BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 1883 HEARING: 6/25/14
AUTHOR: Skinner FISCAL: No
VERSION: 6/18/14 TAX LEVY: No
CONSULTANT: Weinberger
VOLUNTARY CONTRACTUAL ASSESSMENTS
Allows a public agency to transfer its interest in
voluntary contractual assessments and makes several other
changes to the statutes governing those assessments.
Background and Existing Law
A benefit assessment is an involuntary charge that property
owners pay for a public improvement or service that
provides a special benefit to their property. The amount
of the assessment must be directly related to the amount of
the benefit that the property receives. Benefit
assessments can finance public projects like flood control,
street improvement, streetlights, and public landscaping.
As an alternative to benefit assessments, and only with the
free and willing con-sent of affected property owners,
public agencies can use "voluntary contractual assessments"
to finance:
Public improvements to developed parcels (SB 837,
McQuorquodale, 1987).
Renewable energy sources or energy efficiency
improvements that are permanently fixed to real
property (AB 811, Levine, 2008).
Water efficiency improvements that are permanently
fixed to real property (AB 474, Blumenfield, 2009).
Electric vehicle charging infrastructure (SB 1340,
Kehoe, 2010).
Seismic strengthening improvements that are
permanently fixed to real property (AB 184, Swanson,
2011).
Recently, voluntary contractual assessments have been used
to finance property-assessed clean energy (PACE) projects,
which rely on public financing to pay for the installation
of renewable energy and energy efficiency improvements on
AB 1883 -- 6/18/14 -- Page 2
private property. The Legislature has amended the
Mello-Roos Community Facilities District Act to allow for
Mello-Roos parcel taxes to finance PACE projects (SB 555,
Hancock, 2011). PACE financing practitioners want to amend
provisions of the contractual benefits assessment statutes
to make it easier to pool projects financed by PACE bonds
and replicate some of the PACE financing provisions that
are available under the Mello-Roos Act.
Proposed Law
Assembly Bill 1882 allows a public agency to transfer its
right, title, and interest in and to any voluntary
contractual assessments, if bonds have not been issued
pursuant to current law. The bill:
Specifies that this authority must not be construed
to authorize the transferee to initiate and prosecute
a foreclosure action resulting from a delinquency in
the payment of the voluntary contractual assessment,
and
Requires that initiation and prosecution of a
foreclosure action and the sole right to enforce its
senior lien status remains with the local agency.
Assembly Bill 1883 requires the public agency and the
transferee to enter into an agreement that, among other
things, identifies the specific period of time during which
the transfer of voluntary contractual assessment will be
operative and, prohibits that timeframe from exceeding
three years.
Assembly Bill 1883 requires a transfer of any voluntary
contractual assessments to be treated as a true and
absolute transfer of the asset so transferred for the
period of the transfer and not as a pledge or grant of a
security interest by the public agency for any borrowing.
The bill prohibits the characterization of the transfer of
any of those assets as an absolute transfer by the public
agency from being negated or adversely affected by the fact
that only a portion of any voluntary contractual assessment
is transferred or by any characterization of the transferee
for the purposes of accounting, taxation, or securities
regulation.
Assembly Bill 1883 defines "transfer" to mean the sale,
assignment or other transfer.
AB 1883 -- 6/18/14 -- Page 3
State law prohibits public agencies from using voluntary
contractual assessments to finance facilities for parcels
that are undergoing development. Assembly Bill 1883,
instead, prohibits public agencies from using voluntary
contractual assessments to finance facilities for parcels
in connection with the initial construction of a
residential building, unless the initial construction is
undertaken by the intended owner or occupant.
Assembly Bill 1883 amends state laws governing voluntary
contractual assessment financing to clarify that references
to "financing" also refer to "refinancing." The bill
directs that a public agency's legislative body must
conclude that providing refinancing will result in
increased adoption of the improvements authorized to be
financed with voluntary contractual assessments.
