BILL NUMBER: AB 1554 CHAPTERED 08/23/04 CHAPTER 263 FILED WITH SECRETARY OF STATE AUGUST 23, 2004 APPROVED BY GOVERNOR AUGUST 23, 2004 PASSED THE ASSEMBLY AUGUST 12, 2004 PASSED THE SENATE JULY 29, 2004 AMENDED IN SENATE JULY 14, 2004 AMENDED IN SENATE JULY 7, 2004 AMENDED IN SENATE JUNE 21, 2004 AMENDED IN SENATE JULY 16, 2003 AMENDED IN ASSEMBLY JUNE 3, 2003 AMENDED IN ASSEMBLY APRIL 30, 2003 AMENDED IN ASSEMBLY MARCH 28, 2003 INTRODUCED BY Assembly Member Keene FEBRUARY 21, 2003 An act to amend Sections 14002.3, 41320, 41320.2, 41327, and 41328 of, to add Article 2.7 (commencing with Section 41329.50) to Chapter 3 of Part 24 of, and to repeal Sections 41323 and 41324 of, the Education Code, and to add Article 9 (commencing with Section 63049.67) to Chapter 2 of Division 1 of Title 6.7 of the Government Code, relating to school finance, making an appropriation therefor, and declaring the urgency thereof, to take effect immediately. LEGISLATIVE COUNSEL'S DIGEST AB 1554, Keene. School finance: emergency apportionments and lease financing. (1) Existing law provides for emergency apportionments made by the state to school districts that are experiencing financial problems or that become insolvent and requires that the emergency apportionment be repaid to the state over a 5-year period together with interest. This bill would make the emergency apportionments through either lease financing made available by the California Infrastructure and Economic Development Bank, which would be authorized to issue bonds for purposes of the emergency apportionments and related costs, or an apportionment from the General Fund designed to provide an advance of apportionments owed to the district from the State School Fund. In the case of lease financing, the lease would not exceed 20 years. In the case of an apportionment from the General Fund, the repayment period would not exceed 20 years. The bill would require the Controller, in the case of a lease financing, to make rent payments to the California Infrastructure and Economic Development Bank for the school district only from moneys in the State School Fund designated for apportionment to the school district pursuant to revenue limit funding provisions, and those amounts would be applied toward the minimum funding requirements for school districts and community college districts imposed by Section 8 of Article XVI of the California Constitution. (2) The bill would authorize the West Contra Costa Unified School District and the Oakland Unified School District to use lease financing to repay their existing emergency apportionments. The bill would also provide that the emergency loan made to the Vallejo City Unified School District through legislation enacted during the 2003-04 Regular Session is deemed an interim loan and would require the interim loan to be repaid with proceeds of a lease financing. The bill would require the executive director of the bank to annually notify the Controller of the actual amount of the difference between the cost of the lease financing for these 3 districts compared to the cost of the original emergency loan for each district and to issue a warrant to each school district in that amount. The bill would require the Controller to annually transfer that amount from Section A of the State School Fund to pay the warrants. The funds appropriated by this provision would be applied toward the minimum funding requirements for school districts and community college districts imposed by Section 8 of Article XVI of the California Constitution. The bill would appropriate $100,000 from the California Infrastructure and Economic Development Bank Fund to the California Infrastructure and Economic Development Bank to establish one personnel year in order to fulfill the requirements of the emergency apportionment financing authorized by the bill. (4) Existing law requires a school district to bear 60%, and the county office of education to bear 40% of all costs associated with implementing the conditions associated with receiving an emergency apportionment. This bill, instead, would require the qualifying district to bear 100% of those costs. (5) This bill would make a legislative finding and declaration that the unique circumstances of the West Contra Costa Unified School District and the Vallejo City Unified School District warrant the enactment of a special statute. (6) This bill would declare that it is to take effect immediately as an urgency statute. Appropriation: yes. THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS: SECTION 1. Section 14002.3 of the Education Code is amended to read: 14002.3. Notwithstanding any other law, for purposes of Sections 14002, 14004, and 41301, for the 2000-01 fiscal year and each fiscal year thereafter, the Superintendent of Public Instruction shall certify to the Controller amounts that do not exceed the amounts needed to fund the revenue limits of school districts, as determined pursuant to Section 42238, the revenue limits of county superintendents of schools, as determined pursuant to Section 2558, warrants issued pursuant to Section 41329.57, and the revenue limit portion of charter school operational funding, as determined pursuant to Section 47633. SEC. 2. Section 41320 of the Education Code is amended to read: 41320. As a condition to any emergency apportionment to be made pursuant to Section 41320.2 the following requirements shall be met: (a) The district requesting the apportionment shall