BILL ANALYSIS �
AB 2131
Page 1
Date of Hearing: May 9, 2012
ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT
Cameron Smyth, Chair
AB 2131 (Olsen) - As Introduced: February 23, 2012
SUBJECT : Local government: investments.
SUMMARY : Authorizes the legislative body of a local agency to
invest up to 5% of the city or county's aggregate investment
funds in Property Assessed Clean Energy (PACE) bonds or projects
financed with PACE bonds.
EXISTING LAW :
1)Authorizes the legislative body of a local agency, as defined,
that has a sinking fund or moneys in its treasury that are not
required for immediate needs to invest in specified
investments, including United States Treasury notes, bonds,
bills, or certificates of indebtedness, and bonds issued by
the local agency.
2)Defines "Property Assessed Clean Energy bond" or "PACE bond"
as a bond that is secured by any of the following:
a) A voluntary contractual assessment on a property;
b) A voluntary contractual assessment or a voluntary
special tax on property to finance the installation of
distributed generation renewable energy sources, electric
vehicle charging infrastructure, or energy or water
efficiency improvements that is levied pursuant to a
chartered city's constitutional authority; or,
c) A special tax on property authorized under a Community
Facilities District (CFD).
FISCAL EFFECT : None
COMMENTS :
1)Under existing law, a local agency that has money not required
for its immediate needs may invest any portion of that money
in any of fifteen specified investment types, as specified.
Such investments may not exceed a term of maturity in excess
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of five years without explicit legislative authorization.
This bill would permit a city or county (including the city and
county of San Francisco) to invest in PACE bonds or projects
funded by PACE bonds, provided that the local agency may not
invest more than 5% of its aggregate investment funds in the
PACE bonds or projects. This is an author-sponsored measure.
2)PACE financing programs offer government loans to private
property owners to cover the initial costs of renewable
energy, energy efficiency, and water efficiency improvements
that are permanently affixed to real property. Participating
property owners repay the loans through annual assessments,
secured by priority liens, on their property tax bills.
PACE programs avoid a major obstacle to smaller-scale efficiency
and renewable power programs by allowing residential and
commercial property owners to borrow the funds necessary to
pay for the upfront costs of the investment. The PACE loans
are then paid back gradually by an annual special property tax
assessment, usually over the course of 20 years. The
assessment remains on the property when sold or transferred.
Such programs are part of a larger recent trend in the promotion
of "voluntary contractual assessments" as a means for local
agencies to fund energy and water improvements. Supporters of
PACE funding argue that the programs empower property owners
to invest in valuable upgrades to their property while helping
local agencies promote energy efficiency and renewable
generation, all the while spurring job creation and local
economic development. PACE programs are often funded through
municipal bonds, which create no liability for the local
agency. The program is voluntary, so that only property
owners who chose to participate are assessed.
3)According to the author, "AB 2131 will give local
jurisdictions more control over their idle investment dollars,
allowing them to be able to get better returns on investments
while also helping homeowners and businesses perform energy
efficiency projects. Local leaders should be given more
flexibility to invest funds, since they are the closest to
citizens and will be held accountable if funds are not wisely
managed."
4)The California Alternative Energy and Advanced Transportation
Financing Authority (CAEATFA), within the State Treasurer's
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Office, administers a PACE Bond Reserve Program (Program)
created by SB 77 (Pavley), Chapter 15, Statutes of 2010.
This program allows CAEATFA to use a $50 million fund to
finance reserves for PACE bonds to assist local jurisdictions
in financing the installation of distributed generation
renewable energy sources or energy or water efficiency
improvements that are permanently affixed on residential and
commercial property through the use of a voluntary contractual
assessment. Tax liens created by assessments are typically
senior to other obligations, including mortgages, and must be
paid first. In response to the legislation, CAEATFA began
conducting research to develop minimum loan structure and
credit underwriting criteria. Additionally, CAEATFA can pool
local PACE bonds by purchasing them from individual
municipalities, combining them with other PACE bonds, and
selling the pooled bonds through public or negotiated sales.
