THIRD READING  

Bill No: AB 1659

Author: Bloom (D), Friedman (D), Eduardo Garcia (D), Irwin (D), Levine (D), Mullin (D), Luz Rivas (D), Robert Rivas (D) and Wood (D), et al.

Amended: 8/28/20 in Senate

Vote: 27 - Urgency

PRIOR VOTES NOT RELEVANT

SENATE ENERGY, U. & C. COMMITTEE: 7-3, 8/28/20

AYES: Dodd, Hertzberg, Hill, McGuire, Skinner, Stern, Wiener

NOES: Moorlach, Chang, Dahle

NO VOTE RECORDED: Hueso, Bradford, Rubio

SUBJECT: Large electrical corporations: wildfire mitigation: revenue bonds

SOURCE: Author

DIGEST:

This bill extends, to the year 2051, a per kilowatt charge on customers of large electric utilities in order to help finance the sale of bonds for the purpose of financing three billion dollars ($3,000,000,000) for numerous natural resources and wildfire-related projects.

ANALYSIS:

Existing law:

1. Establishes the California Public Utilities Commission (CPUC) and authorizes the CPUC to exercise ratemaking and rulemaking authority over all public utilities, as defined, subject to control by the Legislature. (California Constitution Article XII)
2. Establishes the Public Utilities Act authorizes the CPUC to supervise and regulate every public utility, including electrical corporations, and to do all things that are necessary and convenient in the exercise of that power and jurisdiction. (Public Utilities Code §201 et seq., and §701)
3. Authorizes the CPUC to fix the rates and charges for every public utility and requires that those rates and charges be just and reasonable. (Public Utilities Code §451)
4. Establishes the Wildfire Fund to pay eligible claims arising from a covered wildfire, as provided. Requires the CPUC to initiate a rulemaking proceeding to consider using its existing authority to require certain electrical corporations to collect a nonbypassable charge from its ratepayers to support the Wildfire Fund, and requires the CPUC to direct those electrical corporations to collect that charge if the CPUC determines that the imposition of the charge is just and reasonable and that it is an appropriate exercise of its authority, as specified. (Public Utilities Code §3284)
5. Authorizes the Department of Water Resources (DWR) to issue Wildfire Fund bonds on and after either the date on which the DWR legally defeases all of its remaining bonds under the provisions described above or the date on which it pays those obligations in full at maturity, whichever is earlier, to support the Wildfire Fund. Entitles the DWR to recover, as a revenue requirement, amounts necessary to enable it to finance the bond in support of the Wildfire Fund. Requires those bond proceeds and revenues received by DWR to be deposited in the DWR Charge Fund. Continuously appropriates the monies in the DWR Charge Fund to DWR for specified purposes, including transfers to the Wildfire Fund and repayment of the bonds issued in support of the Wildfire Fund. (Water Code §§80506, 80540, 80504, 80550)
6. Requires, except under certain circumstances, a two-thirds vote of the Legislature, and a majority vote of the people at an election, before the State may issue a general obligation bond. (California Constitution Article XVI, §1 et seq.)
7. Describes the state’s responsibilities regarding the issuance and sale of general obligation bonds. (Government Code §16720 et seq.)

This bill:

1. Enacts the Wildfire Prevention and Community Resilience Act of 2020 and would require the Natural Resources Agency, in consultation with the CPUC, to adopt an interim expenditure plan and an expenditure plan that are focused on reducing wildfire risk on the ground and in communities through activities such as defensible space implementation, home hardening, improved public safety, including expenditures to add trained emergency medical technicians to the workforce, and other authorized activities, as well as to prepare residents for wildfires through public education and outreach, as provided.
2. Establishes the Wildfire Prevention and Community Resilience Fund and, upon appropriation by the Legislature, would require monies in the fund be used for the implementation of those plans. Requires the Secretary of the Natural Resources Agency, upon the adoption of the interim plan, to notify the State Controller of the adoption. This bill requires, within 30 days of the notification, the transfer of $500,000,000 from the Surplus Money Investment Fund to the Wildfire Prevention and Community Resilience Fund, and appropriates the money to the Natural Resources Agency for the implementation of the interim expenditure plan. Provides for the repayment of the monies transferred from the Wildfire Prevention and Community Resilience Fund to the Surplus Money Investment Fund, as provided. Requires the CPUC to require large electrical corporations, as defined, to collect, on and after a specified time, a nonbypassable charge from their ratepayers, as provided, to finance the bonds issued for the support of the Wildfire Prevention and Community Resilience Fund, as described below.
3. Authorizes DWR to issue bonds, in an aggregate amount of up to $3,000,000,000, the repayment of which, including interest, commences on the date on which the department has paid in full, at maturity, or legally defeases all of its outstanding bonds issued for the support of the Wildfire Fund or on January 1, 2036, whichever is earlier, to support the Wildfire Prevention and Community Resilience Fund. Entitles the DWR to recover, as a revenue requirement, amounts necessary to enable it to finance the bonds in support of the Wildfire Prevention and Community Resilience Fund. Requires those bond proceeds and revenues received by the department to be deposited in the DWR. Continuously appropriates the monies in the DWR Charge Fund to the DWR for specified purposes, including transfers to the Wildfire Prevention and Community Resilience Fund and repayment of the bonds issued for the support of the Wildfire Prevention and Community Resilience Fund.

Background

Wildfire Fund – Insurance Fund. Among its many provisions, AB 1054 (Holden, Chapter 79, Statutes of 2019) establishes a Wildfire Fund as a mechanism to address third-party damages from wildfires ignited by electric investor-owned utilities (IOUs), the costs of which exceed the greater of one billion dollars or the amount of the insurance coverage required of the electric IOU. The Wildfire Fund is capitalized, initially, with a loan from the state’s Surplus Money Investment Fund. The Fund is jointly funded by both electric IOU ratepayers (via an existing charge on utility bills – the DWR Charge) and the electric IOUs (via shareholder contributions). The Wildfire Fund assumes about $1 billion per utility in annual commercial insurance requirements, a capitalization from non-ratepayer funds of $7.5 billion ($7,500,000,000), and financing of ratepayer contributions via the extension of the DWR Charge, with the goal of providing upwards of $30-40 billion in claims-paying capacity for electric IOU-caused wildfires.

The DWR charge – volumetric charge on electric utility customers. The DWR Charge was originally established in response to the Electricity Crisis in 2000-01 in order to fund procurement of electric generation by DWR for the benefit of electric IOU customers. The existing DWR charge is roughly $0.005 per kilowatt hour (kWh) for most customers of all three of the large electrical IOUs – Pacific Gas & Electric (PG&E), San Diego Gas & Electric (SDG&E), and Southern California Edison (SCE). The charge is not applied to any other electric utility customers in the state, including those of Los Angeles Department of Water and Power, Sacramento Municipal Utility District, and other publicly owned utilities or smaller electric IOUs. As a nonbypassable charge, the DWR charge is assessed on all customers, except qualifying low-income customers, customers needing electricity for medical necessity, and some direct access customers. Customers participating in the Net Energy Metering (NEM) Program pay the DWR charge on either (1) the net usage over the course of the year, or (2) the net usage within a metered interval (one hour for residential customer and 15 minutes for commercial customers), depending on when the customer enrolled in the NEM Program. The DWR charge was scheduled to end in 2021, but was extended by AB 1054 in order to collect up to $10.5 billion ($10,500,000,000) to fund the Wildfire Fund, with shareholders of the three large electric IOUs contributing the other $10.5 billion for the fund. The DWR charge is applied to each kWh of electricity provided to customers. As such, the charge adds roughly a few dollars to the average residential customer’s monthly electric utility bill and several dollars (and upwards, in some cases in the thousands of dollars) to commercial and industrial customers’ monthly utility bills.

Other wildfire mitigation efforts. In addition to the establishment of the fund, recent legislation and CPUC decisions have instituted a number of wildfire mitigation investments and requirements. These include updated requirements of the electric IOU’s wildfire mitigation plans (WMPs) to reduce the risk of utility-ignited wildfires. The WMPs include investments in electric grid-hardening, vegetation management along electric utility lines, some undergrounding of overhead lines, investments in electric grid improvements to section distribution lines, backup power for substation and some qualifying customers, wildfire surveillance and monitoring, and weather monitoring. According to the CPUC Annual SB 695 Report, the costs of the three year 2020 WMPs range from $600 million for SDG&E, $3.9 billion for SCE, and $9.5 billion for PG&E. While these costs have not all been approved for recovery from ratepayers or incurred, the CPUC estimates that for 2020 incremental WMP revenue requirements the estimated monthly bill impacts to residential customers is $8 for PG&E, $6.54 for SCE, and $1.88 for SDG&E customers.

Previous bond efforts. Proposition 68 and Proposition 3. California voters have to weighed in on at least two propositions that intended to fund resource-focused projects. Their ballot summaries follow:

• 1. Proposition 3. Authorizes $8.877 billion in state general obligation bonds for various infrastructure projects. Fiscal Impact: Increased state costs to repay bonds averaging $430 million per year over 40 years. Local government savings for water-related projects, likely averaging a couple hundred million dollars annually over the next few decades. Proposition 3 failed.
  2. Proposition 68. Authorizes $4 billion in general obligation bonds for: parks, natural resources protection, climate adaptation, water quality and supply, and flood protection. Fiscal Impact: Increased state bond repayment costs averaging $200 million annually over 40 years. Local government savings for natural resources-related projects, likely averaging several tens of millions of dollars annually over the next few decades. Proposition 68 passed.

Bond authority. When public agencies or entities issue bonds, they borrow money from investors, who provide cash in exchange for the agencies’ commitment to repay the principal amount of the bond plus interest. Bonds are usually either revenue bonds, which repay investors out of revenue generated from the project the agency buys with bond proceeds, or general obligation bonds, which the public agency pays out of general revenues and are guaranteed by its full faith and credit. Section One of Article XVI of the California Constitution and the state’s General Obligation Bond Law guide the issuance of the state’s general obligation debt. The Constitution allows the Legislature to place general obligation bonds on the ballot for specific purposes with a two-thirds vote of the Assembly and Senate. Voters also can place bonds on the ballot by initiative, as they have for parks, water projects, high-speed rail, and stem cell research, among others. General obligation bonds must be ratified by majority vote of the state’s electorate. The Constitution commits the state to repay investors from general revenues above all other claims, except payments to public education. California voters approved $38.4 billion of general obligation bonds between 1974 and 1999, which increased significantly to $112 billion between 2000 and 2010. In 2018, voters approved the $4 billion California Drought, Water, Parks, Climate, Coastal Protection, and Outdoor Access for All Act of 2018 (SB 5, De León, Chapter 852, Statutes of 2017), the $3 billion Veterans and Affordable Housing Bond Act (SB 3, Beall, Chapter 365, Statutes of 2017), and the $1.5 billion Children’s Hospital Bond Act of 2018 (Proposition 4). However, voters defeated Proposition 3, the California Water Infrastructure and Watershed Conservation Bond Initiative, which would have authorized $8.87 billion in bonds for water infrastructure, groundwater supplies and storage, surface water storage and dam repairs, watershed and fisheries improvements, and habitat protection and restoration.

Comments

AB 1659. This bill extends the DWR charge through December 31, 2050, in order to finance the sale of bonds to fund numerous natural resources and wildfire-related projects and activities. Many of these projects and activities were proposed in previous efforts to pass a general obligation bond, including bills noted below that are no longer moving through the legislative process. The authors wish to fund various projects to reduce the severity, frequency, and impacts of climate-related events, including the catastrophic wildfires (both utility-caused and non-utility caused) that have plagued the state in recent years, including this month’s lightning-ignited fires.

The Wildfire Prevention and Community Resilience Fund. AB 1659 notes a number of category of projects and activities to reduce fire risks on the ground and protecting communities through such things as defensible space, home hardening, public safety, as well as public education and outreach on increasing fire resiliency. This bill proposes an interim expenditure plan that allocates 500 million dollars for immediate projects and an expenditure plan for longer-term projects of no less than 2.3 billion dollars. For the longer-term expenditure plan, the list of projects and activities is largely reflective of those proposed in SB 45 (Allen, 2020), although the amounts have been increased in this bill.

