BILL ANALYSIS �
AB 2131
Page 1
ASSEMBLY THIRD READING
AB 2131 (Olsen)
As Introduced February 23, 2012
Majority vote
LOCAL GOVERNMENT 9-0
-----------------------------------------------------------------
|Ayes:|Smyth, Alejo, Bradford, | | |
| |Campos, Davis, Gordon, | | |
| |Hueso, Knight, Norby | | |
-----------------------------------------------------------------
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
AB 2131
Page 2
COMMENTS : 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 15 specified investment types, as specified.
Such investments may not exceed a term of maturity in excess 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.
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.
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
AB 2131
Page 3
invest funds, since they are the closest to citizens and will be
held accountable if funds are not wisely managed."
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.
The California Alternative Energy and Advanced Transportation
Financing Authority (CAEATFA), within the State Treasurer's
Office, administers a PACE Bond Reserve Program (Program)
created by SB 77 (Pavley), Chapter 15, Statutes of 2010.
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.
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 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
AB 2131
Page 4
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
Representatives 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 Legislature may wish to ask the author for current
information on the PACE bond market in California and the
projects expected to utilize the public funds (percentage of
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 Legislature may wish to ask
the author to clarify how much current demand there is for PACE
investment.
According to the author, "PACE would be a safe investment with a
reasonable rate of return. PACE project loans would be protected
AB 2131
Page 5
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
this bill (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 Legislature 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.
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.
SB 1340 (Kehoe), Chapter 649, Statutes of 2010, expanded the
PACE Reserve program to assist local jurisdictions in financing
the installation of electric vehicle charging infrastructure.
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.
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
AB 2131
Page 6
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 5% of the property's
market value. 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 5% of the property's
appraised market value. 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
the authorization that allows public agencies to enter into
contractual assessments to finance the installation of specified
improvements to now include water efficiency improvements.
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.
Analysis Prepared by : Hank Dempsey / L. GOV. / (916) 319-3958
FN: 0003599
AB 2131
Page 7