submit to the county superintendent of schools having jurisdiction over the district a report issued by an independent auditor approved by the county superintendent of schools on the financial conditions and budgetary controls of the district, a written management review conducted by a qualified management consultant approved by the county superintendent of schools, and a fiscal plan adopted by the governing board to resolve the financial problems of the district. (b) The county superintendent of schools shall review, and provide written comment on, the independent auditor's report, the management review, and the district plan. That written comment shall include the county superintendent's approval or disapproval of the district plan. In the event the county superintendent disapproves the plan, the governing board shall revise the district plan to respond to the concerns expressed by the county superintendent. (c) Upon his or her approval of the district plan, the county superintendent of schools shall submit copies of the report, review, plan, and written comments specified in subdivision (b) to the Superintendent of Public Instruction, the Joint Legislative Audit Committee, the Joint Legislative Budget Committee, the Director of Finance, and the Controller. (d) The Superintendent of Public Instruction shall review the reports and comments submitted to him or her by the county superintendent of schools and shall certify to the Director of Finance that the action taken to correct the financial problems of the district is realistic and will result in placing the district on a sound financial basis. (e) The district shall develop a schedule to repay the emergency loan, including any lease financing pursuant to Article 2.7 (commencing with Section 41329.50), and submit it to the county superintendent of schools. The county superintendent of schools shall review and comment on the repayment schedule and submit it to the Superintendent of Public Instruction for approval or disapproval. Upon the approval of the repayment schedule, and of the other reports, reviews, plans, and the appointment of the trustee required by this article, the Superintendent of Public Instruction shall request the Controller to disburse the proceeds of the emergency loan to the district. (f) The district requesting the apportionment shall reimburse the county superintendent of schools for the costs incurred by the superintendent pursuant to this section. SEC. 3. Section 41320.2 of the Education Code is amended to read: 41320.2. (a) The governing board of a school district that determines during a fiscal year that its revenues are less than the amount necessary to meet its current year expenditure obligations may request an emergency apportionment through the Superintendent of Public Instruction subject to the requirements and repayment provisions of this article and Article 2.7 (commencing with Section 41329.50). (b) It is not the intent of the Legislature that this section authorize emergency loans to school districts for the purpose of meeting cashflow requirements pending the receipt of local taxes and other funds. (c) It is the intent of the Legislature that emergency apportionments, as described in this section, not occur, unless funds have been specifically appropriated therefor by the Legislature. SEC. 4. Section 41323 of the Education Code is repealed. SEC. 5. Section 41324 of the Education Code is repealed. SEC. 6. Section 41327 of the Education Code is amended to read: 41327. (a) In accordance with timelines, instructions, and a format established by the Superintendent of Public Instruction, the state-appointed administrator shall prepare or obtain the following reports and plans: (1) A management review and recovery plan. (2) A multiyear financial recovery plan. The multiyear financial recovery plan shall include a plan, to be submitted annually on or before July 1, to repay to the state any and all loans owed by the district. (3) During the period of service by the state-appointed administrator, an annual report on the financial condition of the district, including, but not necessarily limited to, all of the following information: (A) Specific actions taken to reduce district expenditures or increase income to the district, and the amount of the resulting cost savings and increases in income. (B) A copy of the adopted district budget for the current fiscal year. (C) The amount of the district budgetary reserve. (D) The status of employee contracts. (E) Any obstacles to the implementation of the recovery plans described in paragraphs (1) and (2). (b) Each of the reports or plans required under this section, or under any other law that requires the district to prepare reports or plans, shall be submitted to the Superintendent of Public Instruction for approval, after his or her consideration of comments and recommendations of the county superintendent of schools. The Superintendent of Public Instruction may accept and approve, for the purposes of this section, any reports or plans that were prepared by or for the district prior to the district's acceptance of a loan as described in subdivision (a) of Section 41326. (c) With the approval of the Superintendent of Public Instruction, the state-appointed administrator may enter into agreements on behalf of the district and, subject to any contractual obligation of the district, change any existing district rules, regulations, policies, or practices as necessary for