• Interim expenditure plan developed by the Natural Resources Agency within 90 days of the effective date and awarding of moneys within six months for:
  • $50M for workforce training for reducing wildfire risks.
  • $450M to address urgent actions to reduce wildfire. Of this funding:
    • $100M to Cal FIRE for fire prevention grants.
    • $75M to Cal FIRE for most urgent fire prevention projects.
• Expenditure plan developed by the Natural Resources Agency allocated proportionately within the service areas of the large electric IOUs and exclusively within those service areas, with funding for the following activities:
  • Not less than $100M for workforce training in fire prevention and management, emergency medical technician, watershed and forest restoration, among others.
  • Not less than $200M to the Office of Emergency Services to develop a prehazard mitigation grant program for emergency notifications, microgrids, and disaster planning, among others.
  • Not less than $300M to the Natural Resources Agency to implement projects in the wildland urban interface (WUI) to reduce fire risk through such investments as defensible space, home hardening, public safety investments. Of the $300M:
    • Not less than $75M of the funds for the most urgent fire prevention projects.
    • Not less than $25M of the funds dispersed to a state conservancy working on firefighter health and safety research.
• Not less than $50M to California Air Resources Board for projects that reduce emissions related to forest treatments.
  • $100M to Cal FIRE for fire prevention grants
  • Not less than $200M to the Wildlife Conservation Board for restoration of forests and wildlands.
  • Not less than $200M for the development of community wildfire protection, including fire safe councils, resource conservation districts (RCDs).
  • Not less than $300M for grants through Regional Fire and Forest Capacity Program to reduce risk of wildfires through integrated regional approaches to restoration of watersheds.
  • Not less than $100M to the Department of State Parks and Recreation to reduce the risk of wildfire and restore fire-related damages.
  • Not less than $300M to state conservancies within the service territories of the large electric IOUs to reduce wildfire risks.
  • Not less than $300M to the Strategic Growth Council for cooling centers, clean air centers, hydration stations, emergency shelters, among others.
  • Not less than $300M for water infrastructure upgrades and improvements that increase water supply reliability for fire fighting. Of this fund:
    • $50M for the restoration of the Friant-Kern Canal.
    • $50M for the restoration projects of the San Joaquin River identified in the specified Stipulation of Settlement.

Should electric utility customers pay for the projects/activities proposed in this bill? The proponents of this bill argue that electric IOU ratepayers are a reasonable entity from which to collect funds for the proposed projects in this bill. Some supporters argue that the wildfire mitigation and related activities are needed not only within the electric infrastructure rights-of-way, but in the overall ecological landscape of California in order to prevent catastrophic fires in the future. The supporters argue that such an approach benefits electric IOUs and their ratepayers from future claims of damages stemming from wildfires ignited by electric utility equipment. Those opposed express concerns that the charge is unfairly borne by electric ratepayers served by PG&E, SCE, and SDG&E, and not the remaining 25 percent plus of Californians served by other electric utilities. Additionally, those opposed believe the list of projects and activities bear little relation to electric utility service and should not be funded via a charge to electric ratepayers. Those opposed argue that electric utilities and their customers (especially those of electric IOUs) are already bearing a significant cost, and will be incurring additional costs, associated with mitigating fires directly connected to the electric system.

Legal concerns? The authors note that AB 1054 established a precedent in allowing for the use of a dedicated rate component to finance investments that are less directly related to electric utility systems – an insurance fund for wildfires ignited by electric utility infrastructure. The supporters note that the extension of the DWR charge simply maintains the existing nonbypassable charge originally established by AB X1 (Keeley, Chapter 4, Statutes of 2001) and extended last year by AB 1054 (Holden, Chapter 79, Statutes of 2019). They argue that the use of the charge to finance projects proposed in this bill is appropriate as these projects benefit electric ratepayers, as much as all Californians. Nonetheless, there is likely to be disputes as to the legal underpinnings for the approach proposed in this bill. Some legal experts may argue that the AB 1054 charge for the Wildfire Fund more closely aligns with the exceptions granted in the Constitution for the issuance of debt by the legislature absent a vote of the electorate as a fee for a revenue bond to benefit electric ratepayers. However, it is unclear whether the approach in this bill may satisfy the requirements of Article 16, Section 1.

Per the Governance and Finance Committee: Bond market costs and uncertainty. AB 1659’s bonds are repaid from a charge that does not generate revenue until January 1, 2036, or earlier if AB 1054’s revenue requirement ends before that date. Extending this charge today assumes that the proceeds from the future imposition of this charge are needed more today than they will be then; if the Legislature extends the charge and pledges it to repay bonds issued to fund specified purposes, its proceeds will not be available to meet other needs. Additionally, with no payments of principal or interest until January 1, 2036, interest on the bonds both accretes to principal and compounds, which increases the ratio of debt payment to principal, as investors demand more compensation when waiting for repayment. After some school districts issued these “capital appreciation bonds” with high debt to principal ratios, the Legislature limited their maturity period, debt-to-principal ratio, and required them to be subject to redemption without premium, among other limitations (AB 182, Buchanan, Chapter 477, Statutes of 2013). Interest paid on some of the bonds issued under the bill may also not be tax exempt, further increasing interest costs; bond proceeds must generally only be used only for public purposes for interest to be exempt from both state and federal tax, and AB 1659 programs funds for a broad array of purposes, some of which may not be exclusively public. While interest rates are currently at historic lows, the Committee may wish to consider the cost of capital to fund the bill’s purposes.

CPUC role unclear? As currently drafted, this bill is unclear as to the CPUC’s oversight of the imposition of the DWR charge on electric IOU customers and the financing order proposed for the Wildfire Prevention and Community Resiliency Fund. AB 1054 included language to require a review by the CPUC, including requiring a proceeding by the CPUC to make a determination as to whether the financing order would be just and reasonable. However, AB 1659 is less clear as to the CPUC’s approval for the financing order and may require future legislation to clarify this role.

Related/Prior Legislation

SB 45 (Allen, 2020) proposes the Wildfire Prevention, Safe Drinking Water, Drought Preparation, and Flood Protection Bond Act of 2020, subject to voter approval in the November 3, 2020, statewide general election. This bill proposes the issuance of $5.51 billion in general obligation bonds to implement its provisions. The bill is currently held at the Assembly Desk.

AB 352 (E. Garcia, 2019) proposes the Wildfire Prevention, Safe Drinking Water, Drought Preparation, and Flood Protection Bond Act of 2020, subject to voter approval in the November 3, 2020 statewide general election. The bill proposes the issuance of $3.92 billion in general obligation bonds to implement its provisions. The bill is currently held in the Senate Committee on Environmental Quality.

AB 3256 (E. Garcia, 2019) proposes the Economic Recovery, Wildfire Prevention, Safe Drinking Water, Drought Preparation, and Flood Protection Bond Act of 202, subject to voter approval in the November 3, 2020 statewide general election. The bill proposes the issuance of $6.98 billion in general obligation bonds to implement its provisions. The bill is currently held in the Assembly Committee on Rules.

AB 1298 (Mullin, 2019) would have proposed the Resiliency, Fire Risk Reduction, Recycling, Groundwater and Drinking Water Supply, Clean Beaches, and Jobs Infrastructure Bond Act of 2020 for an unspecified amount. The bill died pursuant to Art. IV, Sec. 10(c) of the Constitution.

AB 1054 (Holden, Chapter 79, Statutes of 2019), among its many provisions, established a Wildfire Fund as a mechanism to address third-party damages against an electric IOU from wildfires ignited by the utility. The Wildfire Fund is funded by the extension of the DWR Charge on customers of the utilities and a commensurate contribution from electric IOU shareholders.

FISCAL EFFECT: Appropriation: Yes Fiscal Com.: Yes Local: Yes

According to the Senate Committee on Appropriations:

• One-time cost of $500 million (Surplus Money Investment Fund [SMIF]) in 2020-21 for an initial loan to capitalize the Wildfire Prevention and Community Resilience Fund. This transfer would be a short-term loan repaid from proceeds of bonds within a fiscal year.
• Approximately $5 - $7 million annually (DWR Charge Fund), for the DWR to administer the surcharge and issue bonds as necessary.
• Unknown but likely significant costs for the Natural Resources Agency (CNRA) to develop and adopt an expenditure plan focused on reducing wildfire risk on the ground and in communities.
• Costs of roughly $5 million to $10 million annually (General Fund and special funds) to the state as a utility ratepayer due to continuation of the DWR bond surcharge on ratepayers that would have otherwise phased out in 2036.
• Unknown, potentially significant costs (General Fund and special funds) to the state as a utility ratepayer for interest payments, which could be relatively high due to the 15-year delay in debt service (see staff comments).
• To the extent the bill encourages increased wildfire prevention spending that reduce the occurrence of catastrophic wildfires from what otherwise would have occurred, this bill would result in unknown potential savings for reduced fire suppression (General Fund).
• To the extent this bill impacts utility credit ratings, potential unknown costs to the state as a utility ratepayer.

SUPPORT: (Verified 8/30/20)

American Forest Foundation

Arroyos & Foothills Conservancy

Aztec Solar Inc.

Big Sur Land Trust

California Association of Local Conservation Corps

California Association of Resource Conservation Districts

California Energy Storage Alliance

California Invasive Plant Council

California Landscape Stewardship Network

California Park & Recreation Society

California Solar & Storage Association

California State Association of Counties

California Watershed Network

California Wildlife Foundation

City of Santa Cruz Water Department

City of Watsonville

Coalition for Clean Air

Community Nature Connection

Conservation Corps North Bay

Defenders of Wildlife

Ducks Unlimited

East Bay Regional Park District

Endangered Habitats League

Engie North America

Escondido Creek Conservancy

Farmworker Institute for Education and Leadership Development

Fire Restoration Group

Friends of Santa Cruz State Parks

Friends of the Los Angeles River

Hills For Everyone

Land Trust of Santa Cruz County

Los Angeles Conservation Corps Los Angeles Neighborhood Land Trust

Mammoth Lakes Trails and Public Access

Marin County Board of Supervisors

Midpeninsula Regional Open Space District

Mountains Recreation & Conservation Authority

Pacific Forest Trust

Peninsula Open Space Trust

Placer Land Trust

Planning and Conservation League

Regional Asthma Management and Prevention

Resources Legacy Fund

Rural County Representatives of California

San Francisco Conservation Corps

San Jose Conservation Corps

Santa Barbara County Board of Supervisors

Santa Clara Valley Open Space Authority

Santa Clara Valley Water District

Save the Redwoods League

School Energy Coalition

Sempervirens Fund

Sequoia Community Corps

Sierra Business Council

Sierra Forest Legacy

Sonoma County Board of Supervisors

Sonoma County Water Agency

Sunpower

Terra Verde Energy, LLC

The Nature Conservancy, California Chapter

TOGETHER Bay Area

Trust for Public Land

Urban Corps of San Diego County

Wildlands Conservancy

OPPOSITION: (Verified 8/31/20)

AARP

African-American farmers of California

Agricultural Council of California

Agricultural Energy Consumers Association

California Agricultural Aircraft Association

California Business Properties Association

California Business Roundtable

California Chamber of Commerce

California Citrus Mutual

California Cotton Ginners and Growers Association

California Farm Bureau Federation

California Fresh Fruit Association

California Grain & Feed Association

California Grocers Association

California Large Energy Consumers Association

California League of Food Producers

California Manufacturers & Technology Association

California Seed Association

California Taxpayers Association

California Walnut Commission

California Warehouse Association

Central Valley Latino Mayors and Elected Officials Coalition

Consumer Federation of California

El Dorado County Chamber of Commerce

El Dorado Hills Chamber of Commerce

Elk Grove Chamber of Commerce

Far West Equipment Dealers Association

Folsom Chamber of Commerce

Fresno Chamber of Commerce

Fresno County Farm Bureau

Greater Bakersfield Chamber of Commerce

Howard Jarvis Taxpayers Association

Inland Empire Utilities Agency

Kern County Economic Development Corporation

Kern County Taxpayers Association

Latin Business Association

Los Angeles Area Chamber of Commerce

Nisei Farmers League

Pacific Egg & Poultry Association

Pacific Gas and Electric

Rancho Cordova Chamber of Commerce

Roseville Chamber of Commerce

San Diego Gas and Electric

Si Se Puede

The Utility Reform Network

Tulare County Farm Bureau

United Chamber Advocacy Network

Valley Ag Water Coalition

Western Agricultural Processors Association

Western Growers Association

Western Independent Refiners Association

Western States Petroleum Association

Yuba Sutter Chamber of Commerce

ARGUMENTS IN SUPPORT: According to the author, “Assembly Bill 1659 generates at least 2.5 billion dollars for wildfire and climate related jobs and investments by extending an existing small fixed charge on utility rates. The bill includes short and long-term plans that will be developed and overseen by the CPUC and the Natural Resources Agency. Both plans are focused on reducing fire risks on the ground and protecting communities through such things as defensible space, home hardening, emergency personnel, as well as public education and outreach on increasing fire resiliency. AB 1659 takes swift action to provide the resources necessary to contain and extinguish the fires currently burning in our state and will help safeguard us from future wildfires.”

The numerous supporters of this bill support funding for many of the projects, as proposed, and the merits of electric ratepayers as the funding source for these projects. As stated by a coalition of supporting organizations, AB 1659 “…will provide a major infusion of funding for programs to address California’s fire crisis. The impact of the current firestorms on lives, communities, and public health make clear that we need to dramatically accelerate efforts to restore resilience to our landscapes and communities.”

ARGUMENTS IN OPPOSITION: The organizations opposed to this bill are largely representative of electric-utility customers (ratepayers) who oppose the extension of the DWR Charge as proposed in this bill and take issue with electric utility customers being charged for their electricity usage to fund projects that are unrelated to their usage or the electric system. A letter from a coalition of organizations opposed to the bill states: “The structure of the bill places the burden of current wildfires on future generations of California homeowners and businesses by forcing them to pay billions of dollars for programs and projects unrelated to utility service through the year 2050.” Furthermore, those opposed to the bill cite several factors contributing to increases of their electric utility bills, including: expenses associated with the billions in dollars of investments in wildfire mitigation of the electric system, other policy requirements that increase costs on electric utility bills, and funding the Wildfire Fund from AB 1054. They also note the likely need to increase costs to address the recent rotating blackouts and the impacts from the COVID pandemic-related economic impacts. Specific to the Wildfire Fund and the DWR Charge, a coalition of entities opposed to this bill state: “Even for moderate commercial energy users, AB 1054 already increased utility bills by hundreds of thousands of dollars per company.”

