to form improvement districts,
which are geographical subdivisions through which each
district can fund capital improvements that benefit entities
located within the improvement districts. With a two-thirds
vote of the property owners in an improvement district, IRWD
and SMWD can finance capital projects by issuing general
obligation bonds. These bonds are secured by property taxes,
in excess of the 1% general rate, that are attributable to
parcels within the improvement district.
When issuing general obligation bonds for improvements, IRWD
and SMWD typically purchase third-party credit enhancements,
such as bond insurance or a letter of credit, to provide
additional security for the bonds. Investors rely on the
higher rating of a third-party credit enhancement provider
rather than the issuer's rating. This reduces the interest
rate on the bonds, normally more than offsetting the cost of
the credit enhancement.
2)Rationale . This bill is intended to address problems that the
districts, along with many municipal issuers, are facing with
respect to securing credit enhancements for their general
obligation bonds. Recent turmoil in the credit markets has
diminished the number of third-party credit enhancement
providers, and has made it difficult for municipal borrowers
to purchase affordable third-party credit enhancements. To
address this problem, IRWD and SMWD are seeking authority to
pledge their general district revenues (both property taxes
and rate payments) as backup security for the payment of their
improvement districts' general obligation bonds. The districts
assert that, by allowing them to use their strong overall
credit as backup support for general obligation bonds issued
by their improvement districts, the bill will significantly
lower the districts' cost of borrowing and, as a result, will
save money for taxpayers and ratepayers.
3)Shift in risk ? Though this bill has no state fiscal
implications, it could have some implications for ratepayers
and property owners within the IRWD and SMWD. By pledging all
revenues of the districts as backup for bond repayments, the
bill shifts the ultimate obligation for debt repayment from
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the beneficiaries of the capital projects supported by the
bonds - property owners within the geographical boundaries of
the improvement districts - to all ratepayers and property
owners within the water districts.
The districts contend, however, that any payments related to
such a backup pledge would only occur in the unlikely event
that property taxes within the improvement districts were
insufficient to support bond payments. IRWD also contends that
the authority it is seeking already exists with respect to
agreements it may enter into with providers of credit
enhancements. Specifically, as part of a credit enhancement
transaction, issuers and third-party credit enhancement
providers enter into a reimbursement agreement that specifies
the issuer's obligation to repay the third party if there are
draws upon the credit for bond payments. IRWD asserts that it
is currently able to pledge general district revenues for such
reimbursements on bonds issued through its improvement
districts.
Analysis Prepared by : Brad Williams / APPR. / (916) 319-2081