the effective implementation of the recovery plans referred to in subdivision (a). SEC. 7. Section 41328 of the Education Code is amended to read: 41328. The qualifying district shall bear 100 percent of all costs associated with implementing this article, including the activities of the County Office Fiscal Crisis and Management Team or the regional team. The Superintendent of Public Instruction shall withhold from the apportionments to be made from the State School Fund to the district the amounts due pursuant to this section. SEC. 8. Article 2.7 (commencing with Section 41329.50) is added to Chapter 3 of Part 24 of the Education Code, to read: Article 2.7. Emergency Apportionment Financing 41329.50. The following definitions apply to this article, Article 2 (commencing with Section 41320), and Article 2.5 (commencing with Section 41325), unless the context clearly indicates or requires another or different meaning: (a) "Bank" means the California Infrastructure and Economic Development Bank. (b) "Bonds" has the same meaning specified in Section 63010 of the Government Code. (c) "Loan" and "emergency apportionments" means the financing described in Sections 41329.51, 41329.52, and 41329.53. The financing does not constitute a borrowing but an advance payment of apportionments subject to repayment with interest as described in the article. (d) "School district" means a school district that requests an emergency apportionment pursuant to Section 41320, including, as applicable, an administrator appointed pursuant to Article 2 (commencing with Section 41320) and a trustee appointed pursuant to Article 2.5 (commencing with Section 41325). 41329.51. Notwithstanding any other law, an emergency apportionment is a financing provided to a school district complying with the requirements contained in Article 2 (commencing with Section 41320) and Article 2.5 (commencing with Section 41325). The emergency apportionment shall be made pursuant to either Section 41329.52 or Section 41329.53, as determined by statute. The school district, the bank, and the Superintendent of Public Instruction shall promptly perform the duties specified in the statute making the emergency apportionment. 41329.52. (a) A school district may receive a two part financing designed to provide an advance of apportionments owed to the district from the State School Fund. (b) The initial emergency apportionment shall be an interim loan from the General Fund to the school district. General Fund money shall not be advanced to a school district until that district agrees to obtain a lease financing as described in subdivision (c) and the bank adopts a reimbursement resolution governing the lease financing. The interim loan shall be repaid in full, with interest, from the proceeds of the lease financing pursuant to subdivision (c) within one year of the date the district receives the initial emergency apportionment disbursement. The interest rate on the interim loan shall be the rate earned by moneys in the Pooled Money Investment Account as of the date of the initial disbursement of emergency apportionments to the school district. (c) The school district shall enter into a lease financing with the bank for the purpose of financing the emergency apportionment, including a repayment to the General Fund of the amount advanced pursuant to subdivision (b). In addition to the emergency apportionment, the lease financing may include funds necessary for reserves, capitalized interest, credit enhancements and costs of issuance. The bank shall issue bonds for that purpose pursuant to the powers granted pursuant to the Bergeson-Peace Infrastructure and Economic Development Bank Act as set forth in Division 1 (commencing with Section 63000) of Part 6.7 of the Government Code. The term of the lease shall not exceed 20 years. 41329.53. (a) As an alternative to the lease financing pursuant to Section 41329.52, a school district may receive an emergency apportionment from the General Fund designed to provide an advance of apportionments owed to the district from the State School Fund. The emergency apportionment shall be repaid within 20 years. The calculation of the amount of the apportionment, including implied costs, and the interest rate shall be calculated pursuant to subdivision (b). Each year the Superintendent of Public Instruction shall withhold from the apportionments to be made to the district from the State School Fund an amount equal to the emergency apportionment repayment that becomes due in the year. (b) The determination by statute as to whether the emergency apportionment shall take the form of lease financing pursuant to Section 41329.52 or an emergency apportionment from the General Fund pursuant to this section shall be based upon the availability of funds within the General Fund and not on any cost differential between the two financing mechanisms. To ensure that the two alternatives are cost neutral, if the statute does not authorize a lease financing, the bank shall commission a cost study from financial advisers under contract with the bank to determine the interest rate, costs of issuance, and if it is more cost effective, credit enhancement costs likely if the financing was a lease financing rather than an emergency apportionment from the General Fund. These implied lease costs shall be included as the fixed interest rate on the repayment of the emergency apportionment to the General Fund, repayable over 20 years. 