Representing residential electric IOU customers, The Utility Reform Network states: “This bill sets a dangerous precedent of treating utility rates as a piggybank to pay for state services.”

Prepared by: Nidia Bautista / E., U., & C. / (916) 651-4107

8/31/20 17:24:47

**** END ****

SENATE COMMITTEE ON

Senator Anthony Portantino, Chair

2019 - 2020 Regular Session

AB 1659 (Bloom) - Large electrical corporations: wildfire mitigation: securitization

Bill Summary:

This bill would extend, to the year 2051, a per kilowatt charge on customers of large electric utilities in order to back the sale of bonds for the purpose of financing 3 billion dollars ($3,000,000,000) of numerous natural resources and wildfire-related projects.

Fiscal Impact:

• One-time cost of $500 million (Surplus Money Investment Fund [SMIF]) in 2020-21 for an initial loan to capitalize the Wildfire Prevention and Community Resilience Fund. This transfer would be a short-term loan repaid from proceeds of bonds within a fiscal year.
• Approximately $5 - $7 million annually (DWR Charge Fund), for the Department of Water Resources (DWR) to administer the surcharge and issue bonds as necessary.
• Unknown but likely significant costs for the Natural Resources Agency (CNRA) to develop and adopt an expenditure plan focused on reducing wildfire risk on the ground and in communities.
• Costs of roughly $5 million to $10 million annually (General Fund and special funds) to the state as a utility ratepayer due to continuation of the DWR bond surcharge on ratepayers that would have otherwise phased out in 2036.
• Unknown, potentially significant costs (General Fund and special funds) to the state as a utility ratepayer for interest payments, which could be relatively high due to the 15-year delay in debt service (see staff comments).
• To the extent the bill encourages increased wildfire prevention spending that reduce the occurrence of catastrophic wildfires from what otherwise would have occurred, this bill would result in unknown potential savings for reduced fire suppression (General Fund).
• To the extent this bill impacts utility credit ratings, potential unknown costs to the state as a utility ratepayer.

Background:

The DWR Charge. The DWR Charge was originally established in response to the Electricity Crisis in 2000-01 in order to fund electric generation procurement by DWR for the benefit of electric IOU customers. The existing DWR charge is roughly $0.005 per kilowatt hour (kWh) for most customers of all three of the large electrical IOUs – Pacific Gas & Electric (PG&E), San Diego Gas & Electric (SDG&E), and Southern California Edison (SCE). The charge is not applied to any other electric utility customers in the state, including those of Los Angeles Department of Water and Power, Sacramento Municipal Utility District, and other publicly owned utilities or smaller electric IOUs. The DWR Charge is a nonbypassable charge assessed on customers, except some customers are exempted from the charge, including: qualifying low-income customers, customers needing electricity for medical necessity, and some direct access customers. Customers participating in the Net Energy Metering Program pay a DWR charge on either (1) the net usage over the course of the year, or (2) the net usage within a metered interval (one hour for residential customer and 15 minutes for commercial customers), depending whether they are taking service on the original net energy metering tariff. The DWR charge was scheduled to end after 2021, but was extended by AB 1054 in order to collect up to $10.5 billion ($10,500,000,000) to fund the Wildfire Fund. The DWR charge is applied to each kWh of electricity provided to customers, as such, the charge adds roughly a few dollars to the average residential customer’s monthly electric utility bill and several dollars (and upwards, in some cases in the thousands of dollars) to commercial and industrial customers’ monthly utility bills.

Other wildfire mitigation efforts. In addition to the establishment of the fund, recent legislation and CPUC decisions have instituted a number of mitigation investments and requirements. These include updated requirements of the electric IOU’s wildfire mitigation plans (WMPs) to reduce the risk of utility-ignited wildfires. The WMPs include investments in electric grid-hardening, vegetation management along electric utility lines, some undergrounding of overhead lines, investments in electric grid improvements to section distribution lines, backup power for substation and some qualifying customers, wildfire surveillance and monitoring, and weather monitoring. According to the CPUC Annual SB 695 Report, the costs of the three year 2020 WMPs range from $600 million for SDG&E, $3.9 billion for SCE, and $9.5 billion for PG&E. While these costs have not all been approved for recovery or incurred, the CPUC estimates that for 2020 incremental WMP revenue requirements the estimated monthly bill impacts to residential customers is $8 for PG&E, $6.54 for SCE, and $1.88 for SDG&E. In addition to the numerous investments in reducing wildfire risks from electric utility infrastructure, electric IOUs are also utilizing power shutoffs during events that may result in utility-caused wildfires.

Proposed Law:

This bill:

1. Enacts the Wildfire Prevention and Community Resilience Act of 2020 and would require the Natural Resources Agency, in consultation with the CPUC, to adopt an interim expenditure plan and an expenditure plan that are focused on reducing wildfire risk on the ground and in communities through activities such as defensible space implementation, home hardening, improved public safety, including expenditures to add trained emergency medical technicians to the workforce, and other authorized activities, as well as to prepare residents for wildfires through public education and outreach, as provided.
2. Establishes the Wildfire Prevention and Community Resilience Fund and, upon appropriation by the Legislature, would require monies in the fund be used for the implementation of those plans. Requires the Secretary of the Natural Resources Agency, upon the adoption of the interim plan, to notify the State Controller of the adoption. Requires the CPUC to require large electrical corporations, as defined, to collect, on and after a specified time, a nonbypassable charge from their ratepayers, as provided, to finance the bonds issued for the support of the Wildfire Prevention and Community Resilience Fund, as described below.
3. Authorizes DWR to issue bonds, in an aggregate amount of up to $3,000,000,000, the repayment of which, including interest, commences on the date on which the department has paid in full, at maturity, or legally defeases all of its outstanding bonds issued for the support of the Wildfire Fund or on January 1, 2036, whichever is earlier, to support the Wildfire Prevention and Community Resilience Fund. Entitles the DWR to recover, as a revenue requirement, amounts necessary to enable it to finance the bonds in support of the Wildfire Prevention and Community Resilience Fund. This bill would continuously appropriate the monies in the DWR Charge Fund to DWR for specified purposes, including transfers to the Wildfire Prevention and Community Resilience Fund and repayment of the bonds issued for the support of the Wildfire Prevention and Community Resilience Fund.

Each of these allocations are structured as “no less than”, thereby establishing a “floor” or minimum amount for each expenditure category, as follows:

• Workforce training—$100M.
• CalOES-$200M for prehazard mitigation grants including communications, microgrids, backup power.
• Natural Resources Agency—$300M focused on projects in the wildland urban interface (WUI) to reduce fire risk through such investments as defensible space, home hardening, public safety investments. Focus is on disadvantaged communities and vulnerable populations.
• Air Resources Board—$50M for projects that are alternatives to pile burning and other technologies that emit greenhouse gases (GHG). Goal is to dispose of the woody material with negative GHG emissions.
• Wildlife Conservation Board (WCB)—$200M for forest restoration and increased wildfire and climate resilience.
• $200M grants to fire safe councils, resource conservation districts, and local fire agencies for wildfire protection plans that may include defensible space, home hardening, and other projects to improve fire resilience.
• State Parks—$300M to reduce fire risk and restore fire-related damages.
• $300M to state conservancies to reduce fire risk and to help with appropriate workforce training. Priority shall be given to reducing catastrophic wildfire in the WUI.
• $300M to Strategic Growth Council for cooling centers, backup solar power, to safeguard vulnerable populations.
• $300M for water projects that increase water supply for firefighting or that decrease reliance on water from areas impacted by wildfires. Of this, $50M to Friant-Kern to restore capacity (with local match) and $50M to restore flows in the San Joaquin.

Related Legislation:

SB 45 (Allen, 2020) proposes the Wildfire Prevention, Safe Drinking Water, Drought Preparation, and Flood Protection Bond Act of 2020, subject to voter approval in the November 3, 2020, statewide general election. This bill proposes the issuance of $5.51 billion in general obligation bonds to implement its provisions. The bill is currently held at the Assembly Desk.

AB 352 (E. Garcia, 2019) proposes the Wildfire Prevention, Safe Drinking Water, Drought Preparation, and Flood Protection Bond Act of 2020, subject to voter approval in the November 3, 2020 statewide general election. This bill proposes the issuance of $3.92 billion in general obligation bonds to implement its provisions. The bill is currently held in the Senate Committee on Environmental Quality.

AB 1298 (Mullin, 2019) proposes the Resiliency, Fire Risk Reduction, Recycling, Groundwater and Drinking Water Supply, Clean Beaches, and Jobs Infrastructure Bond Act of 2020 for an unspecified amount. The bill died pursuant to Art. IV, Sec. 10(c) of the Constitution.

AB 3256 (E. Garcia, 2019) proposes the Economic Recovery, Wildfire Prevention, Safe Drinking Water, Drought Preparation, and Flood Protection Bond Act of 202, subject to voter approval in the November 3, 2020 statewide general election. The bill proposes the issuance of $6.98 billion in general obligation bonds to implement its provisions. The bill is currently held in the Assembly Committee on Rules.

AB 1054 (Holden, Chapter 79, Statutes of 2019) among its many provisions, the bill establishes a Wildfire Fund as a mechanism to address third-party damages against an electric IOU from wildfires ignited by the utility. The Wildfire Fund is funded by the extension of the DWR Charge on customers of the utilities and a commensurate contribution from electric IOU shareholders.

Staff Comments:

Interest costs. AB 1659’s bonds are repaid from a charge that does not generate revenue until January 1, 2036, or earlier if AB 1054’s revenue requirement ends before that date. Extending this charge today assumes that the proceeds from the future imposition of this charge are needed more today than they will be then; if the Legislature extends the charge and pledges it to repay bonds issued to fund specified purposes, its proceeds will not be available to meet other needs. Additionally, with no payments of principal or interest until January 1, 2036, interest on the bonds both accretes to principal and compounds, which increases the ratio of debt payment to principal, as investors demand more compensation when waiting for repayment. According to the Senate Governance and Finance Committee, after some school districts issued these “capital appreciation bonds” with high debt to principal ratios, the Legislature limited their maturity period, debt-to-principal ratio, and required them to be subject to redemption without premium, among other limitations (AB 182, Buchanan, Chapter 477, Statutes of 2013). Interest paid on some of the bonds issued under the bill may also not be tax exempt, further increasing interest costs; bond proceeds must generally only be used only for public purposes for interest to be exempt from both state and federal tax, and AB 1659 programs funds for a broad array of purposes, some of which may not be exclusively public.

Savings on fire suppression costs. The Department of Forestry and Fire Protection (CalFire) spends roughly $1 billion annually (General Fund) on “emergency fire suppression” – additional fire suppression resources needed when a fire continues to spread after the “initial attack” or about the first 24 hours. The vast majority of fires are contained during initial attack – the ones that are not usually grow to be the largest and most expensive wildfires.

Potential utility credit rating impacts. To the extent that that bill impacts utilities’ credit ratings, it could result in indirect costs for ratepayers by increasing financing costs for other utility investments because the utility is potentially viewed as more risky.

Utility financing costs are generally passed on to ratepayers. Utilities are a relatively capital‑intensive industry and, thus, rely heavily on raising up‑front capital to pay for infrastructure investments and maintenance. Every time the bond rating agencies downgrade the utilities, there is a corresponding increase in the costs of borrowing for the electrical corporations. In response to recent credit downgrades, the major IOUs filed applications to the CPUC to approve an increase in their authorized return on equity from about 10 percent to about 16 percent. PG&E estimates this change could increase monthly residential ratepayer bills in its territory by roughly 7 percent.

The Legislative Analyst’s Office estimates that a downgrade of a utility’s credit rating from “A” to “BBB” would result in a 1 percent to 4 percent increase in electricity rates, a $1 to $4 per month increase in the monthly bill for a residential customer, an increase of $500 million to $750 million in total annual ratepayer costs, and an increase of $5 billion to $11 billion in ratepayer costs over a 10-year period.

Who should pay? Ratepayers would bear the costs of the proposed projects in this bill. Some supporters of this bill argue that such an approach benefits electric IOUs and their ratepayers from future claims of damages stemming from wildfires ignited by

electric utility equipment. Those opposed express concerns that the charge is unfairly borne by electric ratepayers served by PG&E, SCE, and SDG&E, and not the remaining 25 percent plus of Californians served by other electric utilities. Additionally, those opposed believe the list of projects and activities bear little relation to electric utility service and should not be funded via a charge to electric ratepayers.

-- END --

SENATE COMMITTEE ON ENERGY, UTILITIES AND COMMUNICATIONS

Senator Ben Hueso, Chair

2019 - 2020 Regular

Bill No: AB 1659 Hearing Date: 8/28/2020

SUBJECT: Large electrical corporations: wildfire mitigation: revenue bonds

DIGEST: This bill would extend, to the year 2051, a per kilowatt charge on customers of large electric utilities in order to back the sale of bonds for the purpose of financing 3 billion dollars ($3,000,000,000) of numerous natural resources and wildfire-related projects.