State law requires a public agency's legislative body to
cause documents to be recorded with the county recorder
providing notice of a contractual assessment on real
property. Assembly Bill 1883 requires that document to
include the legal description of real property subject to a
contractual assessment only if there is no assessor's
parcel number for the affected real property. Assembly
Bill 1883 allows a public agency to reduce costs by
recording the document and another notice required by state
law as a single, combined recorded document.
Assembly Bill 1883 amends and enacts numerous statutory
provisions governing bonds that are to be repaid with
revenues from contractual assessments. State law requires
that each bond's interest rate may be determined by an
appropriate index, but must be fixed at the time each bond
is issued. Assembly Bill 1883 specifies that this fixed
interest rate requirement applies only if the bond is
issued to finance improvements to residential property with
three or fewer units.
Assembly Bill 1883 expands the purposes for which a bond
reserve fund may be used to include:
Paying the costs of foreclosure on properties
participating in the program,
Funding capitalized interest for a period of up to
two years from the bond's date of issuance, and
Funding the administrative fee required for
participating in the state's PACE Reserve Program.
AB 1883 -- 6/18/14 -- Page 4
Assembly Bill 1883 allows a public agency to conclude that
it is in the public interest for bonds issued by the public
agency to not be subject to redemption before their
scheduled maturity date except as a result of full or
partial prepayment of the contractual assessments. For
bonds issued to finance improvements to nonresidential
property or residential property with four or more units,
the bonds' redemption premium must be determined by
agreement of the public agency issuing the bonds, the
property owner, and the initial purchaser of the bonds.
Assembly Bill 1883 specifies conditions under which a
public agency may issue bonds to refinance outstanding
bonds payable from contractual assessments. Specifically,
the bill requires that:
The total interest cost to maturity on the
refunding bonds must be less than the total interest
cost to maturity on the bonds to be refunded.
The final maturity date of the refunding bonds must
not be later than the final maturity date of the
refunded bonds, except that if the bonds to be
refunded are variable rate bonds, the final maturity
date of the refunding bonds may extend to, but not
beyond, the useful life of the financed improvements.
The total interest component of the scheduled
contractual assessment installments to maturity, after
issuance of the refunding bonds, must be less than the
total interest component of the scheduled contractual
assessment installments to maturity prior to issuance
of the refunding bonds.
Assembly Bill 1883 allows a public agency, with a property
owner's prior written approval, to refinance outstanding
bonds payable from contractual assessments by issuing bonds
that don't comply with the requirements above. However,
the final maturity date of the refunding bonds may be later
than the final maturity date of the bonds being refunded
only if the final maturity date of the refunding bonds does
not extend beyond the useful life of the financed
improvements.
State law specifies requirements that apply to the
imposition and collection of voluntary contractual
assessments, including lien priority, the manner of
collection, and applicable penalties and remedies in the
AB 1883 -- 6/18/14 -- Page 5
event of delinquency or default. Assembly Bill 1883
directs that those procedures do not apply if another
procedure has been authorized by the legislative body or by
statute.
Assembly Bill 1883 allows a public agency to impose a
voluntary contractual assessment on a leasehold or
possessory interest in property owned by a public agency
with written consent of the public agency that owns the
property. The bill specifies that:
The contractual assessment levied on a leasehold or
possessory interest is payable by the owner of the
leasehold or possessory interest.
The term of the leasehold interest must be at least
as long as the term of the assessment contract at the
time the contract is executed.
The tax collector may collect unpaid contractual
assessments on possessory interests pursuant to
specified statutory collection procedures.
For a system that is financed using voluntary contractual
assessments and operated pursuant to a power purchase
agreement, state law specifies provisions that must be
included in the power purchase agreement. To ensure that
the property owner is guaranteed electric power from the
system for the length of the lien, state law requires that
a power purchase agreement must include both of the
following provisions:
The system cannot be removed if the system's owner
is not performing its obligations under the contract.
The owner of the system must be a bankruptcy-remote
special purpose entity that meets specified
conditions.