41329.54. In furtherance of the lease financing authorized pursuant to Section 41329.52, and notwithstanding any other law, the school district may lease any property of the school district to the bank or from the bank, in connection with the bonds issued by the bank. In each case, the lease shall include any rental provision or term and any transfer, assignment, payment, security, default, remedy, and other terms or provisions agreed to by the bank and the school district. In addition, the school district may enter into any agreement for liquidity or credit enhancement, with any reimbursement, payment, interest, security, default, remedy and other terms it deems necessary or appropriate in connection with entering into the lease financing. The school district may enter into any other agreements or execute any other documents necessary or desirable to carry out the purposes of this section. This section shall be deemed to provide a complete, additional, and alternative method for accomplishing the acts authorized by this article. Any agreement entered into in connection with the lease of any property of the district pursuant to a financing pursuant to Section 41329.52, including without limitation, any agreement for liquidity or credit enhancement, need not comply with the requirements of any other law applicable to the purchase, sale, or lease of school district property or the granting of any pledge or encumbrance. 41329.55. (a) Simultaneous with the execution of the lease financing authorized pursuant to Section 41329.52, the school district shall provide to the Controller a notification of its lease financing. The notice shall include a schedule of rent payments to become due to the bank from the school district and identifying the bond trustee. The Controller shall make the apportionment to the bond trustee of those amounts on the dates shown on the schedule. The bank may further authorize that the apportionments be used to pay or reimburse the provider of any credit enhancement of bonds issued by the bank in connection with this article. The Controller shall make the apportionment only from moneys in the State School Fund designated for apportionment to the district pursuant to Section 42238. (b) The amount apportioned for a school district pursuant to this section is an allocation to the district for purposes of subdivision (b) of Section 8 of Article XVI of the California Constitution. For purposes of computing revenue limits pursuant to Section 42238 for any school district, the revenue limit for any fiscal year in which funds are apportioned for the district pursuant to this section shall include any amounts apportioned by the Controller pursuant to subdivision (a) as well as Section 41329.54. (c) No party, including the school district or any of its creditors, shall have any claim to the money apportioned or to be apportioned to the bond trustee by the Controller pursuant to this section. 41329.56. (a) Chapter 57 of the Statutes of 1993 consolidated several previous emergency apportionments and a loan to the West Contra Costa Unified School District and specified the repayment terms of that apportionment. Chapter 14 of the Statutes of 2003 authorized an emergency apportionment to the Oakland Unified School District and specified the repayment terms of that apportionment. Collectively these are referred to in this section as "existing apportionments." (b) Promptly following the effective date of this article, the bank shall issue separate bonds for the West Contra Costa Unified School District and the Oakland Unified School District for lease financing pursuant to Section 41329.52. The school districts shall use the proceeds to repay the existing apportionments. The terms of the leases shall not exceed 20 years. 41329.57. (a) (1) The Controller shall annually transfer from Section A of the State School Fund the amount of funds necessary to pay the warrants issued pursuant to paragraph (2) so that the effective cost of the lease financing provided to the Oakland Unified School District, the Vallejo City Unified School District, and the West Contra Costa Unified School District pursuant to this article shall be equal to the cost of the emergency loan made to each district at the annual rate paid on moneys in the Pooled Money Investment Account for the year immediately preceding the date each loan was funded. (2) The executive director of the bank shall annually notify the Controller of the actual amount of the difference between the cost of the lease financing compared to the cost of the original emergency loan for each district for each year and the Controller shall annually issue a warrant to each school district in that amount. Payments to a district shall occur only during the term of the loan for that district and shall be made no sooner than the corresponding payments are made to bondholders under the lease financing for that district. (3) For purposes of making the computations required by Section 8 of Article XVI of the California Constitution, the warrants issued pursuant to paragraph (2) are "General Fund revenues appropriated to school districts," as defined in subdivision (c) of Section 41202 for the fiscal years in which the warrants are issued and included within the "total allocations to school districts and community college districts from General Fund proceeds of taxes appropriated pursuant to Article XIII B" as defined in subdivision (e) of Section 41202, for the fiscal years