ANALYSIS:

Existing law:

1. Establishes the California Public Utilities Commission (CPUC) and authorizes the CPUC to exercise ratemaking and rulemaking authority over all public utilities, as defined, subject to control by the Legislature. (California Constitution Article XII)
2. Establishes the Public Utilities Act authorizes the CPUC to supervise and regulate every public utility, including electrical corporations, and to do all things that are necessary and convenient in the exercise of that power and jurisdiction. (Public Utilities Code §201 et seq., and §701)
3. Authorizes the CPUC to fix the rates and charges for every public utility and requires that those rates and charges be just and reasonable. (Public Utilities Code §451)
4. Authorizes the CPUC, in a proceeding on an application by an electrical corporation to recover costs and expenses arising from a catastrophic wildfire occurring on or after January 1, 2019, to allow cost recovery if the costs and expenses are just and reasonable, after consideration of the conduct of the utility, including consideration of specified factors. (Public Utilities Code §451.1)
5. Establishes the Wildfire Fund to pay eligible claims arising from a covered wildfire, as provided. Requires the CPUC to initiate a rulemaking proceeding to consider using its existing authority to require certain electrical corporations to collect a nonbypassable charge from its ratepayers to support the Wildfire Fund, and requires the CPUC to direct those electrical corporations to collect that charge if the CPUC determines that the imposition of the charge is just and reasonable and that it is an appropriate exercise of its authority, as specified. (Public Utilities Code §3284)
6. Authorizes, until January 1, 2003, the Department of Water Resources (DWR) to enter into contracts for the purchase of electric power. Authorizes DWR to sell power to retail end use customers and local publicly owned electric utilities under certain circumstances. Authorizes the DWR to issue revenue bonds and entitles the DWR to recover, as a revenue requirement, amounts necessary to enable it to finance the bonds and purchase electric power pursuant to these provisions. (Water Code §§80000, et seq., 80100, et seq., 80130, et seq., 80200, 80260)
7. Authorizes the DWR to issue Wildfire Fund bonds on and after either the date on which the DWR legally defeases all of its remaining bonds under the provisions described above or the date on which it pays those obligations in full at maturity, whichever is earlier, to support the Wildfire Fund. Entitles the DWR to recover, as a revenue requirement, amounts necessary to enable it to finance the bond in support of the Wildfire Fund. Requires those bond proceeds and revenues received by DWR to be deposited in the DWR Charge Fund. Continuously appropriates the monies in the DWR Charge Fund to DWR for specified purposes, including transfers to the Wildfire Fund and repayment of the bonds issued in support of the Wildfire Fund. (Water Code §§80506, 80540, 80504, 80550)
8. Requires, except under certain circumstances, a two-thirds vote of the Legislature, and a majority vote of the people at an election, before the state may issue a general obligation bond. (California Constitution §1 et seq.)
9. Describes the state’s responsibilities regarding the issuance and sale of general obligation bonds. (Government Code §16720 et seq.)
10. Provides—pursuant to SB 5 (De León, Chapter 852, Statutes of 2017), which was approved by the voters in the form of Proposition 68, known as the California Drought, Water, Parks, Climate, Coastal Protection, and Outdoor Access For All Act of 2018—a general obligation bond of $4 billion for resources-focused projects.

This bill:

1. Enacts the Wildfire Prevention and Community Resilience Act of 2020 and would require the Natural Resources Agency, in consultation with the CPUC, to adopt an interim expenditure plan and an expenditure plan that are focused on reducing wildfire risk on the ground and in communities through activities such as defensible space implementation, home hardening, improved public safety, including expenditures to add trained emergency medical technicians to the workforce, and other authorized activities, as well as to prepare residents for wildfires through public education and outreach, as provided.
2. Establishes the Wildfire Prevention and Community Resilience Fund and, upon appropriation by the Legislature, would require monies in the fund be used for the implementation of those plans. Requires the Secretary of the Natural Resources Agency, upon the adoption of the interim plan, to notify the State Controller of the adoption. This bill would require, within 30 days of the notification, the transfer of $500,000,000 from the Surplus Money Investment Fund to the Wildfire Prevention and Community Resilience Fund, and would appropriate the money to the Natural Resources Agency for the implementation of the interim expenditure plan. Provides for the repayment of the monies transferred from the Wildfire Prevention and Community Resilience Fund to the Surplus Money Investment Fund, as provided. Requires the CPUC to require large electrical corporations, as defined, to collect, on and after a specified time, a nonbypassable charge from their ratepayers, as provided, to finance the bonds issued for the support of the Wildfire Prevention and Community Resilience Fund, as described below.
3. Authorizes DWR to issue bonds, in an aggregate amount of up to $3,000,000,000, the repayment of which, including interest, commences on the date on which the department has paid in full, at maturity, or legally defeases all of its outstanding bonds issued for the support of the Wildfire Fund or on January 1, 2036, whichever is earlier, to support the Wildfire Prevention and Community Resilience Fund. Entitles the DWR to recover, as a revenue requirement, amounts necessary to enable it to finance the bonds in support of the Wildfire Prevention and Community Resilience Fund. Requires those bond proceeds and revenues received by the department to be deposited in the DWR. This bill would continuously appropriate the monies in the DWR Charge Fund to the DWR for specified purposes, including transfers to the Wildfire Prevention and Community Resilience Fund and repayment of the bonds issued for the support of the Wildfire Prevention and Community Resilience Fund.

Background

Wildfire Fund – Insurance Fund. Among its many provisions, AB 1054 (Holden, 2019) establishes a Wildfire Fund as a mechanism to address third-party damages from wildfires ignited by electric investor-owned utilities (IOUs), the costs of which exceed the greater of one billion dollars or the amount of the insurance coverage required of the electric IOU. The Wildfire Fund is capitalized, initially, with a loan from the state’s Surplus Money Investment Fund. The Fund is jointly funded by both electric IOU ratepayers (via an existing charge on utility bills – the DWR Charge) and the electric IOUs (via shareholder contributions). The Wildfire Fund assumes about $1 billion per utility in annual commercial insurance requirements, a capitalization from non-ratepayer funds of $7.5 billion ($7,500,000,000), and financing of ratepayer contributions via the extension of the DWR Charge, with the goal of providing upwards of $30-40 billion in claims-paying capacity for electric IOU-caused wildfires.

The DWR Charge – volumetric charge on electric utility customers. The DWR Charge was originally established in response to the Electricity Crisis in 2000-01 in order to fund electric generation procurement by DWR for the benefit of electric IOU customers. The existing DWR charge is roughly $0.005 per kilowatt hour (kWh) for most customers of all three of the large electrical IOUs – Pacific Gas & Electric (PG&E), San Diego Gas & Electric (SDG&E), and Southern California Edison (SCE). The charge is not applied to any other electric utility customers in the state, including those of Los Angeles Department of Water and Power, Sacramento Municipal Utility District, and other publicly owned utilities or smaller electric IOUs. The DWR Charge is a nonbypassable charge assessed on customers, except some customers are exempted from the charge, including: qualifying low-income customers, customers needing electricity for medical necessity, and some direct access customers. Customers participating in the Net Energy Metering Program pay a DWR charge on either (1) the net usage over the course of the year, or (2) the net usage within a metered interval (one hour for residential customer and 15 minutes for commercial customers), depending whether they are taking service on the original net energy metering tariff. The DWR charge was scheduled to end after 2021, but was extended by AB 1054 in order to collect up to $10.5 billion ($10,500,000,000) to fund the Wildfire Fund. The DWR charge is applied to each kWh of electricity provided to customers, as such, the charge adds roughly a few dollars to the average residential customer’s monthly electric utility bill and several dollars (and upwards, in some cases in the thousands of dollars) to commercial and industrial customers’ monthly utility bills.

Other wildfire mitigation efforts. In addition to the establishment of the fund, recent legislation and CPUC decisions have instituted a number of wildfire mitigation investments and requirements. These include updated requirements of the electric IOU’s wildfire mitigation plans (WMPs) to reduce the risk of utility-ignited wildfires. The WMPs include investments in electric grid-hardening, vegetation management along electric utility lines, some undergrounding of overhead lines, investments in electric grid improvements to section distribution lines, backup power for substation and some qualifying customers, wildfire surveillance and monitoring, and weather monitoring. According to the CPUC Annual SB 695 Report, the costs of the three year 2020 WMPs range from $600 million for SDG&E, $3.9 billion for SCE, and $9.5 billion for PG&E. While these costs have not all been approved for recovery or incurred, the CPUC estimates that for 2020 incremental WMP revenue requirements the estimated monthly bill impacts to residential customers is $8 for PG&E, $6.54 for SCE, and $1.88 for SDG&E. In addition to the numerous investments in reducing wildfire risks from electric utility infrastructure, electric IOUs are also utilizing power shutoffs during events that may result in utility-caused wildfires.

Previous bond efforts. Proposition 68 and Proposition 3. California voters have to weighed in on at least two propositions that intended to fund resource-focused projects. Their ballot summaries follow:

• 1. Proposition 3. Authorizes $8.877 billion in state general obligation bonds for various infrastructure projects. Fiscal Impact: Increased state costs to repay bonds averaging $430 million per year over 40 years. Local government savings for water-related projects, likely averaging a couple hundred million dollars annually over the next few decades. Proposition 3 failed.
     
  2. Proposition 68. Authorizes $4 billion in general obligation bonds for: parks, natural resources protection, climate adaptation, water quality and supply, and flood protection. Fiscal Impact: Increased state bond repayment costs averaging $200 million annually over 40 years. Local government savings for natural resources-related projects, likely averaging several tens of millions of dollars annually over the next few decades. Proposition 68 passed.

Bond authority. When public agencies or entities issue bonds, they borrow money from investors, who provide cash in exchange for the agencies’ commitment to repay the principal amount of the bond plus interest. Bonds are usually either revenue bonds, which repay investors out of revenue generated from the project the agency buys with bond proceeds, or general obligation bonds, which the public agency pays out of general revenues and are guaranteed by its full faith and credit. Section One of Article XVI of the California Constitution and the state’s General Obligation Bond Law guide the issuance of the state’s general obligation debt. The Constitution allows the Legislature to place general obligation bonds on the ballot for specific purposes with a two-thirds vote of the Assembly and Senate. Voters also can place bonds on the ballot by initiative, as they have for parks, water projects, high-speed rail, and stem cell research, among others. General obligation bonds must be ratified by majority vote of the state’s electorate. The Constitution commits the state to repay investors from general revenues above all other claims, except payments to public education. California voters approved $38.4 billion of general obligation bonds between 1974 and 1999, which increased significantly to $112 billion between 2000 and 2010. In 2018, voters approved the $4 billion California Drought, Water, Parks, Climate, Coastal Protection, and Outdoor Access for All Act of 2018 (SB 5, De León, Chapter 852, Statutes of 2017), the $3 billion Veterans and Affordable Housing Bond Act (SB 3, Beall, Chapter 365, Statutes of 2017), and the $1.5 billion Children’s Hospital Bond Act of 2018 (Proposition 4). However, voters defeated Proposition 3, the California Water Infrastructure and Watershed Conservation Bond Initiative, which would have authorized $8.87 billion in bonds for water infrastructure, groundwater supplies and storage, surface water storage and dam repairs, watershed and fisheries improvements, and habitat protection and restoration.

COMMENTS

AB 1659. This bill would extend the DWR Charge through 2050 in order to finance the sale of bonds to fund numerous natural resources and wildfire-related projects and activities. Many of these projects and activities were proposed in previous efforts to pass a general obligation bond, including bills noted below that are no longer moving through the legislative process. The authors wish to fund various projects to reduce the severity, frequency, and impacts of climate-related events, including the catastrophic wildfires (both utility-caused and non-utility caused) that have plagued the state in recent years, including this month’s lightening-ignited fires.

Fund wildfire mitigation and natural resources activities and projects. The projects and activities include reducing fire risks on the ground and protecting communities through such things as defensible space, home hardening, public safety (including more EMTs), as well as public education and outreach on increasing fire resiliency. Plan A allocates $50 million (M) for workforce training and development and $450M to address fire-related emergency actions. For the longer-term expenditure plan, the expenditures basically come from the forestry/fire chapter of SB 45, although the amounts have been increased in this bill.

• Each of these allocations are structured as “no less than”, thereby establishing a “floor” or minimum amount for each expenditure category, as follows:
  
  • Workforce training—$100M.
  • CalOES-$200M for prehazard mitigation grants including communications, microgrids, backup power.
  • Natural Resources Agency—$300M focused on projects in the wildland urban interface (WUI) to reduce fire risk through such investments as defensible space, home hardening, public safety investments. Focus is on disadvantaged communities and vulnerable populations.
  • Air Resources Board—$50M for projects that are alternatives to pile burning and other technologies that emit greenhouse gases (GHG). Goal is to dispose of the woody material with negative GHG emissions.
  • Wildlife Conservation Board (WCB)—$200M for forest restoration and increased wildfire and climate resilience.
  • $200M grants to fire safe councils, resource conservation districts, and local fire agencies for wildfire protection plans that may include defensible space, home hardening, and other projects to improve fire resilience.
  • State Parks—$300M to reduce fire risk and restore fire-related damages.
  • $300M to state conservancies to reduce fire risk and to help with appropriate workforce training. Priority shall be given to reducing catastrophic wildfire in the WUI.
  • $300M to Strategic Growth Council for cooling centers, backup solar power, to safeguard vulnerable populations.
  • $300M for water projects that increase water supply for firefighting or that decrease reliance on water from areas impacted by wildfires.
    Of this, $50M to Friant-Kern to restore capacity (with local match) and $50M to restore flows in the San Joaquin.