Assembly Bill 1883, instead, directs that a power purchase
agreement must ensure that the system cannot be removed if
the system's owner is not performing its obligation under
the contract and one of the following is true:
The system owner covenants in a contract with the
property owner that neither the owner nor any
successor will remove or decommission the system
during the contract's term and warrants that no
assignee, creditor, partner, or owner will have any
right, during the contract's term, to remove or
decommission the system.
The owner of the system must be a bankruptcy-remote
AB 1883 -- 6/18/14 -- Page 6
special purpose entity that meets specified
conditions.
Assembly Bill 1883 includes legislative findings and
declarations regarding property-assessed clean energy
(PACE) financing and the need to reduce financing costs by
pooling PACE projects before bonds are issued.
The bill makes additional technical and clarifying changes
to the statutes governing voluntary contractual
assessments.
State Revenue Impact
No estimate.
Comments
1. Purpose of the bill . Current law authorizes local
governments to help residences and businesses finance
energy and water improvements by issuing PACE bonds. The
property owner repays the loan through a voluntary property
assessment. The closing costs for issuing a bond can be
prohibitively high for small to medium sized commercial
projects. Pooling several small projects together allows
them to share the costs. Current law requires bonds to be
issued as the need for work arises. AB 1883 allows local
governments to temporarily transfer the revenue from
assessments to a third party capital provider. This way,
projects can be funded on-demand, as required by law.
After a sufficient number of projects have been financed,
the local government will be able to issue a single large
bond and divide the bond issuance costs between the
individual projects. In some cases, this could reduce
closing costs for individual projects by up to 60%. AB
1883 makes additional changes to the statutes governing
voluntary contractual assessments to allow PACE programs
that operate under those statutes the same flexible
financing tools that are available under newer PACE
statutes.
2. Unintended consequences . AB 1883 makes extensive
changes to the statutes governing bonds backed by voluntary
contractual assessments. By amending these statutes to
AB 1883 -- 6/18/14 -- Page 7
conform to current PACE financing practices, the bill may
have unintended consequences for voluntary contractual
assessments that are used for other purposes. For example,
the bill specifies that the requirement in current law that
bonds must be issued at a fixed interest rate applies only
if the bond is issued to finance improvements to
residential property with three or fewer units. This
appears to have the unintended consequence of allowing
public agencies to issue variable rate debt to pay for
public improvements financed with voluntary contractual
assessments. The Committee may wish to consider amending
AB 1883 to preserve the fixed interest rate requirement
that is in current law, and provide a narrow exception for
bonds issued to finance improvements to nonresidential
private property or residential private property with four
or more units.
3. Refunding bonds . AB 1883 allows a property owner to
grant written consent for a public agency to issue
refunding bonds that don't conform to the requirements that
generally apply to those bonds. That flexibility may be
appropriately negotiated between a public agency and a
property owner with experience in, and knowledge of,
municipal finance. However, property owners who are not
familiar with municipal financing tools may find it
difficult to fully evaluate the risks and benefits of
granting exceptions to the requirements for refunding
bonds. The Committee may wish to consider amending AB 1883
to allow only non-residential property owners or owners of
property with four or more units to grant written consent
for a public agency to issue refunding bonds that don't
comply with the general rules enacted by the bill.
4. Let's get technical . To clarify AB 1883's provisions,
the committee may wish to consider amending the bill to
correct an erroneous cross-reference by deleting "(f)" on
line 1 of page 10 and replacing it with "(e)".
Assembly Actions
Assembly Local Government Committee: 9-0
Assembly Floor: 76-0
Support and Opposition (6/19/14)
AB 1883 -- 6/18/14 -- Page 8
Support : California Energy Efficiency Industry Council;
Counties of Alameda and San Luis Obispo; Figtree Financing;
Environmental Defense Fund; Natural Resources Defense
Council; Renewable Funding; Sonoma County Energy
Independence Program.
Opposition : Unknown.