SENATE BILL NO. 39 "An Act adopting the Municipal Property Assessed Clean Energy Act; authorizing municipalities to establish programs to impose assessments for energy improvements in regions designated by municipalities; imposing fees; and providing for an effective date." 9:40:29 AM Co-Chair MacKinnon read the title of the bill. 9:40:58 AM SENATOR JOHN COGHILL, SPONSOR, gave a high-level overview of the legislation. 9:42:29 AM RYNNIEVA MOSS, STAFF, SENATOR COGHILL, discussed the Sectional Analysis (copy on file): Sec. 1. Adds C-PACE financing to powers of Home Rule municipalities. Sec. 2. Adds C-PACE financing to powers of First Class Boroughs. Sec. 3. Adds C-PACE financing to powers of Second Class Boroughs on a non-areawide basis. Sec. 4. Adds C-PACE financing to powers of Second Class Boroughs on an areawide basis. Sec. 5. Creates a new chapter (Chapter 55) of law under Title 29 - Municipal Government which establishes the Municipal Property Assessed Clean Energy Act, sets the requirements for establishing the program: (b)(1) Adopt a resolution of intent with findings, intent, description of eligibility of property owners and projects, repayment, third- party financing, municipal debt servicing procedures for third-party financing. (2) Provide a notice of the report regarding assessment program with location of the report, time and place of public hearing, name of local administrator of program, and name of the assessor. (3) Hold a public hearing taking public comment. (4) Adopt an ordinance establishing the program and the terms of the program. (c) A municipality may hire a program director or contract for professional services to administer the program. (d) A municipality may set an application fee, an interest rate, or a combination of both to offset costs of administrating the program. Sec. 29.55.105. (a) Allows for an assessment to be imposed to repay the financing of qualified projects on commercial real property in the municipality that adopts the program. (b) All parties to the loan must have a written contract. (c) Identifies qualifying costs. (d) Qualified projects do not include undeveloped lots or lots undergoing development at the time of assessment or the purchase of products or devises that are not a permanent part of the property. (e) Provides that a municipality can create programs in more than one region of the municipality. Sec. 29.55.110. To create a program a municipality must prepare a report with the following items: (a) (1) A map showing the boundaries of each region of the municipality in the program. (2) A form for written contracts between municipality and property owner. (3) A form for written contracts between the municipality and third-party financers. (4) A description of qualified projects. (5) A plan ensuring third-party financing sources(s) and, if applicable, raising capital for municipal funding (such as bonding). (6) Setting perimeters for issuance of bonds. (7) Justifying the period of assessment. (8) Description of application process and eligibility for funding. (9) Solvency requirements for applicant. (10) Process municipality will use to assess the property and collect assessments. (11) Method of notice to mortgage holder required for participation. (12) Method of review by third party. (13) Description of marketing and participant education provided by the municipality. (14) Description of quality assurance and antifraud measures. (b) The report will be made available on the Internet website of the municipality and at the primary administrative office of the municipality. Sec. 29.55.115. Requires the municipality to give 30-day notice to any mortgage holder on the property and obtain written consent from them to enter into a written contract with the property owner. Sec. 29.55.120. Requires the property owner to hire an independent third party to prepare: (1) (A) a review of the baseline conditions, savings; (B) outline the projected reduction in energy costs, energy consumption or demand, or a reduction in emissions affecting local air quality; and (2) verification of completion of project. Sec. 29.55.125. Allows property owner to purchase equipment and materials directly; and contract directly for services. Sec. 29.55.130. Requires the municipality to record in the appropriate recording district details of a C-PACE assessment. Sec. 29.55.135. (a) C-PACE assessments are paramount to all other liens except municipal tax liens and other special assessments. (b) Assessment liens run with the property and remaining balances are not eliminated by foreclosure. (c) Penalties and interest can be added to delinquent installments. (d) Allows municipalities to recover costs and expenses of a lawsuit to collect delinquent PACE assessments. Sec. 29.55.140. Allows a municipality to issue bonds or notes to finance PACE projects. Sec. 29.55.145. Allows a municipality to enter into an agreement with a third party or one or more municipalities to administer a C-PACE program. Sec. 29.55.150. A municipality may not coerce a property owner by making the issuance of a permit, license, or other authorizations from the municipality contingent on that property owner entering into a PACE contract. Sec. 29.55.155. Applicability section. Sec. 29.55.160. Definitions. Sec. 29.55.165. Short title. Sec. 6. Immediate effective date. Co-Chair MacKinnon remarked that the current version of the bill was version J. Senator Micciche looked at 29.55.150, and noted that a municipality could only use it as a "carrot and not as a stick" on other municipal processes. He asked that the issue be addressed. Ms. Moss asked for a repeat of the concern. 