Should electric utility customers pay for the projects/activities proposed in this bill? The proponents of this bill argue that electric IOU ratepayers are a reasonable entity from which to collect funds for the proposed projects in this bill. Some supporters argue that the wildfire mitigation and related activities are needed not only within the electric infrastructure rights-of-way, but in the overall ecological landscape of California in order to prevent catastrophic fires in the future. The supporters argue that such an approach benefits electric IOUs and their ratepayers from future claims of damages stemming from wildfires ignited by electric utility equipment. Those opposed express concerns that the charge is unfairly borne by electric ratepayers served by PG&E, SCE, and SDG&E, and not the remaining 25 percent plus of Californians served by other electric utilities. Additionally, those opposed believe the list of projects and activities bear little relation to electric utility service and should not be funded via a charge to electric ratepayers. They argue that electric utilities and their customers (especially those of electric IOUs) are already bearing a significant cost, and will be incurring additional costs, associated with mitigating fires directly connected to the electric system.

Legal questions. The authors note that AB 1054 established a precedent to allow for the use of a dedicated rate component to finance investments that are less directly related to electric utility systems – an insurance fund for wildfires ignited by electric utility infrastructure. The supporters note that the extension of the DWR charge simply maintains the existing nonbypassable charge to finance projects that could benefit electric ratepayers, as much as all Californians. Nonetheless, there is likely to be disputes as to the legal underpinnings for the approach proposed in this bill. Some legal experts may argue that the AB 1054 charge for the Wildfire Fund more closely aligns with the exceptions granted in the Constitution for the issuance of debt by the legislature absent a vote of the electorate as a fee for a revenue bond to benefit electric ratepayers. However, it is unclear whether the approach in this bill may meet the requirements of Article 16, Section 1.

Per the Governance and Finance Committee: Bond market costs and uncertainty. AB 1659’s bonds are repaid from a charge that does not generate revenue until January 1, 2036, or earlier if AB 1054’s revenue requirement ends before that date. Extending this charge today assumes that the proceeds from the future imposition of this charge are needed more today than they will be then; if the Legislature extends the charge and pledges it to repay bonds issued to fund specified purposes, its proceeds will not be available to meet other needs. Additionally, with no payments of principal or interest until January 1, 2036, interest on the bonds both accretes to principal and compounds, which increases the ratio of debt payment to principal, as investors demand more compensation when waiting for repayment. After some school districts issued these “capital appreciation bonds” with high debt to principal ratios, the Legislature limited their maturity period, debt-to-principal ratio, and required them to be subject to redemption without premium, among other limitations (AB 182, Buchanan, Chapter 477, Statutes of 2013). Interest paid on some of the bonds issued under the bill may also not be tax exempt, further increasing interest costs; bond proceeds must generally only be used only for public purposes for interest to be exempt from both state and federal tax, and AB 1659 programs funds for a broad array of purposes, some of which may not be exclusively public. While interest rates are currently at historic lows, the Committee may wish to consider the cost of capital to fund the bill’s purposes.

Jeopardizing the AB 1054 Wildfire Fund. Per conversations with the California Earthquake Authority, the current administrator of the Wildfire Fund, they have suggested some amendments to ensure the AB 1054 Wildfire Fund is not jeopardized. The CEA have noted that the measure currently has inconsistent terminology regarding the commencement date for the charge to repay its bonds which could affect the issuance of AB 1054 bonds. The author has expressed an interest in adopting the suggested amendments to address these concerns.

CPUC approval of the financing order. As currently drafted, the bill is unclear as to the CPUC’s oversight and review of the financing order. In AB 1054, the CPUC held a proceeding to make a determination as to whether the financing order would be just and reasonable, per the requirements of AB 1054. However, AB 1659 is less clear as to the CPUC’s approval for the financing order and may require future legislation to clarify.

Amendments

The author and committee may wish to amend the bill per the following amendments agreed to and requested by authors:

• Add co-authors.
• Push deadlines for the interim expenditure plan from 30 to 60 days and three to six months.
• Add a specific reference to apprenticeship programs.
• Change the “may” to “shall” for grants to counties in the OES prehazard mitigation section.
• Add in the CNRA funding an allocation for CalFire of $75M with a restriction on vegetation management that applies only to chapparal and coastal scrub ecosystems. The restriction prohibits veg management except for defensible space around buildings and for projects near threatened communities where veg management can be used to create staging areas for fighting wildfires.
• Directs not less than $25 million from the funding to the Natural Resources Agency funding to CalFIRE for a conservancy focused on firefighter health and safety and vegetation management.
• Add language to ensure that any utility’s obligation to maintain line clearance or vegetation management and disallow the use of this funding for that purpose.
• Clarifies that the initial $500M bridge loan from the SMIF is paid back within fiscal year 2020-21 (instead of as quickly as possible).
• Defines fair grounds as an eligible entity to receive funding from the $300M to the SGC in order to safeguard vulnerable populations from extreme events.
• Add amendments, per the CEA, to preserve in whole AB 1054 Wildfire Fund.

Prior/Related Legislation

SB 45 (Allen, 2020) proposes the Wildfire Prevention, Safe Drinking Water, Drought Preparation, and Flood Protection Bond Act of 2020, subject to voter approval in the November 3, 2020, statewide general election. This bill proposes the issuance of $5.51 billion in general obligation bonds to implement its provisions. The bill is currently held at the Assembly Desk.

AB 352 (E. Garcia, 2019) proposes the Wildfire Prevention, Safe Drinking Water, Drought Preparation, and Flood Protection Bond Act of 2020, subject to voter approval in the November 3, 2020 statewide general election. This bill proposes the issuance of $3.92 billion in general obligation bonds to implement its provisions. The bill is currently held in the Senate Committee on Environmental Quality.

AB 1298 (Mullin, 2019) proposes the Resiliency, Fire Risk Reduction, Recycling, Groundwater and Drinking Water Supply, Clean Beaches, and Jobs Infrastructure Bond Act of 2020 for an unspecified amount. The bill died pursuant to Art. IV, Sec. 10(c) of the Constitution.

AB 3256 (E. Garcia, 2019) proposes the Economic Recovery, Wildfire Prevention, Safe Drinking Water, Drought Preparation, and Flood Protection Bond Act of 202, subject to voter approval in the November 3, 2020 statewide general election. The bill proposes the issuance of $6.98 billion in general obligation bonds to implement its provisions. The bill is currently held in the Assembly Committee on Rules.

AB 1054 (Holden, Chapter 79, Statutes of 2019) among its many provisions, the bill establishes a Wildfire Fund as a mechanism to address third-party damages against an electric IOU from wildfires ignited by the utility. The Wildfire Fund is funded by the extension of the DWR Charge on customers of the utilities and a commensurate contribution from electric IOU shareholders.

FISCAL EFFECT: Appropriation: Yes Fiscal Com.: Yes Local: Yes

SUPPORT:

American Forest Foundation

Arroyos & Foothills Conservancy

Big Sur Land Trust

California Association of Local Conservation Corps

California Association of Resource Conservation Districts

California Invasive Plant Council

California Landscape Stewardship Network

California Park & Recreation Society

California Watershed Network

California Wildlife Foundation

City of Santa Cruz Water Department

City of Watsonville

Coalition for Clean Air

Community Nature Connection

Conservation Corps North Bay

Defenders of Wildlife

Ducks Unlimited

East Bay Regional Park District

Endangered Habitats League

Escondido Creek Conservancy

Farmworker Institute for Education and Leadership Development

Fire Restoration Group

Friends of the Los Angeles River

Friends of Santa Cruz State Parks

Hills For Everyone

Land Trust of Santa Cruz County

Los Angeles Conservation Corps Los Angeles Neighborhood Land Trust

Mammoth Lakes Trails and Public Access

Marin County Board of Supervisors

Midpeninsula Regional Open Space District

Mountains Recreation & Conservation Authority

Pacific Forest Trust

Peninsula Open Space Trust

Placer Land Trust

Planning and Conservation League

Resources Legacy Fund

Regional Asthma Management and Prevention

San Francisco Conservation Corps

San Jose Conservation Corps

Santa Barbara County Board of Supervisors

Santa Clara Valley Open Space Authority

Save the Redwoods League

Sempervirens Fund

Sequoia Community Corps

Sierra Business Council

Sierra Forest Legacy

Sonoma County Board of Supervisors

Sonoma County Water Agency

The Nature Conservancy, California Chapter

TOGETHER Bay Area

Trust for Public Land

Urban Corps of San Diego County

Wildlands Conservancy

OPPOSITION:

African-American farmers of California

Agricultural Council of California

Agricultural Energy Consumers Association

California Agricultural Aircraft Association

California Business Properties Association

California Business Roundtable

California Chamber of Commerce

California Citrus Mutual

California Cotton Ginners and Growers Association

California Farm Bureau Federation

California Fresh Fruit Association

California Grain & Feed Association

California Grocers Association

California Large Energy Consumers Association

California League of Food Producers

California Manufacturers & Technology Association

California Seed Association

California Taxpayers Association

California Walnut Commission

California Warehouse Association

El Dorado County Chamber of Commerce

El Dorado Hills Chamber of Commerce

Elk Grove Chamber of Commerce

Far West Equipment Dealers Association

Folsom Chamber of Commerce

Howard Jarvis Taxpayers Association

Inland Empire Utilities Agency

Nisei Farmers League

Pacific Egg & Poultry Association

Pacific Gas and Electric

Rancho Cordova Chamber of Commerce

Roseville Chamber of Commerce

San Diego Gas and Electric

The Utility Reform Network

United Chamber Advocacy Network

Valley Ag Water Coalition

Western Agricultural Processors Association

Western Growers Association

Western Independent Refiners Association

Western States Petroleum Association

Yuba Sutter Chamber of Commerce

ARGUMENTS IN SUPPORT: According to the author:

Assembly Bill 1659 generates at least 2.5 billion dollars for wildfire and climate related jobs and investments by extending an existing small fixed charge on utility rates. The bill includes short and long-term plans that will be developed and overseen by the CPUC and the Natural Resources Agency. Both plans are focused on reducing fire risks on the ground and protecting communities through such things as defensible space, home hardening, emergency personnel, as well as public education and outreach on increasing fire resiliency. AB 1659 takes swift action to provide the resources necessary to contain and extinguish the fires currently burning in our state and will help safeguard us from future wildfires

The numerous supporters of this bill support funding for many of the projects, as proposed, and the merits of electric ratepayers as the funding source for these projects. As stated by a coalition of supporting organizations:

AB 1659 “…will provide a major infusion of funding for programs to address California’s fire crisis. The impact of the current firestorms on lives, communities, and public health make clear that we need to dramatically accelerate efforts to restore resilience to our landscapes and communities.”

ARGUMENTS IN OPPOSITION: The organizations opposed to this bill are largely representative of electric-utility customers (ratepayers) who oppose the extension of the DWR Charge as proposed in this bill and take issue with electric utility customers being charged for their electricity usage to fund projects that are unrelated to their usage or the electric system. A letter from a coalition of organizations opposed to the bill states: “The structure of the bill places the burden of current wildfires on future generations of California homeowners and businesses by forcing them to pay billions of dollars for programs and projects unrelated to utility service through the year 2050.” Furthermore, those opposed to the bill cite several factors contributing to increases of their electric utility bills, including: expenses associated with the billions in dollars of investments in wildfire mitigation of the electric system, other policy requirements that increase costs on electric utility bills, and funding the Wildfire Fund from AB 1054. They also note the likely need to increase costs to address the recent rotating blackouts and the impacts from the COVID pandemic-related economic impacts. Specific to the Wildfire Fund and the DWR Charge, a coalition of entities opposed to this bill state: “Even for moderate commercial energy users, AB 1054 already increased utility bills by hundreds of thousands of dollars per company.” Representing residential electric IOU customers, TURN states: “This bill sets a dangerous precedent of treating utility rates as a piggybank to pay for state services.”

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 THIRD READING  

Bill No: AB 1659

Author: Bloom (D)

Amended: 7/11/19 in Senate

Vote: 21

SENATE HOUSING COMMITTEE: 10-0, 6/18/19

AYES: Wiener, Morrell, Bates, Caballero, Durazo, Moorlach, Roth, Skinner, Umberg, Wieckowski

NO VOTE RECORDED: McGuire

SENATE GOVERNANCE & FINANCE COMMITTEE: 7-0, 7/10/19

AYES: McGuire, Moorlach, Beall, Hertzberg, Hurtado, Nielsen, Wiener

SENATE APPROPRIATIONS COMMITTEE: Senate Rule 28.8

ASSEMBLY FLOOR: 67-0, 5/13/19 - See last page for vote

SUBJECT: Local home financing agencies: cities

SOURCE: Eric Garcetti, Mayor of Los Angeles

DIGEST:

This bill redefines “city” as it applies to home mortgage financing and multifamily rental housing bonds, to include any nonprofit public benefit corporation or instrumentality created by the City of Los Angeles for the purpose of issuing housing bonds in the City, as specified.

