BILL ANALYSIS
AB 1754
Page 1
Date of Hearing: April 21, 2010
ASSEMBLY COMMITTEE ON EDUCATION
Julia Brownley, Chair
AB 1754 (Swanson) - As Amended: April 13, 2010
SUBJECT : Emergency apportionments: Oakland Unified School
District
SUMMARY : Extends, from 20 years to 30 years, the period within
which the General Fund portion of the emergency loan provided to
Oakland Unified School District (OUSD) must be repaid.
EXISTING LAW :
1)Establishes a process for state oversight and financial
assistance for school districts in financial trouble.
2)Authorizes the governing board of a school district that
determines that its revenues are insufficient to meet its
current year obligations to request an emergency apportionment
(loan) from the state through the SPI.
3)Requires that acceptance of an emergency loan constitutes
agreement by the school district to specified conditions,
including the following:
a) The SPI assumes all the legal rights, duties, and powers
of the governing board of the district.
b) An audit, for the fiscal year in which the emergency
apportionments are disbursed and each year thereafter, is
to be conducted of the books and accounts of the district,
in lieu of the required annual school district; this audit
may be conducted by the SCO, his or her designee, or an
auditor selected by the district and approved by the SCO.
c) The SPI may appoint an administrator to act on behalf of
the SPI.
d) The school district governing board becomes advisory
only.
e) The authority of the SPI and the state-appointed
administrator continues until specified conditions have
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been met, including SPI determination that future
compliance with recovery plans is probable.
4)Authorizes the West Contra Costa (formerly Richmond) Unified
School District (WCCUSD), OUSD and Vallejo City Unified School
District (VCUSD) to refinance existing General Fund (GF)
emergency loans through the California Infrastructure and
Economic Development Bank (I-Bank), with any difference
between interest paid on the existing GF loans and the costs
of refinancing those loans, due to higher interest rates
through the I-Bank, paid by the state.
FISCAL EFFECT : Unknown
COMMENTS : According to the author, this bill, "would extend
Oakland Unified School District's (OUSD) emergency apportionment
loan repayment by ten years, making it a 30 year loan instead of
a 20 year loan. This extension would reduce the district's
annual loan repayment. In these difficult economic times, OUSD,
like most districts in California, is being devastated by state
funding cuts. OUSD's current reapportionment loan repayment is
$6 million dollars annually. Of that $6 million, $3.9 million
is paid to the I - Bank and $2.1 million is paid to the state.
The intent of AB 1754 is to lower the $2.1 million dollar annual
payment that the district makes to the state by extending the
loan term to 30 years."
Background on OUSD
According to OUSD in 2003, district officials became aware of a
negative general fund balance for the 2001-02 fiscal year, and
of potential deficits in its 2002-03 budget, in August 2001. The
district projected at the time that it would run out of cash in
May of 2003 and be unable to pay school employees. In 1999,
OUSD had negotiated a 24.4% teacher salary increase to be phased
in over three years. Also from 1999 to 2003, the district
estimated that it had declining enrollment of 3,265 pupils,
worth $15 to $22 million in annual revenues. Despite making
budget cuts for the 2002-03 fiscal year that the district
believed would save approximately $31 million, the district
continued to project a negative fund balance at the close of the
2002-03 fiscal year; the district governing board then requested
an emergency loan.
The district also noted at the time that, "in contrast to the
circumstances surrounding other school districts that have
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recently received state loans, there have not been any
accusations of intentional mismanagement or fraud in OUSD. The
budget deficits at the OUSD were inadvertently hidden by an
inadequate system of checks and balances in the district's
financial services division, and were exacerbated by declining
enrollment, increases in health care costs, and state education
budget cuts".
SB 39 (Perata), Chapter 14, Statutes of 2003, appropriated $100
million for an emergency loan to OUSD, and required the
Superintendent of Public Instruction to assume all the rights,
duties, and powers of the governing board of the district and to
appoint an administrator to act on behalf of the Superintendent
of Public Instruction in exercising the Superintendent's
authority over the school district. The bill authorized the
administrator, with the approval of the Superintendent, to enter
into agreements on behalf of the school district and to change
any existing district rules, policies, or practices, as
provided. The bill also specified that the governing board of
the school district not receive any compensation during the
period of the Superintendent's authority over the district, and
continued the authority of the Superintendent and the
administrator over the school district until certain conditions
were met, including the completion of an improvement plan for
the district. The bill required the Kern County Office Fiscal
Crisis and Management Assistance Team (FCMAT) to prepare an
improvement plan for the school district by July 1, 2003, and to
report on the implementation of the plan in written progress
reports until September 2004; budget actions subsequently
extended these reports through 2008. The bill required the
district to repay the loan as a straight line loan amortized
over a 20-year term, with interest as provided, and required the
district, except as specified, to bear 100% of all costs
associated with implementing its provisions.