9:47:12 AM Senator Micciche looked at page 3, Section 29.55.150. Co-Chair MacKinnon wondered if Senator Micciche was referring to the Sectional Analysis. Senator Micciche replied in the affirmative. Co-Chair MacKinnon queried the page number of the bill. Ms. Moss explained that the issue was on page 10, line 7. She stated that it was a coercive clause that outlined that a municipality may not issue a permit, license, or other authorization to a person on the condition that they enter into the PACE program. Senator Dunleavy wondered if there were any anticipated costs to the state. Ms. Moss replied in the negative. She noted that page 7, line 16, which stated that if there was a mortgage on the property the mortgage holder must sign off on the loan as they were waiving some of their rights for collection. Senator von Imhof wondered whether the act could create a fund that could be comingled with other sources of money other than bond money such as federal or private grant money. Ms. Moss replied in the affirmative, and declared that there were federal loan and grant programs. She stated that there was a speaker from the Alaska Energy Association (AEA) who would address loans and grants available from the USDA and rural utilities programs that had zero interest and other programs at approximately 3 percent interest. Senator von Imhof wondered whether the program could be comingled with municipal bond money for one program; or were there separate programs that a homeowner could use on each source of funds. Ms. Moss deferred to AEA. Co-Chair MacKinnon asked whether municipalities could access the State Municipal Bond to provide similar loans. Ms. Moss replied in the affirmative. Co-Chair MacKinnon queried a requirement that the applicants have a good credit rating. Ms. Moss responded that she assumed that would be a requirement. She stated that the banks required good credit. Co-Chair MacKinnon announced that she wanted clarification from AEA as to how potential borrowers met a credit standard. She wondered whether there could be a manipulation to a construction loan to someone who would not otherwise qualify. Ms. Moss replied that the municipality would create the rules for the loans. 9:51:46 AM AT EASE 9:54:25 AM RECONVENED 9:54:29 AM Co-Chair MacKinnon noted that there was a similar bill in the previous session, which included a letter dated March 16, 2015. She wondered if there was a letter from the Alaska Bankers Association on the current legislation. Ms. Moss replied that there was not yet a letter, but they had met the week prior and anticipated sending a new letter. Senator Dunleavy wondered whether the bill put an existing lienholder in a lower position. Ms. Moss replied in the affirmative. She looked at page 7, line 16, which noted that the mortgage holder was required to approve the loan before the loan was issued. The value of the investment of the loan-held property would increase. Co-Chair MacKinnon felt that the issue may speak to the credit worthiness issue. She remarked that the remaining consideration would be related to the maximum dollar value of a loan. Ms. Moss looked at page 7, line 3, and noted that there had been appropriate ratio between the amount of the assessment and the assessed value of the property. Co-Chair MacKinnon queried an appropriate ratio, and wondered if that was approved by the local municipality. Ms. Moss replied that it was approved by the municipality. Co-Chair MacKinnon felt that there should be work with the Alaska Energy Authority (AEA) to streamline some best practices, rather than a variety of best credit practices adopted individually by multiple municipalities. 9:58:22 AM GENE THERRIAULT, DEPUTY DIRECTOR, STATEWIDE ENERGY POLICY DEVELOPMENT, ALASKA ENERGY AUTHORITY, DEPARTMENT OF COMMERCE, COMMUNITY AND ECONOMIC DEVELOPMENT, introduced himself. SEAN SKALING, DEPUTY DIRECTOR, ALTERNATIVE ENERGY AND ENERGY EFFICIENCY, ALASKA ENERGY AUTHORITY, DEPARTMENT OF COMMERCE, COMMUNITY AND ECONOMIC DEVELOPMENT (via teleconference), discussed the presentation, Commercial Property Assessed Clean Energy (C-PACE)" (copy on file). Mr. Skaling addressed slide 2, "Commercial Property Assessed Clean Energy": C-PACE is a financing mechanism for cost-effective energy improvements to commercial building. Energy improvement loans are repaid through a separate, voluntary line on the property tax bill. Mr. Skaling looked at slide 3, "C-PACE Scenario." He remarked that AEA had provided partial reimbursement for commercial energy audits to commercial building owners, and many took advantage of that program. He stated that the scenario was typical of the businesses that received an energy audit. 