ANALYSIS:

Existing law:

1. Defines “city” or “county” for purposes of local housing finance agencies to include a city and county and also any agency created by a joint powers agreement entered into by cities or counties or both for the express purpose of the joint exercise of powers.
2. Finds and declares that the authority to issue revenue bonds to aid in the financing of home purchase is needed in the cities and counties of the state and that it is in the public interest and serves a public purpose to provide financing for decent, safe, and sanitary housing that people in the lower end of purchasing spectrum can afford and is a function pertaining to the government and affairs of cities and counties of the state.
3. Authorizes a city or county, for purposes of a home financing program, to issue bonds to defray in whole or in part, the costs of acquiring home mortgages or making loans to lending institutions in order to enable them to make home mortgages, to sell or otherwise dispose of any home mortgages, to pledge any revenues or receipts to be received from or with respect to any home mortgages or loans made to lending institutions, to issue its bonds to refund previously issued bonds.
4. Grants any city or county the power to issue revenue bonds for the purpose of financing the acquisition, construction, rehabilitation, refinancing, or development of multifamily rental housing and for the provision of capital improvements in connection with and determined necessary to that multifamily rental housing.

This bill redefines “city” as it applies to home mortgage financing and multifamily rental housing bonds, to include any nonprofit public benefit corporation or instrumentality created by the City of Los Angeles for the purpose of issuing housing private activity bonds (PABs) in the City if it meets the following criteria:

1. The City of Los Angeles created the instrumentality to finance, create, or preserve affordable housing within the City of Los Angeles and is created by a vote of the city council in an open meeting.

2) A board of directors consisting of designated City officials and private industry experts with knowledge of and experience in the areas of housing finance and development govern the instrumentality.

3) The Mayor, with the advice and consent of the City Council, appoints the instrumentality’s board members, and all appointees serve staggered terms.

4) The instrumentality’s board holds appropriate meetings to authorize all corporate actions and all such meetings are open to the public.

5) The instrumentality, its board members, officers, and employees are subject to the Brown Act, the California Public Records Act and the Political Reform Act of 1974, as applicable.

6) The instrumentality maintains books and records prepared in accordance with Generally Accepted Accounting Principles, which must be audited each fiscal year. It shall prepare an annual report detailing its programs and accomplishments each fiscal year and maintains a public website where it posts its audited financial statements and annual report at the end of each fiscal year. The instrumentality shall also submit its audited financial statements and annual report to the Mayor, the City Council, and the Treasurer at the end of each fiscal year.

7) The instrumentality establishes a policy for preventing conflicts of interest.

8) The instrumentality shall submit its policies for issuing bonds to the California Debt Limit Allocation Committee for review and approval before the corporation receives any private activity bond allocations.

9) On or before January 1, 2026, the instrumentality shall report on its activities to the Legislature, as specified.

10) The instrumentality cannot regulate or enforce local land use decisions or acquire property by eminent domain.

Background

1. Local housing finance agencies. A city or county is authorized to issue PABs to provide mortgages or loans for multi-family housing developments. These bonds are exempt from state and federal taxes, which lowers the cost of the debt and allows cities and counties to provide lower-cost financing.
2. New York model. This bill allows the City to replicate a model used in New York City — the New York City Housing Development Corporation (HDC). In the 1970s, the New York State Legislature created the New York City HDC as a public benefit corporation to finance affordable multi-family housing. Authorized to issue bonds with below market interest rates to fund affordable housing, New York’s HDC operates on a self-sustaining generation of fees, interest earnings, and bond and mortgage rates. Since its creation, the HDC has financed the production of over 190,000 units, currently manages $16.1 billion of assets, and plans to produce 300,000 affordable apartments by 2026.

While New York’s HDC is called a public benefit corporation, it operates as a quasi-governmental entity (the legislative findings refer to it as a “corporate governmental agency”). Its powers were established by state statute by the New York Legislature and specify in great detail the governmental structure of the HDC, annual audit reporting requirements, detailed powers and authorities, remedies for bondholders and noteholders in the event the HDC were to default on its payments, types of bonds that may be issued, accounting and budgeting obligations, relationship to the state and the City’s housing agency, and its debt ceiling. New York’s HDC is also subject to open meetings, financial disclosures, and oversight by the state Authorities Budget Office.

1. How would this work? This bill allows the City of Los Angeles to create a nonprofit public benefit corporation or instrumentality called the Los Angeles Housing Finance Corporation (LA HFC), and considers the instrumentality a city for the purposes of issuing home mortgage finance and multifamily rental housing PABs in Los Angeles. Instead of the City Council issuing these bonds, a corporate board of directors consisting of City officials and private industry experts would be responsible for administering the bonds. The City estimates that LA HFC would need $10 million to get started, which the corporation would pay back over the next few years. Because LA HFC would be a separate entity from the City, its debts would not be considered part of the City’s debts. By creating a separate legal entity, LA HFC’s credit rating would be independent of the City’s credit rating. While the City can already issue these bonds on its own, it may or may not receive more favorable ratings from investors depending on its credit situation at the time.
2. Precedent. Allowing the City of Los Angeles to create a separate entity governed by a separate board of directors is not without risk. The City has to loan $10 million to startup the corporation that it could use for other purposes. While the City expects LA HFC to pay off this initial investment in a few years, it is uncertain how successfully this new entity will issue bonds. Having a nonprofit public benefit corporation act as a City would set a new precedent in California.
3. More specificity? State law authorizes cities and counties to create a variety of entities and corporations to perform specified services, such as municipal or public utilities, community energy authorities, and infrastructure financing districts, among others. These laws generally set forth the powers and duties of these entities and corporations, such as the authority to issue bonds. Some of these laws set forth a governing structure for these entities and corporations. Rather than create a new governmental agency with specific management structure and powers, this bill gives LA HFC the power to act as it were a city. While the City of Los Angeles modeled it after New York’s HDC, which the state Legislature enacted, the two entities share both similarities and differences. While both issue PABs, the New York Legislature set up New York HDC to act as a corporate governmental agency with a more defined board structure and set of powers and duties.

Comments

1. Purpose of the bill. According to the author, this bill “will provide a solution to the lack of stable funding for affordable housing development without using taxpayer dollars. [This bill] will permit nonprofit public benefit corporations to sell state income tax exempted bonds. The exemption will allow cities, like the City of Los Angeles, to create self-sustaining local housing agencies that use mortgage loan repayments to fund affordable housing projects and support low and middle-income homebuyers. Cities that decide to create their own housing finance agency will be insulated from financial risk. Similar nonprofit finance agencies in New York and Rhode Island have successfully funded thousands of new homes. [This bill] will help the City of Los Angeles and cities across the state mirror those successes by providing a tool for cities to address the housing shortage at the local level.”

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

SUPPORT: (Verified 8/12/19)

Eric Garcetti, Mayor of Los Angeles (source)

City of West Hollywood

OPPOSITION: (Verified 8/12/19)

None received

ASSEMBLY FLOOR: 67-0, 5/13/19

AYES: Aguiar-Curry, Bauer-Kahan, Berman, Bloom, Bonta, Calderon, Carrillo, Cervantes, Chau, Chen, Chiu, Chu, Cooley, Cooper, Cunningham, Daly, Diep, Eggman, Friedman, Gabriel, Gallagher, Cristina Garcia, Eduardo Garcia, Gipson, Gloria, Gray, Grayson, Holden, Irwin, Jones-Sawyer, Kalra, Kamlager-Dove, Lackey, Levine, Limón, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Muratsuchi, Nazarian, Obernolte, O'Donnell, Petrie-Norris, Quirk, Quirk-Silva, Ramos, Reyes, Luz Rivas, Robert Rivas, Rodriguez, Blanca Rubio, Salas, Santiago, Smith, Mark Stone, Ting, Voepel, Waldron, Weber, Wicks, Wood, Rendon

NO VOTE RECORDED: Arambula, Bigelow, Boerner Horvath, Brough, Burke, Choi, Dahle, Flora, Fong, Frazier, Gonzalez, Kiley, Patterson

Prepared by: Alison Hughes / HOUSING / (916) 651-41248/14/19 15:38:15

**** END ****

SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Mike McGuire, Chair

2019 - 2020 Regular

Local home financing agencies: City of Los Angeles: nonprofit public benefit corporation

Allows the City of Los Angeles to create a nonprofit public benefit corporation to issue private activity bonds for housing financing purposes.

Background

Private activity bonds. When public agencies issue bonds, they borrow money from investors, who provide cash in exchange for the agencies’ commitment to repay the principal amount of the bond plus interest. Bonds are usually either revenue bonds, which repay investors out of revenue generated from the project the agency buys with bond proceeds, or general obligation bonds, which the public agency pays out of general revenues and are guaranteed by its full faith and credit. Section 26 of Article XIII of the California Constitution exempts interest on bonds issued by the State or a local government from state income taxes. The federal government also exempts interest on many bonds issued by state and local governments from federal income taxes.

Private activity bonds (PABs) are a third type of bonds. PABs are tax-exempt bonds public agencies issue on behalf of private businesses allowing for lower borrowing costs than private entities financed projects at market rates. Local agencies can issue PABs for a variety of purposes, including low-income and multi-family housing, industrial development, or facilities that treat water, sewage, or hazardous material. Unlike other bonds, the obligation to pay principal and interest on PABs is not the local agency’s responsibility, but the responsibility of the private entity receiving bond proceeds. Since these bonds are federally tax-exempt, the federal government limits the number of PABs each state can issue in a given year. The California Debt Limit Allocation Committee (CDLAC) monitors the cap. In 2019, California’s cap was $4.15 billion. Local agencies need an allocation from this amount approved by CDLAC to issue PABs. California has never used its entire cap.

Home mortgage financing. To provide financing for decent, safe, and sanitary housing that people in the lower income ranges can afford to purchase, existing law allows a city or county to issue PABs to defray the costs of acquiring home mortgages, to sell or otherwise dispose of any home mortgages, or make loans to lending institutions to enable them to make home mortgages. The local agency must adopt regulations establishing criteria for families to qualify for a home financing program based on (1) income available for housing needs, (2) size of household, (3) costs and condition of available housing, and (4) eligibility for federal housing assistance. Mortgagors must certify that the individuals remain in the home for at least two years, unless they have a hardship, and the program must comply with the land use and housing elements of the local agency’s general plan. Bonds issued to help finance these mortgages must not have maturity dates beyond 45 years.

Multifamily rental housing bonds. A local agency can issue bonds for the purpose of financing the acquisition, construction, rehabilitation, refinancing, or development of multifamily rental housing and improvements associated with those developments. The local agency can purchase or undertake loans to finance multifamily rental housing and require that when it lends funds to lending institutions, those institutions use funds for making construction loans or mortgage loans to finance multifamily rental housing developments. Lease payments collected in excess of what is needed for debt service, operating expenses, and related revenues, must go towards reducing residents’ rents.

Nonprofit public benefit corporations. Public or private entities can create nonprofit public benefit corporations for any public or charitable purpose. To form a nonprofit public benefit corporation, one or more individuals or agencies must file articles of incorporation with the Secretary of State. If the legislative body of a local agency files articles of incorporation to delegate some of its authority to such a corporation, it must also file the articles of incorporation with the State Controller. Corporations select a board of directors to manage their affairs based on the bylaws they adopt. Bylaws set processes for membership, meetings, tenure of officers, membership fees, and voting procedures. Once created, a nonprofit public benefit corporation can take various actions, among them to:

• Adopt, amend, and repeal bylaws;
• Qualify to conduct its activities in any other state, territory, dependency, or foreign county;
• Acquire, own, sell, lend, and otherwise exchange and dispose of its own bonds;
• Issue memberships;
• Pay pensions;
• Levy dues, assessments, and admission fees;
• Make donations for the public welfare or for community-related purposes; and
• Assume obligations, enter into contracts, and borrow or lend money.

New York model. In the 1970s, the New York State Legislature created the New York City Housing Development Corporation (HDC) as a public benefit corporation to finance affordable multi-family housing. Authorized to issue bonds with below market interest rates to fund affordable housing, New York’s HDC operates on a self-sustaining generation of fees, interest earnings, and bond and mortgage rates. Since its creation, the HDC has financed the production of over 190,000 units. Currently it manages $16.1 billion of assets and plans to produce 300,000 affordable apartments by 2026.

While New York’s HDC is called a public benefit corporation, it operates as a quasi-governmental entity (its enabling legislation refers to it as a “corporate governmental agency”). When the New York Legislature established its powers, it specified all of the following: the entity’s governing structure; the entity’s annual audit reporting requirements; the entity’s powers and authorities; the entity’s accounting and budgeting obligations; the entity’s remedy for both bondholders and noteholders in the event it defaults on payments; the types of bonds the entity may issue; the entity’s debt ceiling; and the entity’s relationship to both the state and the City’s housing agency. New York’s HDC is also subject to open meetings, financial disclosures, and oversight by the state Authorities Budget Office.