According to CAEAFTA as of March 2012, while it "is monitoring
the development and implementation of new PACE programs,
�CAEAFTA] has not engaged the administrators
of PACE commercial programs given a statutory restriction
allowing the bond reserve funds to only be used to support
bonds with commercial property project costs less than
$25,000, and, most commercial buildings that undergo any
energy efficiency or renewable energy improvements have
project costs ranging from $250,000 to $1 million." However,
not all PACE programs need go through CAEAFTA.
5)There is some question as to whether or not this bill is
premature, given that there is ongoing uncertainty over the
fate of the PACE residential program and pending legislative
and administrative initiatives at the federal level.
On July 6, 2010, the Federal Housing Finance Agency ("FHFA"),
which oversees the nation's largest mortgage finance companies
Fannie Mae and Freddie Mac, issued a pronouncement concluding
that PACE programs "present significant safety and soundness
concerns" and violated standard mortgage provisions since PACE
tax liens have priority over any other loan or mortgage (which
means that, in the event of a default, FHFA could incur higher
mortgage loan losses). The concerns expressed by FHFA caused
the majority of the PACE residential programs throughout the
country to be placed on hold, including many
of the existing residential PACE programs in California. In
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response, the California Attorney General and several local
governments began legal action to overturn the FHFA
directives.
According to a 2011 annual report to the Legislature from
CAEATFA issued March 2012, FHFA's issues with the residential
PACE program may be resolved through federal rulemaking: "In
an August 2011 ruling?the federal district court in the
Northern District of California directed that FHFA must
publish, accept and consider comments on FHFA's directive
regarding mortgages with PACE obligations. More recently, in
January 2012, the Northern District court ordered FHFA to
initiate an official rulemaking process to allow for
stakeholder input in regards to the PACE energy financing
programs. The FHFA is required by federal law to factor all
comments into a reassessment of their current position on
residential PACE programs. It is anticipated that FHFA could
make a determination on its existing position on mortgages
with PACE assessments in Spring 2012. There is also an active
and cooperative mobilization effort being led by non-profit
organizations, municipalities, counties and states. There is
optimism that the legal and legislative challenges to PACE
programs will be resolved in 2012."
There is federal legislation pending on this same matter. The
PACE Assessment Protection Act of 2011 (H.R. 2599), sponsored
by Reps. Nan Hayworth (R-N.Y.), Dan Lungren (R-Calif.) and
Mike Thompson (D-Calif.) would restore the ability of local
governments to offer PACE programs to finance the installation
of renewable energy and energy efficiency improvements. H.R.
2599 is intended to incorporate best practices and guidelines
from the U.S. Department of Energy to ensure safety for
homeowners, private capital providers and existing mortgage
lenders.
It is important to note that FHFA's objections and the
resulting legal challenges apply only to residential projects.
According to the author's office, roughly half of residential
mortgages are outside of the FHFA system, meaning that many
individual homeowners could still theoretically participate in
a PACE program. Several PACE commercial programs were
launched in California in 2011.
The Committee may wish to ask the author for current
information on the PACE bond market in California and the
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projects expected to utilize the public funds (% residential
vs. commercial, average project size, most common project
types, geographic location, etc.) that could be made available
under this measure. To the extent that residential PACE
programs are partially on hold and some commercial efforts are
limited to smaller projects, the Committee may wish to ask the
author to clarify how much current demand there is for PACE
investment.
6)According to the author, "PACE would be a safe investment with
a reasonable rate of return. PACE project loans would be
protected like �CFD] bond liens. If a bank forecloses on a
house with a PACE project funded by a local municipality,
banks would have to pay the property taxes, CFD, PACE and
Mechanics liens before the property could be processed for
sale."