SB 39 also stated specific conditions which, when met, would
trigger return of all rights, duties, and powers to the
governing board of OUSD. One of those conditions required
ongoing progress reviews conducted by FCMAT; that
review-recommendation process focuses on five areas of
responsibility to be considered for return to the district: 1)
Community Relations and Governance, 2) Financial Management, 3)
Personnel Management, 4) Facilities Management, and 5) Student
Achievement. FCMAT scores a district's efforts in each of these
categories, compares that score to an established standard, and
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subsequently makes recommendations to the SPI regarding the
return of powers to the governing board. By mid-2009, the SPI
had acted on recommendations from FCMAT and returned all
operational areas to the control of the OUSD governing board.
Background on school district emergency loans and loan financing
As a result of court decisions (see Butt v. State of California,
1992) giving the state the ultimate responsibility for ensuring
the equitable provision of public education to all pupils,
including those in financially failing school districts, and the
resulting early experiences with districts on the verge of
insolvency, the state developed a process for providing
financial oversight to school districts, and for providing
financial assistance and financial recovery to school districts
in financial trouble. This process is commonly referred to as
the AB 1200 process - a reference to the initial authorizing
legislation, AB 1200 (Eastin), Chapter 1213, Statutes of 1991.
The potential end result of this process, the granting of an
emergency loan to the school district and the requirement that
the district accept accompanying conditions, including
assumption of control of the district by the SPI and the
completion of a SCO conducted audit, has been reached in eight
cases: King City Joint Union High School District (KCJUHSD),
VCUSD, OUSD, West Fresno Elementary School District (ESD), Emery
Unified School District (USD), Compton USD, Coachella Valley
USD, and WCCUSD. Six of those loans, including OUSD, are still
outstanding. In many other cases the oversight, advice and
assistance provided by county offices of education and other
fiscal advisors under the AB 1200 process has been sufficient to
pull the school district out of immediate financial trouble and
to provide time for the governing board of the district to take
those actions necessary to begin a return to a more stable
fiscal condition without the need for an emergency loan. The
table below summarizes the status of emergency loans as reported
by the California Department of Education (CDE) on March 25,
2010.
----------------------------------------------------------------------
| District | Year |Loan authorized |Balance owed | Rate |
| | Authorized | | | |
|---------------+---------------+----------------+-------------+-------|
|King City | 2009 | up to | $5,000,000 | 1.00% |
|JUHSD | | $13,000,000| | |
|---------------+---------------+----------------+-------------+-------|
|Vallejo City | 2004 | $60,000,000| $48,338,523| 1.50% |
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|USD | | | | |
|---------------+---------------+----------------+-------------+-------|
|Oakland USD | 2003 | $100,000,000| $78,347,270| 1.78% |
|---------------+---------------+----------------+-------------+-------|
|West Fresno | 2003 | $2,000,000| $681,039| 1.93% |
|ESD | | | | |
|---------------+---------------+----------------+-------------+-------|
|Emery USD | 2001 | $2,300,000| $959,974| 4.19% |
|---------------+---------------+----------------+-------------+-------|
|W. Contra | 1990 | $28,525,000| $11,866,981| 1.53% |
|Costa USD | | | | |
|---------------+---------------+----------------+-------------+-------|
|Compton USD | 1993 | $19,951,259| $0| n/a |
|---------------+---------------+----------------+-------------+-------|
|Coachella | 1992 | $7,300,000| $0|n/a |
|Valley USD | | | | |
----------------------------------------------------------------------
Initially emergency loans were financed entirely with state GF,
with an interest rate based on the annual rate paid on monies in
the state's Pooled Money Investment Account (PMIA). However, AB
1554 (Keene), Chapter 263, Statutes of 2004, required that
existing emergency loans for the WCCUSD, OUSD and VCUSD be
refinanced through the I-Bank, with any difference between
interest paid on the existing GF loans and the costs of
refinancing those loans (with higher interest rates through the
I-Bank) paid by the state.