The Mayor of Los Angeles wants to set up a nonprofit benefit corporation in the City of Los Angeles based on the New York model.

Proposed Law

Assembly Bill 1659 changes the definition of city, as it applies to home mortgage financing and multifamily rental housing bonds, to include any nonprofit public benefit corporation or instrumentality created by the City of Los Angeles for the purpose of issuing housing PABs in the City that meets the following criteria:

• The City of Los Angeles created the instrumentality to finance, create, or preserve affordable housing within the City of Los Angeles.
• A board of directors consisting of designated City officials and private industry experts with knowledge of and experience in the areas of housing finance and development govern the instrumentality.
• The Mayor, with the advice and consent of the City Council, appoints the instrumentality’s board members, and all appointees serve staggered terms.
• The instrumentality’s board holds appropriate meetings to authorize all corporate actions and all such meetings are open to the public.
• The instrumentality, its board members, officers, and employees are subject to the Brown Act, the California Public Records Act and the Political Reform Act of 1974, as applicable.
• The instrumentality maintains books and records prepared in accordance with Generally Accepted Accounting Principles (GAAP), which must be audited each fiscal year.
• The instrumentality prepares an annual report detailing its programs and accomplishments each fiscal year.
• The instrumentality maintains a public website where it posts its audited financial statements and annual report at the end of each fiscal year.
• The instrumentality submits its audited financial statements and annual report to the Mayor, the City Council, and the Treasurer at the end of each fiscal year.
• The instrumentality cannot regulate or enforce local land use decisions.
• The instrumentality cannot acquire property by eminent domain.

State Revenue Impact

No estimate.

Comments

1. Purpose of the bill. According to the author, “In their 2017 report on California’s housing future, the California Department of Housing and Community Development noted that a challenge of meeting the housing demand includes the lack of stable funding for affordable home development, especially for lower-income households. AB 1659 will provide one solution to addressing the unstable funding by permitting nonprofit public benefit corporations to sell bonds that are exempt from state income tax to fund affordable housing development. AB 1659 will help the city of Los Angeles create the state’s first local housing finance agency, the Los Angeles Housing Finance Corporation (LA HFC). Structured similarly to the already successful models of both New York and Rhode Island’s Housing Finance Corporations, the LA HFC requires zero investment from taxpayer dollars and works as a self-sustaining funding model. California needs more affordable housing and a Housing Finance Corporation can serve as a long-term solution to solving these problems on a city level.”

2. How would this work? AB 1659 allows the City of Los Angeles to create a nonprofit public benefit corporation or instrumentality, and considers the instrumentality a city for the purposes of issuing home mortgage finance and multifamily rental housing PABs in Los Angeles. Instead of the City Council issuing these bonds, a corporate board of directors consisting of City officials and private industry experts would be responsible for administering the bonds. The City estimates that LA HFC would need $10 million to get started, which the corporation would pay back over the next few years. Because LA HFC would be a separate entity from the City, its debts would not be considered part of the City’s debts. By creating a separate legal entity, LA HFC’s credit rating would be independent of the City’s credit rating. While the City can already issue these bonds on its own, it may or may not receive more favorable ratings from investors depending on its credit situation at the time.

3. Delegation? The City already has the power to form a nonprofit public benefit corporation to delegate some of its authorities. However, a city cannot delegate its police powers, which is the city and county’s constitutional ability to “make and enforce within its limits, all local, policy, sanitary, and other ordinances and regulations not in conflict with general laws.” The California Supreme Court ruled, “a local government may not contract away its right to exercise its police power in the future, and land use regulations involve the exercise of police power.” Alameda County Land Use Assn. v. City of Hayward (1995) 38 Cal.App.4^th 1716, 1724. For this reason, AB 1659 specifically prohibits LA HFC from regulating or enforcing local land use decisions. While untested in the courts, it is plausible that the delegation of PAB issuances may fall outside of the definition of police powers.

4. Tax exempt? If that is the case, the City could create a nonprofit public benefit corporation for the purposes of issuing home finance and multifamily rental housing bonds. However, Sections 3 and 26 of Article XVI of the California Constitution only exempts bonds issued by the State or a local government from property tax or state income tax. In other words, PABs issued by a nonprofit public benefit corporation would not be exempt from state taxes as they would be if the City issued the PABs. AB 1659 considers LA HFC to meet the definition of a city, extending the corporation tax-exempt status. While providing LA HFC tax-exempt status would likely allow the corporation to receive more favorable bond terms, the Committee may wish to consider whether to provide a nonprofit public benefit corporation the ability to issue tax-exempt bonds.

5. Precedent. Allowing the City of Los Angeles to create a separate entity governed by a separate board of directors is not without risk. The City has to loan $10 million to startup the corporation that it could use for other purposes. While the City expects LA HFC to pay off this initial investment in a few years, it is uncertain how successfully this new entity will issue bonds. In addition, it is unclear whether the federal government may have issues with how the organization is set up that could affect is federal tax-exempt status. Outside of approving the initial legislation, the Legislature does not have a role in how the new entity is managed going forward. Having a nonprofit public benefit corporation act as a City would set a new precedent in California. To give the Legislature an opportunity to weigh in on the effectiveness of LA HFC, the Committee may consider amending the bill to limit the LA HFC’s ability to issue bonds to an initial five-year period. After that point, LA HFC could still pay off the bonds it already issued, but would need further legislative action to continue issuing bonds.

6. More needed? State law authorizes cities and counties to create a variety of entities and corporations to perform specified services, such as municipal or public utilities, community energy authorities, and infrastructure financing districts, among others. These laws generally set forth the powers and duties of these entities and corporations, such as the authority to issue bonds. Some of these laws set forth a governing structure for these entities and corporations. Rather than create a new governmental agency with specific management structure and powers, AB 1659 gives LA HFC the power to act as it were a city. While the City of Los Angeles modeled it after New York’s HCD, which the state Legislature enacted, the two entities share both similarities and differences. While both issue PABs, the New York Legislature set up New York HDC to act as a corporate governmental agency with a more defined board structure and set of powers. While the City of Los Angeles may fill in more details in LA HFC’s articles of incorporation and by-laws, AB 1659 would likely benefit from provisions clarifying the powers and duties of this new corporation.

7. Public input. Beyond electing the Mayor, who appoints the LA HFC board of directors, and the City Council, who approves the Mayor’s appointees, and attending public meetings of the corporation, City residents do not have many opportunities to weigh in. They neither vote to form the entity, nor do they vote when it issues bonds. They can review annual reports and audited financial statements to determine if LA HFC meets their needs, but additional steps may help the public take a greater role in how LA HFC will run. The Committee may wish to consider amending the bill to provide greater public input by (1) adding public members or affordable housing advocates to the board, and (2) requiring the City Council approve LA HFC’s formation at an open public meeting.

8. Wait and see. Since AB 1659 creates the first nonprofit public benefit corporation requesting PAB allocations from CDLAC, it is unclear whether CDLAC would find LA HFC’s structure or the policies sufficient for it to receive allocations. Rather than wait to see whether CDLAC would approve a PAB request from LA HFC, the Committee may wish to consider amending the bill to require CDLAC to review and approve LA HFC PAB issuance policies before allocation requests are considered.

9. Administrative costs. Many public agencies have limits on their administrative costs. AB 1659 does not provide any such limitation, which could allow LA HFC to spend a significant amount of funds on administrative costs, as opposed to financing housing. The Committee may wish to consider amending the bill to limit how much LA HFC can spend on administrative costs.

10. Practical considerations. AB 1659 raises several operational concerns, outlined below:

• The bill requires the board of directors to comply with the Brown Act, the Political Reform Act of 1974, and the California Public Records Act, but does not also require the board to establish a policy for preventing conflicts of interest. Since some of the directors may have financial interests in properties that receive PABs through LA HFC, having a policy in place may help reduce the risk of a conflict of interest. The bill also does not specify whether board members receive compensation for their service on the board.
• Public agency officials are subject to the prudent investor standard, which says that the first and foremost consideration when managing public funds is preservation of principal, the second is liquidity, and the third is to achieve a return. Since the LA HFC is not a public agency, it is unclear whether it must abide by such a standard.
• Since AB 1659 amends sections of law dealing with a city and county’s power to issue PABs for home financing and multifamily rental housing, it references a city or county’s ability to perform public functions, such as passing resolutions and establishing rules and regulations. The bill does not specify whether these powers provided by existing law to local agencies transfer to LA HFC.
• AB 1659 does not set a debt limit for LA HFC, which would allow LA HFC to issue any amount of bonds it sees fit. LA HFC’s limitation would be based on how much of the state’s PAB limit CDLAC decides to allocate to the corporation.

11. Incoming! The Senate Housing Committee approved AB 1659 at its June 18^th meeting on a vote of 10-0. The Senate Governance and Finance Committee is hearing it as the committee of second reference.

12. Special legislation. The California Constitution prohibits special legislation when a general law can apply (Section 16 of Article IV). AB 1659 contains findings and declarations explaining the need for legislation that applies on to the City of Los Angeles.

Assembly Actions

Assembly Housing and Community Development Committee: 7-0

Assembly Floor: 67-0

Support and Opposition

(7/5/19)

Support: City of West Hollywood; Eric Garcetti, Mayor ff Los Angeles

Opposition: Unknown.

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SENATE COMMITTEE ON HOUSING

Senator Scott Wiener, Chair

2019 - 2020 Regular

Bill No: AB 1659 Hearing Date: 6/18/2019

SUBJECT: Local home financing agencies: cities

DIGEST: This bill expands the definition of “city” to allow a nonprofit public benefit corporation created at the discretion of a city to act as a local housing financing agency.

ANALYSIS:

Existing law:

1. Defines “city” or “county for purposes of local housing finance agencies to include a city and county and also any agency created by a joint powers agreement entered into by cities or counties or both for the express purpose of the joint exercise of powers.
2. Finds and declares that the authority to issue revenue bonds to aid in the financing of home purchase is needed in the cities and counties of the state and that it is in the public interest and serves a public purpose to provide financing for decent, safe, and sanitary housing that people in the lower end of purchasing spectrum can afford and is a function pertaining to the government and affairs of cities and counties of the state.
3. Authorizes a city or county, for purposes of a home financing program, to issue bonds to defray in whole or in part, the costs of acquiring home mortgages or making loans to lending institutions in order to enable them to make home mortgages, to sell or otherwise dispose of any home mortgages, to pledge any revenues or receipts to be received from or with respect to any home mortgages or loans made to lending institutions, to issue its bonds to refund previously issued bonds..
4. Grants any city or county the power to issue revenue bonds for the purpose of financing the acquisition, construction, rehabilitation, refinancing, or development of multifamily rental housing and for the provision of capital improvements in connection with and determined necessary to that multifamily rental housing.

This bill redefines “city” to also include any nonprofit public benefit corporation that meets all the following criteria:

1. It is an instrumentality created at the direction of, and so designated by, a city.
2. The members of the board of directors of the nonprofit have financial expertise.
3. The nonprofit, in a form and manner prescribed by the Treasurer, annually completes an audit that it submits to the Treasurer.

COMMENTS

1. Purpose of the bill. According to the author, this bill “will provide a solution to the lack of stable funding for affordable housing development without using taxpayer dollars. [This bill] will permit nonprofit public benefit corporations to sell state income tax exempted bonds. The exemption will allow cities, like the City of Los Angeles, to create self-sustaining local housing agencies that use mortgage loan repayments to fund affordable housing projects and support low and middle-income homebuyers. Cities that decide to create their own housing finance agency will be insulated from financial risk. Similar nonprofit finance agencies in New York and Rhode Island have successfully funded thousands of new homes. [This bill] will help the City of Los Angeles and cities across the state mirror those successes by providing a tool for cities to address the housing shortage at the local level.
2. Background of local housing finance agencies. A city or county is authorized to issue revenue bonds to provide mortgages or loans for multi-family housing developments. These bonds are exempt from state and federal taxes, which lowers the cost of the debt and allows cities and counties to provide lower-cost financing. The City of Los Angeles (the City) is sponsoring this bill to allow them to create a nonprofit public benefit corporation that can issue bonds that are exempt from state taxes. According to the sponsor, repayment of the bonds will be the sole obligation of the non-profit public benefit corporation and will insulate the City from financial risk and allow it to operate independently from the city’s general fund. The new entity, Los Angeles Housing Finance Corporation (LA HFC), would sell tax-exempt bonds to investors, similar to the authority afforded to cities and counties under existing state law. The bond proceeds will be used to finance mortgage loans to affordable housing developers and low- and moderate-income homebuyers. The City would appoint the Board of Directors of the LA HFC. The mortgages will generate fees that will be used to pay for the cost of staff and overhead. The City anticipates that LA HFC will be able to cover the cost of its operations in three years.
3. New York model. This bill would allow the City to replicate a model used in in New York City — the New York City Housing Development Corporation (HDC). In the 1970s, the New York State Legislature created the New York City Housing Development Corporation (HDC) as a public benefit corporation to finance affordable multi-family housing. Authorized to issue bonds with below market interest rates to fund affordable housing, New York’s HDC operates on a self-sustaining generation of fees, interest earnings, and bond and mortgage rates. Since its creation, the HDC has financed the production of over 190,000 units, currently manages $16.1 billion of assets, and plans to produce 300,000 affordable apartments by 2026.