in which the warrants are issued. (b) It is the intent of the Legislature that the financing cost subsidies funded in this section not be deemed precedent nor in conflict with Section 41329.53, as these districts requested loans prior to the enactment of this article. SEC. 9. Article 9 (commencing with Section 63049.67) is added to Chapter 2 of Division 1 of Title 6.7 of the Government Code, to read: Article 9. Financing of School District Emergency Apportionments 63049.67. (a) Notwithstanding any other provision of this division, a financing of emergency apportionments upon the request of a school district pursuant to Article 2.7 (commencing with Section 41329.50) of Chapter 3 of Part 24 of the Education Code, is deemed to be in the public interest and eligible for financing by the bank. Article 3 (commencing with Section 63041), Article 4 (commencing with Section 63042) and Article 5 (commencing with Section 63043) do not apply to the financing provided by the bank in connection with an emergency apportionment. (b) The bank may issue bonds pursuant to Chapter 5 (commencing with Section 63070) and provide the proceeds to a school district pursuant to a lease agreement. The proceeds may be used as an emergency apportionment, to reimburse the interim emergency apportionment from the General Fund authorized pursuant to subdivision (b) of Section 41329.52 of the Education Code, or to refund bonds previously issued under this section. Bond proceeds may also be used to fund necessary reserves, capitalized interest, credit enhancement costs, and costs of issuance. (c) Bonds issued under this article are not deemed to constitute a debt or liability of the state or of any political subdivision of the state, other than a limited obligation of the bank, or a pledge of the faith and credit of the state or of any political subdivision. All bonds issued under this article shall contain on the face of the bonds a statement to the same effect. (d) Any fund or account established in connection with the bonds shall be established outside of the centralized treasury system. Notwithstanding any other law, the bank shall select the financing team and the trustee for the bonds, and the trustee shall be a corporation or banking association authorized to exercise corporate trust powers. (e) Pursuant to Section 41329.55 of the Education Code, the school district shall instruct the Controller to repay the lease from moneys in the State School Fund designated for apportionment to the school district. (f) Notwithstanding any other law, as long as any bonds issued pursuant to this section are outstanding, the school district for which the bonds were issued is not eligible to be a debtor in a case under Chapter 9 of the United States Bankruptcy Code, as it may be amended from time to time, and no governmental officer or organization is or may be empowered to authorize the school district to be a debtor under that chapter. (g) The bank may enter into contracts or agreements with banks, insurers, or other financial institutions or parties that it determines are necessary or desirable to improve the security and marketability of, or to manage interest rates or other risks associated with, the bonds issued pursuant to this section. The bank may pledge apportionments made by the Controller directly to the bond trustee pursuant to Section 41329.55 of the Education Code as security for repayment of any obligation owed to a bank, insurer, or other financial institution pursuant to this subdivision. SEC. 10. The sum of one hundred thousand dollars ($100,000) is hereby appropriated from the California Infrastructure and Economic Development Bank Fund to the California Infrastructure and Economic Development Bank to establish one personnel year in order to fulfill the requirements of Article 9 (commencing with Section 63049.76) of Chapter 2 of Division 1 of Title 6.7 of the Government Code. SEC. 11. The emergency loan provided to the Vallejo City Unified School District through a statute enacted in the 2003-04 Regular Session is deemed an interim loan as described in Section 41329.52 of the Education Code. The interim loan shall be repaid with proceeds of a lease financing pursuant to Section 41329.52 of the Education Code. SEC. 12. Nothing in this act supersedes, impairs, or revises the authorization provided by Section 11 of Chapter 14 of the Statutes of 2003 or Section 11 of Chapter 53 of the Statutes of 2004 to sell property owned by a district and use the proceeds from the sale to reduce or retire an emergency loan or apportionment. SEC. 13. The Legislature finds and declares that due to unique circumstances relating to the fiscal emergencies in the Oakland Unified School District, the Vallejo City Unified School District, and the West Contra Costa Unified School District, a general statute cannot be made applicable within the meaning of Section 16 of Article IV of the California Constitution. SEC. 14. This act is an urgency statute necessary for the immediate preservation of the public peace, health, or safety within the meaning of Article IV of the Constitution and shall go into immediate effect. The facts constituting the necessity are: In order to address the fiscal emergencies facing school districts that have received or that are requesting an emergency apportionment from the state, and to ensure that those districts meet their cash obligations for this fiscal year, it is necessary that this act take effect immediately.