The I-Bank was created by AB 1495 (Peace), Chapter 94, Statutes
of 1994, also known as the Bergeson-Peace Infrastructure and
Economic Development Bank Act, to promote economic
revitalization, enable future development, and encourage a
healthy climate for jobs in California. The I-Bank is located
within the Business, Transportation and Housing Agency and is
governed by a five-member board of directors. The I-Bank is
authorized to issue tax-exempt and taxable revenue bonds,
provide financing to public agencies, provide credit
enhancements, acquire or lease facilities, and leverage state
and federal funds.
The I-Bank's current programs include the Infrastructure State
Revolving Fund (ISRF) Program, 501(c)(3) Revenue Bond Program,
Industrial Development Revenue Bond Program, Exempt Facility
Revenue Bond Program, Governmental Bond Program and the Proposed
Pooled Bond Program. The ISRF Program provides low-cost
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financing to public agencies for a variety of infrastructure and
public improvements. The revenue bond programs issue industrial
development bonds for manufacturing companies, non-profit
organizations, exempt facility bonds and other types of revenue
bonds. The Pooled Bond Program makes use of authorizations
provided under the federal American Recovery and Reinvestment
Act of 2009.
As a result of AB 1554, WCCUSD's GF loan was entirely refinanced
through the I-Bank. OUSD's and VCUSD's GF loans were only
partially refinanced due to pending property sales in those
districts (proceeds from the property sales were earmarked to be
used to pay down the principal of the GF loan). Problems with
these property sales have left OUSD and VCUSD with GF loan
balances of $28.9 million and $28.2 million, respectively. The
only emergency loan enacted since passage of AB 1554, was
authorized in 2009 to KCJUHSD by SB 130 (Denham), Chapter 20,
Statutes of 2009; this bill structured the loan such that up to
five million dollars in state GF was appropriated as bridge
funding to allow the district time to secure I-bank funding for
up to thirteen million dollars. When I-bank funding is secured,
the first use of those funds is required to be the repayment of
the state GF loan, thus ensuring that the KCJUHSD loan will
ultimately be financed entirely through the I-Bank and will not
be a liability against state GF. This last point underlines the
benefit that I-Bank financing of school district emergency loans
provides to the state - reduced risk to the state and a freeing
up of GF dollars, as compared to the GF financing that was used
historically in early emergency loans.
Of the six school districts with outstanding emergency loans,
three of those districts (OUSD, Emery USD, and WCCUSD) have a
"qualified" budget certification at the 2009-10 first interim
report of the LEA's financial health, released in late March of
this year, and two of the districts (KCJUHSD and VCUSD) were
reported with a "negative" certification. A qualified
certification is assigned by the county superintendent of
schools and the SPI when the district may not meet its financial
obligations for the current or two subsequent fiscal years. A
negative certification is assigned when a district will be
unable to meet its financial obligations for the remainder of
the current year or for the subsequent fiscal year. According
to the CDE, at the 2009-10 first interim reporting there were 12
school districts in the state with a negative certification and
114 districts with a qualified certification.
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The concept behind this bill is sound; the intent is to ease the
financial burden created by the repayment of emergency loans,
especially in districts where an unsound fiscal condition has
been made worse by the budget reductions that have resulted from
California's budget crisis. The result of the bill, however,
will also be to extend the time over which the state is repaid
its GF dollars and extend the time during which the state is at
risk; in the current fiscal situation, neither impact is
attractive from the perspective of the state. In addition, the
benefits of this bill only accrue to one school district, OUSD.
It may be possible to enact a related policy change that could
provide the intended benefits to OUSD and benefit other
districts that are carrying GF emergency loan balances, while at
the same time, depending on the difference between the interest
rates on existing GF loan balances and the rate that would apply
to new I-Bank loans, reducing the GF risk to the state and
freeing up state GF funds that are "locked into" emergency loan
balances.
For example, a district that converted its GF loan balance to
I-Bank refinancing could see a lower annual payment if the
I-Bank refinancing were for a term (e.g., 10 years) longer than
the district's current GF loan term; however, the interest rate
on the I-Bank bond financing would be higher (currently 5.44%
compared to a 1.5% and 1.778% GF loan rate for VCUSD and OUSD,
respectively) - this interest rate differential would work
against lowering the annually payment to the district. The CDE
has estimated the annual payments that VCUSD and OUSD would face
if current GF loan balances were refinanced through the I-Bank
with a 10-year term extension and assuming usual refinance/bond
issuance costs of 3%; these estimates are shown in the table
below.