10:03:27 AM Senator Micciche stressed that the four-year payback challenged the cash flows of a commercial property owner and provided an appropriate ratio between the amount of the assessment and the assessed value of the property. He asserted that the bill did not define an appropriate ratio. He queried a definition of an appropriate ratio. Mr. Skaling replied that the typical investments in PACE programs in the country were all cost-effective measures. The energy cost savings would pay back the loan period. Co-Chair MacKinnon stressed that Senator Micciche's comments were a concern for the committee. 10:05:07 AM Mr. Skaling looked at slide 4, "How C-PACE Works": Voluntary Long-term financing Attractive loan terms Less Risk Positive cash flow Seamless transfer if building sold Repayment attached property Mr. Skaling addressed slide 5, "C-PACE Eligible Improvements": Energy efficiency Heating/Cooling system Lighting Controls Building envelope/insulation Motors/pumps Mr. Skaling addressed slide 6, "C-PACE Eligible Improvements": Alternative energy Heat pumps Solar Fuel switching with efficiency Mr. Skaling looked at slide 7, "Cash Flow from Energy Improvements." He explained that the green was the energy cost that the building owner was paying. He noted the energy efficiency improvements, and noted a roughly 30 percent savings in the energy costs of the building. He noted that, through the savings, a loan could be repaid as long as the loan was stretched out long enough to provide positive cash flow in the yellow area. He explained that they were trying to achieve a loan repayment that was cash- flow positive after the improvements. Mr. Skaling highlighted slide 8, "PACE: How Loan is Repaid." The slide showed how the program functioned. He noted the property owner in the middle. The property owner made improvements to the building, therefore hiring the supplier community. The funding was made by the investors, banks, or financial institutions. The property owner paid back the loans through a voluntary line on the property tax payment to the city or local government, which then paid the investor. Mr. Skaling addressed slide 9, "33 States Enabled PACE." He stated that Alaska's PACE program was modeled after Texas, which had continued success. He stated that Texas had a program called, "PACE in A Box" which helped Texas communities to quickly establish uniformed programs between communities. Co-Chair MacKinnon wondered which states originated the program. Mr. Skaling deferred to Mr. Therriault. Mr. Therriault agreed to provide that information. 10:11:39 AM Co-Chair MacKinnon wanted to know best practices on whether the program was misused by commercial buildings in depressed areas. She queried the unintentional consequences of the program. She wondered if the bill could be improved. Mr. Therriault replied that the first PACE program was established in California in 2008. He stated that there was advice from the nationwide group, PACE Nation, who tried to pull information and education from all the involved states to determine the best practices. He felt that the abuse would drive default rates, but the default rates were less than one percent. Senator von Imhof wondered whether there were any programs that were rescinded. Mr. Therriault replied that was not aware of any programs, but agreed to provide information. He stated that there were some initiated programs that did not see any uptake, and those programs were amended. Senator von Imhof noted that Texas had requested uniform rules to apply to all the municipalities, but there would be flexibility in each municipality under the legislation. She queried a better best practice. Mr. Therriault replied that the language was adopted straight from the Texas statute. The uniformity was related to the community's establishment of the program, and how it communicated with banks and businesses. It also outlined a broad framework of the interworking of the program. 10:16:30 AM Senator von Imhof assumed that there would be an evaluation of the loan-to-value, debt-to-equity ratio, ability to pay credit, etc. She stressed that there would be an assumption that the municipality had done its own due diligence in providing the loan. She wondered if the municipality would be in a second position. Mr. Therriault replied in the affirmative. The PACE repayment obligation was an assessment on the tax bill. All property tax and assessments were superior liens to mortgages. Senator von Imhof surmised that no signature meant no deal. Mr. Therriault agreed. Senator Micciche noted that line 2 said "obtain written consent from the holder of a mortgage lien on the property." He noted that there could be two lenders on one piece of property, and the ratio could be satisfied by