BILL ANALYSIS AB 1874 Page 1 Date of Hearing: March 24, 2010 ASSEMBLY COMMITTEE ON EDUCATION Julia Brownley, Chair AB 1874 (Evans) - As Introduced: February 16, 2010 SUBJECT : Education finance: Vallejo City Unified School District SUMMARY : Extends the time period within which Vallejo City Unified School District (VCUSD) is authorized to sell district owned property and use the proceeds to reduce or retire its emergency loan from the state. Specifically, this bill : 1)Repeals the authority for VCUSD to sell property owned by the district and use the proceeds to reduce or retire its emergency loan from the state between June 1, 2004, and July 1, 2010. 2)Authorizes VCUSD to sell such property and so use the proceeds from January 1, 2011, through January 1, 2015. 3)Deems VCUSD to be ineligible for financial hardship assistance under the School Facility Program from January 1, 2011 through January 1, 2015. EXISTING LAW : 1)Requires that emergency loans to districts in fiscal crisis be provided by legislative appropriation. 2)Requires, upon a district's acceptance of a loan exceeding 200 percent of a district's recommended reserve, that the Superintendent of Public Instruction (SPI) assumes all the legal rights, duties and powers of the district governing board, authorizes the SPI to appoint an administrator to act on his or her behalf, and requires that the district governing board become advisory to the administrator. 3)Authorizes a $60 million emergency loan to VCUSD, and triggers the SPI assumption of powers and appointment of a state administrator in the district. 4)Authorizes VCUSD, between June 1, 2004 and July 1, 2010, to sell surplus property and to use the proceeds from the sale to AB 1874 Page 2 reduce or retire the emergency loan; also deems VCUSD to be ineligible for hardship assistance under the School Facility Program during the same period. FISCAL EFFECT : Increased ability on the part of VCUSD to repay the state for its emergency loan. COMMENTS : In February 2004, VCUSD became aware of a negative general fund year-end balance for the 2002-03 fiscal year and of potential deficits in its 2003-04 budget. The district was projected to run out of cash in June of 2004. Despite immediate reductions in the 2003-04 fiscal year and actions to reduce the district budget for 2004-05 by more than $7.5 million, the district was projected to continue to have a negative fund balance in the 2003-04 fiscal year of approximately $27 million and was projected to have a negative fund balance at the conclusion of the 2004-05 fiscal year. Senate Bill 1190 (Chesbro), Chapter 53, Statutes of 2004, signed into law on June 21, 2004, requires the SPI to assume all the legal rights, duties and powers of the Governing Board of the Vallejo City Unified School District (VCUSD) and to appoint, in consultation with the Solano County Superintendent of Schools, an administrator to act on his behalf in exercising authority over the school district. The bill appropriates $60 million as an emergency loan to the Vallejo City USD, and authorizes the school district, between June 1, 2004 and July 30, 2007, to sell any properties owned by the district and to use the proceeds from the sale to reduce or retire the emergency loan. The bill, except as specified, requires the school district to bear the costs associated with the implementation of the bill's provisions, and prohibited the district from being eligible for financial hardship assistance under the state's School Facility Program from June 2004 through June 2006. The district drew down $50 million of the $60 million state loan authorized by SB 1190 on June 23, 2004, within two days of the signing of the legislation. A State Administrator was appointed by the Superintendent of Public Instruction on June 23, 2004 and started full-time in the district in July 2004. The district drew down the remaining $10 million of the $60 million authorized loan amount on May 29, 2007, placing those funds in a special reserve fund to be used only for the payment of unresolved audit findings. The district has indicated that it plans to pay off this portion of the loan within a few years, or AB 1874 Page 3 earlier, if pending audit findings are resolved. In June 2007, the SPI, consistent with recommendations made by the Fiscal Crisis Management Assistance Team (FCMAT), returned three of five operational areas, Community Relations/Governance, Student Achievement, and Personnel Management, to the control of the local governing board; the areas of Financial Management and Facilities Management remained under the control of the State Administrator. Partial control over Facilities Management was returned to the governing board in December 2008; the State Administrator retained control over the sale of surplus property and specified leases. Three months after the initial return of control to the governing board, the district hired a superintendent; within two years that superintendent was released, though the district continues to be liable for salary and benefit payments under that individual's contract through the end the current fiscal year. An interim superintendent, subsequently elevated to Superintendent in February 2010, now serves the district. The district