-----------------------------------------------------------------
| | CURRENT | REFINANCED | |
-----------------------------------------------------------------
|--------+--------+--------+--------+--------+----------+--------|
| | GF |Interest| Annual |Interest| Annual | Change |
| |balance | rate |payment | rate | payment | in |
| | | | | | |payment |
|--------+--------+--------+--------+--------+----------+--------|
| VCUSD |$28.231 | 1.5 %| $2.266 | 5.44 %| $2.198 M| $68,307|
| | M| | M| | | |
|--------+--------+--------+--------+--------+----------+--------|
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| OUSD |$28.951 | 1.778 %| $2.095 | 5.44 %| $2.169 M|- |
| | M| | M| | |$74,534 |
| | | | | | | |
----------------------------------------------------------------
The CDE estimates show that VCUSD would slightly lower its
annual payment, while OUSD would see a slight increase; neither
of these changes is significant in itself. It should be noted
again, though, that in past I-Bank refinancing of emergency
loans, the state has contributed an amount to fully offset the
interest rate differential, and thus hold the district harmless
for the increase in interest rate; in this instance, however,
that full offset may or may not be to the state's advantage
(i.e., the benefit to the state from the immediate recovery of
up to $57 million in outstanding GF loan balances may or may not
be worth incurring the full offset obligation for the extended
term of the loans). The CDE estimates suggest that there may be
some middle ground where these districts can benefit from
refinancing GF loans with extended terms and the state can
benefit from the recovery of GF loan balances.
Committee amendments: Committee staff recommends the following
amendments so as to implement a more comprehensive approach to
meeting the intent of the author, at the same time as protecting
the interests of the state. These amendments would allow both
districts and the state to find the middle ground where all
parties benefit.
1)Expand the specific authorization in this bill to include
VCUSD, in addition to OUSD.
2)Authorize VCUSD and OUSD, that currently have outstanding GF
emergency loan balances, to extend the term of the loan for 10
additional years for any portion of the loan that is converted
from GF to I-Bank financing during the 2010-11, 2011-12 or
2012-13 fiscal year.
3)Authorize the Director of DOF and the SPI to jointly approve
any payments equal to all or any part of the actual amount of
the difference between the cost, in terms of annual payment,
of the I-Bank lease financing compared to the cost of the GF
portion of the emergency loan that was refinanced and extended
for each district.
4)Require the Controller to issue warrants to VCUSD and OUSD
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pursuant to any payments jointly approved by the Director of
DOF and the SPI under 3) above.
5)State Legislative intent that the authorities granted in this
bill only be used to accomplish both of the following:
a) Allow districts currently obligated for repayment of GF
emergency loans to decrease annual payments.
b) Improve the financial position of the state by
recovering current GF loan balances without incurring
unjustified GF obligations in future years.
Previous legislation: SB 130 (Denham), Chapter 20, Statutes of
2009, appropriates five million dollars and authorizes lease
financing up to thirteen million dollars as an emergency loan
for the KCJUHSD. AB 791 (Swanson), held in the Senate Education
Committee in 2009, would have established a process for the
return of all rights, duties and powers to the governing board
of OUSD. AB 45 (Swanson), vetoed in 2007, was substantially
similar to AB 791. AB 1303 (Daucher), Chapter 97, Statutes of
2005, revises statutes and terms pertaining to the I-Bank lease
financing that the state is using to replace General Fund
financing of school district emergency loans. AB 1554 (Keene),
Chapter 263, Statutes of 2004, requires that existing emergency
loans for WCCUSD, OUSD and VCUSD be refinanced through I-Bank,
with any difference between interest paid on the existing loans
and the costs of refinancing those loans paid by the state. SB
1190 (Chesbro), Chapter 53, Statutes of 2004, appropriates $60
million for an emergency loan to the VCUSD, requires the SPI to
assume all the rights, duties, and powers of the governing board
of the VCUSD and to appoint an administrator to serve during the
term of the loan. SB 39 (Perata), Chapter 14, Statutes of 2003,
provides OUSD with a $100 million loan; a state administrator
was appointed in the district, an administrator is still serving
in that capacity. AB 1495 (Peace), Chapter 94, Statutes of
1994, established the I-Bank. AB 1200 (Eastin), Chapter 1213,
Statutes of 1991, established the AB 1200 process for fiscal
oversight of school districts.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
AB 1754
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Opposition
None on file
Analysis Prepared by : Gerald Shelton / ED. / (916) 319-2087