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2011

Other Budget Issues

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Budget Inclusion. The Governor’s January budget for the California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA) includes $15 million from the Renewable Resource Trust Fund (pursuant to a continuous appropriation authority granted in 2010 legislation, discussed below) to provide a loan loss reserve to support the implementation of local public agencies' and utility districts’ PACE programs.

What Are PACE Programs? PACE programs provide up-front financing for renewable and energy efficiency-related upgrades to properties. Through PACE, property owners who wish to install solar or other renewable energy-generating devices or make water or energy efficiency improvements to their properties may borrow funds from the participating local government for those purposes. These loans are repaid by the property owner over 20 years via an annual assessment on the owner’s property tax bill. The assessment remains on the property even if it is sold or transferred. The added property tax assessments may be offset by energy savings resulting from the retrofit.

Chapter 15, Statutes of 2010 (SB 77, Pavley), Established a State-Financed Loan Loss Reserve at CAEATFA for PACE Bonds. Smaller local governments that have a relatively small number of PACE loans may face higher costs associated with bringing a small bond to market to finance the PACE loans. Chapter 15 provides a way to lower the costs to local governments and property owners in the financing of PACE bonds by allowing CAEATFA to purchase locally-issued PACE bonds and then pool them before going to the market. The loan repayments from the property owners are dedicated by the local governments to the repayment of the bonds. The PACE Reserve program provides a 10 percent reserve cushion that can be used for payments in the event of defaults. Chapter 15 appropriates up to $50 million from the Renewable Resource Trust Fund until December 31, 2014 for the Reserve program.

Recent Federal Actions Have Halted Residential PACE Programs. The Federal Housing Financing Agency (FHFA) and the U.S. Treasury Department Office of the Comptroller of the Currency determined that PACE programs present significant safety and soundness concerns that must be addressed by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. This is due to the fact that under most PACE programs, the PACE loans acquire a priority lien over existing mortgages. According to FHFA, first liens established by PACE loans are unlike routine tax assessments and may pose unusual and difficult risk management challenges for lenders, servicers and mortgage securities investors. In light of these concerns, FHFA issued a directive to the federal residential lending agencies that has, for all practical purposes, halted the operation of residential PACE programs across the country.

California Interests Have Filed Lawsuits Against FHFA. Various California-based interests--including the State of California, Sonoma and Placer Counties, and the City of Palm Desert--have filed suit in federal court to overturn the FHFA's directive. Until there is a legal resolution in this matter, California’s PACE programs (which primarily relate to residential properties) are largely on hold. As a result, there is too much uncertainty surrounding these programs' operational status to warrant at this time the transfer of state monies that the budget includes to fund the PACE loan loss reserve.  

LAO Recommendation. We find that, due to the uncertainty created by a legally contested matter that has largely halted the operation of PACE programs in the state, it is premature to transfer the funds from the Renewable Resource Trust Fund as included in the budget. We therefore recommend the Legislature reverse, without prejudice, the included transfer, pending legal resolution of the issue that has put PACE programs on hold.