one lender. He wondered if there should be clarification that each holder of a mortgage must approve. He felt that it could put the primary lender as a secondary payee, and they may increase the loan with a secondary lender. He wanted to ensure than each mortgage holder have approval. Co-Chair MacKinnon encouraged Senator Micciche to communicate his concerns with the sponsor of the bill. Senator Micciche understood that there was recommended ratio recommended by the PACE program. He stressed that there were energy policies that were often based on hope or political rhetoric rather than established science on the proven practices to improve efficiencies. Co-Chair MacKinnon stressed that the case previously made sense because of the previous high energy costs. She stressed that Fairbanks had air quality issues, whether the prices were high or not. She stressed that the program could benefit the Interior for other reasons than costs. She wondered how active the programs were in the country now that energy prices were decreased. 10:21:19 AM Senator Olson wondered how the communities who were suffering with a debt load would take advantage of the program. He remarked that Galena was facing financial strain, and wondered whether that community could take advantage of the PACE program. Mr. Therriault replied that the program would not be available in Galena. He explained that the legislation allowed for a local government that levied a property tax to use the bill to collect to repay a PACE loan. The statute would apply across the state, but only be available to those municipalities that levied a property tax. Senator Olson wondered if a community with great strain would be able to use the program. Mr. Therriault responded that the mechanism allowed for the community to use the existing relationship with the property owner to collect a PACE. Co-Chair MacKinnon noted that there were approximately 11 or 12 of the 33 states did not have programs established, but had passed enabled legislation. She noted that there were even more. She wondered if the comparison to Texas only showed one program. Mr. Therriault replied that there were 12 municipalities in Texas who had initiated the program under the refresh of the program. Co-Chair MacKinnon surmised that there were many states in the starting stages of the program. 10:26:07 AM Mr. Skaling looked at slide 10, "Time to Add Alaska to the Map." He stressed that there was no cost to the state and the program was voluntary. Mr. Skaling discussed slide 11, "C-PACE is a Win-Win-Win": Property owners Lenders Contractor, vendors Energy auditors Alaska economy Mr. Skaling highlighted slide 12, "Easy Win for Alaska": Fully vetted last session Strong support Completely voluntary No cost to state Mr. Therriault addressed slide 13, "Financing Options": Bank loan Muni revenue bond Energy Efficiency and Conservation Loan Program (EECLP) Rural Energy Savings Program (RESP) Other federal sources 10:33:24 AM Senator Micciche remarked that he would examine other legislation, and compare the other programs in the country. Co-Chair MacKinnon noted that the bill would benefit private sector ownership. Mr. Therriault agreed. Co-Chair MacKinnon announced that school districts could not qualify, because they were not paying property taxes. Mr. Therriault agreed. Co-Chair MacKinnon wondered whether school districts or other government owned buildings could qualify for the Energy Efficiency and Conservation Loan Program or for the Rural Energy Savings program. Mr. Therriault replied that he was not sure. He explained that the funds were available to help with efficiency. Co-Chair MacKinnon noted that there were schools in climate regions that were suffering from lack of weatherization or energy efficient opportunities. She was curious about programs that schools, or other government organizations could use to lower the energy use and consumption. Senator von Imhof wondered who paid for and conducted the energy audits. Mr. Therriault replied that the customer would pay for that expense, but it could be rolled into the financing. Senator Olson stressed that the auditors were the general raters in the winterization program, so those people could be qualified to conduct the assessment. Mr. Therriault agreed. Mr. Skaling furthered that the commercial properties required an additional certification for the auditors. 10:37:34 AM CHRIS ROSE, EXECUTIVE DIRECTOR, RENEWABLE ENERGY ALASKA PROJECT, SUTTON (via teleconference), spoke in support of the bill. Co-Chair MacKinnon wondered whether they both served on the Alaska Energy Advisory. Mr. Rose replied in the affirmative. BRITTANY SMART, FAIRBANKS NORTH STAR BOROUGH, FAIRBANKS (via teleconference), testified in support of the bill. Co-Chair MacKinnon CLOSED public testimony. Vice-Chair Bishop discussed the fiscal note. Co-Chair MacKinnon announced that amendments were due by 5pm the following day. She discussed the following day's schedule. SB 39 was HEARD and HELD in committee for further consideration.