While New York’s HDC is called a public benefit corporation, it operates as a quasi-governmental entity (the legislative findings refer to it as a “corporate governmental agency”). Its powers were established by state statute by the New York Legislature and specify the governmental structure of the HDC, annual audit reporting requirements, detailed powers and authorities, remedies for bondholders and noteholders in the event the HDC were to default on its payments, types of bonds that may be issued, accounting and budgeting obligations, relationship to the state and the City’s housing agency, and its debt ceiling. New York’s HDC is also subject to open meetings, financial disclosures, and oversight by the state Authorities Budget Office.

According to the sponsor, the non-profit public benefit corporation will be set up as a fully independent, separate legal entity so that it is self-sustaining and does not rely on future general fund revenue to operate. It would be governed by a board of directors selected by the City Council and the Mayor.

Moving forward, in order to protect public finances, the author may wish to consider placing similar detailed guardrails and transparency measures around any new public benefit corporations created by this bill.

1. Double-referral. This bill is double referred to the Governance and Finance Committee, which will consider provisions related to local government revenue mechanisms.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

POSITIONS: (Communicated to the committee before noon on Wednesday,

June 12, 2019.)

SUPPORT:

Eric Garcetti, Mayor of Los Angeles (Sponsor)
West Hollywood; City Of

OPPOSITION:

None received.

-- END --

ASSEMBLY THIRD READING

ATR Bill Id:AB 1659

Author:(Bloom)

As Amended Ver:May 8, 2019

Majority vote

SUMMARY:

Revises the law governing local housing finance agencies.

Major Provisions

Expands the definition of "city" authorized to act as a local housing finance agency to include a "nonprofit public benefit corporation" that satisfies the following criteria:

1. Is instrumentally created at the direction of and designated by a city;
2. The board of directors of non-profit public benefit corporation to have financial expertise; and,
3. The non-profit public benefit corporation submits an audit to the California Office of the Treasurer each year.

COMMENTS:

A city or county is authorized to issue revenue bonds to provide mortgages or loans for multi-family housing developments. These bonds are exempt from state and federal taxes which lowers the cost of the debt and allows cities and counties to provide lower-cost financing. The City of Los Angeles (LA City) is sponsoring this bill to allow them to create a nonprofit public benefit corporation that can issue bonds that are exempt from state taxes. According to the sponsor, repayment of the bonds will be the sole obligation of the non-profit public benefit corporation and will insulate LA City from financial risk. The new entity, Los Angeles Housing Finance Corporation (LA HFC) would sell tax-exempt bonds to investors. The bond proceeds will be used to finance mortgage loans to affordable housing developers and low- and moderate-income homebuyers. LA City would appoint the Board of Directors of the LA HFC. With an initial $10 million deposit in collateral, LA City projects that it will issue a $100 million bond which equates to $100 million of mortgage originations resulting in $125 million of affordable housing projects. The mortgages will generate fees that will be used to pay for the cost of staff and overhead. LA City anticipates that LA HFC will be able to cover the cost of its operations in three years.

Qualified Private activity bonds (PABs): PABs are tax-exempt bonds that government agencies issue on behalf of private businesses and may be issued for various purposes such as low-income multi-family housing, industrial development, redevelopment projects, enterprise zones or facilities that treat water, sewage or hazardous materials. The lower borrowing costs of PABs facilitates the development of projects that may not otherwise be feasible if financed at market rates. The federal government caps the amount of PABS that can be issued each year. The California Debt Limit Allocation Committee (CDLAC) monitors the cap. The 2019 State Ceiling for qualified private activity bonds is $4,153,489,725. Each year, CDLAC decides how much will go to multifamily, single-family, and teacher home purchase projects and to non-housing activities. Agencies and organizations authorized to issue tax-exempt private activity bonds or mortgage credit certificates must receive an allocation from CDLAC. The state has never used its allotment of PABs, any unused capacity rolls over the next year. In the past few years, however, demand for PABs has increased and the state has come close to using the full amount. If created, the LA HFC will contribute to this demand and CDLAC may need to consider this in its allocation of PABs.

According to the Author:

According to the author, "California has an ongoing affordable housing crisis. Over the last 10 years, housing production has averaged less than 80,000 new homes annually, far behind the projected need of 180,000 homes annually. Home to just 12 percent of the nation's population, the state has 22 percent of the nation's homeless population. Structured similarly to New York and Rhode Island's financing corporation, the city of LA is the first city in California to propose a Los Angeles Housing Finance Corporation (LA HFC). The LA HFC will issue taxable and tax-exempt bonds with below-market interest rates to help finance affordable housing projects and assist low/moderate income homebuyers. Through an open indenture, the nonprofit corporation will use $10 million as initial collateral to fund a projected $125 million in affordable housing projects. Loan repayments will be used to pay for operating costs, and excess revenue will provide further funding for low-income housing. LA HFC's funding structure requires zero investment from taxpayer dollars and works as a self-sustaining funding model."

Arguments in Support:

This bill will allow cities like Los Angeles to combat our state's housing crisis by allowing them to create nonprofit public benefit corporations to sell bonds that are exempt from state income tax in order to fund affordable housing. California is experiencing an ongoing affordable housing crisis, the effects of which are particularly acute in cities like Los Angeles. As the state works to address the housing shortage, Los Angeles is looking to find innovative solutions that have been effectively used to mitigate housing shortages across the country. Current law and regulations permit cities to issue tax-exempt bonds, but do not reference public benefit corporations created by cities. This bill expands the definition of eligible entities to include such public benefit corporations. The ability to issue low-cost bonds is critical to generating low-cost mortgages, which in turn is a key component of expanding affordable housing development.

Arguments in Opposition:

None on file

FISCAL COMMENTS:

None. This bill is keyed non-fiscal by the Legislative Counsel.

VOTES:

ASM HOUSING AND COMMUNITY DEVELOPMENT: 7-0-1

YES: Chiu, Diep, Gabriel, Gloria, Limón, Maienschein, Quirk-Silva

ABS, ABST OR NV: Kiley

UPDATED:

VERSION: May 8, 2019

CONSULTANT: Lisa Engel / H. & C.D. / (916) 319-2085 FN: 0000439

Date of Hearing: May 1, 2019

ASSEMBLY COMMITTEE ON HOUSING AND COMMUNITY DEVELOPMENT

David Chiu, Chair

ABPCA Bill Id:AB 1659 (

Author:Bloom) – As Introduced Ver:February 22, 2019

SUBJECT: Local home financing agencies: cities

SUMMARY: Revises the law governing local housing finance agencies. Specifically, this bill: Expands the definition of “city” authorized to act as a local housing finance agency to include a nonprofit public benefit corporation instrumentally created at the direction of and designated by a city.

EXISTING LAW:

1. Finds and declares that the authority to issue revenue bonds to aid in the financing of home purchase is needed in the cities and counties of the state and that it is in the public interest and serves a public purpose to provide financing for decent, safe, and sanitary housing that people in the lower end of purchasing spectrum can afford and is a function pertaining to the government and affairs of cities and counties of the state.
2. Gives a city or county, for purposes of a home financing program, the power to issue bonds to defray in whole or in part, the costs of acquiring home mortgages or making loans or lending institutions in order to enable them to make home mortgages, to sell or otherwise dispose of any home mortgages, to pledge any revenues or receipts to be received from or with respect to any home mortgages or loans made to lending institutions, to issue its bonds to refund previously issued bonds in whorl or in part at any time.
3. Defines “city” or “county for purposes of local housing finance agencies to include a city and county and also any agency created by a joint powers agreement entered into by cities or counties or both for the express purpose of the joint exercise of powers.

FISCAL EFFECT: None.

COMMENTS:

Background: A city or county is authorized to issue revenue bonds to provide mortgages or loans for multi-family housing developments. These bonds are exempt from state and federal taxes which lowers the cost of the debt and allows cities and counties to provide lower-cost financing. The City of Los Angeles (LA City) is sponsoring this bill to allow them to create a nonprofit public benefit corporation that can issue bonds that are exempt from state taxes. According to the sponsor, repayment of the bonds will be the sole obligation of the non-profit public benefit corporation and will insulate LA City from financial risk. The new entity, Los Angeles Housing Finance Corporation (LA HFC) would sell tax-exempt bonds to investors. The bond proceeds will be used to finance mortgage loans to affordable housing developers and low- and moderate-income homebuyers. LA City would appoint the Board of Directors of the LA HFC. With an initial $10 million deposit in collateral, LA City projects that it will issue a $100 million bond which equates to $100 million of mortgage originations resulting in $125 million of affordable housing projects. The mortgages will generate fees that will be used to pay for the cost of staff and overhead. LA City anticipates that LA HFC will be able to cover the cost of its operations in three years.

New York model: This bill would allow LA City to replicate a model used in in New York City -- the New York City Housing Development Corporation (HDC). In the 1970s, the New York State Legislature created the New York City Housing Development Corporation (HDC) as a public benefit corporation to finance affordable multi-family housing. Authorized to issue bonds with below market interest rates to fund affordable housing, New York’s HDC operates on a self-sustaining generation of fees, interest earnings, and bond and mortgage rates. Since its creation, the HDC has financed the production of over 190,000 units, currently manages $16.1 billion of assets, and plans to produce 300,000 affordable apartments by 2026. Rhode Island also created a similar corporation to meet its housing demands. Rhode Island also has a non-profit housing corporation, the Rhode Island Housing and Mortgage Finance Corporation (RI Housing) which manages more than two billion dollars in assets today, has helped over 70,000 families buy their homes, and has financed over 14,000 rental units.

California Housing Finance Agency (CalHFA): Established in 1975, CalHFA is the state’s affordable housing lender. CalHFA provides down payment assistance to first-time homebuyers and loans for multi-family housing developments. CalHFA operates independently from the general fund and its operations are funded by bonds that are repaid by the mortgage loans and downpayments. CalHFA operates as a conduit issuer of tax-exempt bonds on behalf of developers. CalHFA has no oversight of local housing finance agencies.

Qualified Private activity bonds (PABs): PABs are tax-exempt bonds that government agencies issue on behalf of private businesses and may be issued for various purposes such as low-income multi-family housing, industrial development, redevelopment projects, enterprise zones or facilities that treat water, sewage or hazardous materials. The lower borrowing costs of PABs facilitates the development of projects that may not otherwise be feasible if financed at market rates. The federal government caps the amount of PABS that can be issued each year. The California Debt Limit Allocation Committee (CDLAC) monitors the cap. The 2019 State Ceiling for qualified private activity bonds is $4,153,489,725. Each year, CDLAC decides how much will go to multifamily, single family and teacher home purchase projects and to non-housing activities. Agencies and organizations authorized to issue tax-exempt private activity bonds or mortgage credit certificates must receive an allocation from CDLAC. The state has never used its allotment of PABs, any unused capacity rolls over the next year. In the past few years, however, demand for PABs has increased and the state has come close to using the full amount. If created, the LA HFC will contribute to this demand and CDLAC may need to consider this in its allocation of PABs.

Purpose of this bill: According to the author, “California has an ongoing affordable housing crisis. Over the last 10 years, housing production has averaged less than 80,000 new homes annually, far behind the projected need of 180,000 homes annually. Home to just 12 percent of the nation’s population, the state has 22 percent of the nation’s homeless population.

According to the California Department of Housing and Community Development, California needs more than 1.8 million additional homes by 2025 to meet demand and projected growth. The department noted that a challenge of meeting the housing demand includes the lack of stable funding for affordable home development, especially for lower-income households.

Structured similarly to New York and Rhode Island’s financing corporation, the city of LA is the first city in California to propose a Los Angeles Housing Finance Corporation (LA HFC). The LA HFC will issue taxable and tax-exempt bonds with below-market interest rates to help finance affordable housing projects and assist low/moderate income homebuyers. Through an open indenture, the nonprofit corporation will use $10 million as initial collateral to fund a projected $125 million in affordable housing projects. Loan repayments will be used to pay for operating costs, and excess revenue will provide further funding for low-income housing. LA HFC’s funding structure requires zero investment from taxpayer dollars and works as a self-sustaining funding model.”

Staff comments: This bill would create a new local entity to finance affordable housing separate from the city that creates it. The city council would not serve as the board of directors of the new non-profit corporation. To ensure there is proper oversight and accountability the committee may wish to require the board of directors to have financial expertise. The committee may also wish to consider if there is a role for the state in providing oversight to this new entity. The committee may wish to at a minimum require the non-profit corporation to complete an audit and submit to the state each year.

Committee amendments:

1. Specify that the board of directors of a non-profit corporation housing finance agency have financial expertise.
2. Require a nonprofit corporation housing finance agency to complete an annual audit and submit it to the Treasurer’s Office each year.

REGISTERED SUPPORT / OPPOSITION:

Support

Mayor Eric Garcetti, City of Los Angeles (Sponsor)

Opposition

None on file.

Analysis Prepared by: Lisa Engel / H. & C.D. / (916) 319-2085