On March 13, 2012, the Modesto City Council voted in favor of AB
2131 (Resolution No. 2012-94). The findings and resolutions
state in part that city staff consulted with an outside asset
management company to provide a general opinion on the
potential fiscal impact on the city of the investments
contemplated by this bill. According to those findings, the
outside firm "concluded that while there is a potential for
higher yield on investment returns it is also possible that
the securities will be illiquid and that this type of
investment would differ from the typical objectives of a
public agency portfolio that focuses on stability and
liquidity?"
The Committee may wish to ask the author for data on the
historical expected return and default rates for PACE bonds in
California, indicators of the strength of any secondary PACE
bond market, and any other information that would indicate
whether or not PACE bonds are safe (and liquid) enough to
justify the investment of public funds.
7)SB 555 (Yee), Chapter 493, Statutes of 2011, added the
acquisition, installation, and improvement of energy
efficiency, water conservation, and renewable energy
improvements that are affixed to the types of facilities that
a CFD may finance or refinance. That bill was approved (5-2)
by the Assembly Local Government Committee on June 29, 2011.
SB 1340 (Kehoe), Chapter 649, Statutes of 2010, expanded the
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PACE Reserve program to assist local jurisdictions in
financing the installation of electric vehicle charging
infrastructure. That bill was approved (7-2) by the Assembly
Local Government Committee on June 30, 2010.
AB 44 (Blakeslee), Chapter 564, Statutes of 2010, expanded the
use of voluntary contractual assessments to include financing
electricity purchase agreements by expanding the definition of
"permanently fixed to real property" to include systems
attached to a residential, commercial, industrial,
agricultural, or other real property. That bill was approved
(8-0) by the Assembly Local Government Committee on August 30,
2010.
In 2010, AB 1755 (Swanson) would have added seismic
strengthening improvements that are permanently fixed to real
property to the list of improvements that local agencies can
finance using "voluntary contractual assessments." This bill
also stated the Legislature's intent that a property owner
cannot participate in a voluntary contractual assessment
program if participation would result in the total amount of
any annual property taxes and assessments exceeding five
percent of the property's market value. That bill was
approved (7-1) by the Assembly Local Government Committee on
April 28, 2010. The measure was subsequently vetoed by
Governor Schwarzenegger because he did "not support expanding
contractual assessment programs to these types of property
improvements."
In 2010, AB 2182 (Huffman) would have added onsite sewer and
septic improvements that are permanently fixed to real
property to the list of improvements that local agencies can
finance using "voluntary contractual assessments." The bill
also stated the Legislature's intent that a property owner
cannot participate in a voluntary contractual assessment
program if participation would result in the total amount of
any annual property taxes and assessments exceeding five
percent of the property's appraised market value. That bill
was approved (8-1) by the Assembly Local Government Committee
on April 28, 2010. The measure was subsequently vetoed by
Governor Schwarzenegger because he did "not support expanding
contractual assessment programs to these types of property
improvements."
AB 474 (Blumenfield), Chapter 444, Statutes of 2009, expanded
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the authorization that allows public agencies to enter into
contractual assessments to finance the installation of
specified improvements to now include water efficiency
improvements. That bill was approved (5-0) by the Assembly
Local Government Committee on April 22, 2009.
AB 811 (Levine), Chapter 159, Statutes of 2008, authorized all
cities and counties in California to designate areas within
which city officials and willing property owners may enter
into contractual assessments to finance the installation of
distributed generation renewable energy sources and energy
efficiency improvements. That bill was approved (6-0) by the
Assembly Local Government Committee on January 16, 2008.
1)Support arguments : According to the author, this measure
"will give cities and counties the choice if they want to
invest idle funds into promoting clean energy?Not only is AB
2131 a local control measure but it will also promote
construction and manufacturing jobs for which California is in
great need."
Opposition arguments : Arguably, this bill authorizes local
agencies to put public funds in investments with unpredictable
risk levels that federal lenders discourage residential
property owners from using to upgrade their homes.
REGISTERED SUPPORT / OPPOSITION :
Support
City of Modesto
Opposition
None on file
Analysis Prepared by : Hank Dempsey / L. GOV. / (916) 319-3958