continues to face outstanding fiscal issues including unpaid and unresolved audit findings, declining enrollment, and loss of revenue due to state budget actions; according to the author, "Since the State takeover, the school district has made over $31 million in budget reductions on a base unrestricted General Fund budget of $95 million. This amount includes $11 million in reductions made in the current year budget?" VCUSD was one of nineteen school districts in the state that received a negative certification of its financial status at the 2008-09 Second Interim Report provided by the California Department of Education; the district continued to be certified negative at the 2009-10 First Interim Report. A negative certification is assigned to a school district or county office of education when it is determined that, based upon current projections, the school district or county office of education will not meet its financial obligations for the current or following fiscal year. As noted above, the school district has had the authority, between June 1, 2004 and July 1, 2010, to sell property owned by the district and to use the proceeds from the sale to reduce or retire the emergency loan. VCUSD made use of this authorization in 2006 to sell an 18 acre parcel, known as the Rollingwood property, to KB Home for a minimum price of $17 million (the AB 1874 Page 4 price was set as a minimum in that it could have increased over time depending on revenues generated by the developer, with the district sharing up to $23.5 million from any increased proceeds, based on a specified formula). Payments on this sales agreement were to be made as the developer moved through the City approval process. Two payments of $3 million each were made to the district; however, KB Home defaulted on this agreement on June 23, 2008. At this time, the status of this sale remains uncertain; after attempts at mediation, the district is now pursuing legal action to either force payment of the balance of funds by KB Home or to clarify that the district retains clear title. At the same time, KB Home is seeking to recover the $6 million already paid. The district also has plans for future sales of property, including four parcels that the district has moved toward sale and development over the last three years, additional unused portions of sites, and the possibility of consolidating and selling surplus school sites resulting from continued and projected future declining enrollment. If this bill is enacted, the proceeds of these future sales will be used to reduce or retire the remaining emergency loan balance ($48.3 million as of the start of the current fiscal year). There is precedent in extending the authorization on the sale of property for districts in order to allow those districts to reduce the balance of their emergency loans. SB 512 (Committee on Education), Chapter 677, Statutes of 2005, extended Oakland Unified School District's (OUSD) authority to sell property owned by the district and to use the proceeds from the sale to reduce or retire their emergency loan. Existing law at the time provided this authority to OUSD from June 1, 2003, to June 30, 2005; SB 512 extended this authorization for OUSD to June 30, 2007. In the same way, AB 1948 (Evans), Chapter 636, Statutes of 2008, extends VCUSD's authority to sell property owned by the district and to use the proceeds from the sale to reduce or retire the emergency loan through July 1, 2010. This bill proposes to further extend this authority to the period between January 1, 2011 and January 1, 2015. It should also be noted that under the budget flexibility provisions enacted by AB 2 X4 (Evans), Chapter 2, Statutes of 2009-10 Fourth Extraordinary Session, all school districts are currently authorized through January 1, 2012, to sell surplus property not purchased with state funds and to use the proceeds from such a sale for any one-time general fund purpose. AB 1874 Page 5 Committee amendments : Committee staff recommends, and the author has accepted, the following amendments: 1)Move the ending date of this authorization for VCUSD to June 30, 2015 rather than January 1, 2015. Since this authorization is fiscal in nature, ending the authority at the end of a fiscal year makes administrative sense. 2)Extend the requirement that proceeds received in a later fiscal year from sales of property made between June 1, 2004 and July 1, 2010 be used to reduce or retire VCUSD's emergency loan; currently this bill inadvertently repeals that requirement. This can be accomplished by amending the bill to also include the past term of authorization and requirements, as well as the extended term (June 1, 2004 through June 30, 2015). 3)Clarify that under the provisions of this bill, the district will be ineligible for hardship assistance under the School Facility Program pursuant to Article 8 of Chapter 12.5 of Part 10, and not financial hardship assistance . Previous legislation : AB 1948 (Evans), Chapter 636, Statutes of 2008, extends VCUSD's authority to sell property owned by the district and to use the proceeds from the sale to reduce or retire the emergency loan through July 1, 2010. SB 1190 (Chesbro), Chapter 53, Statutes of 2004, appropriates $60 million for an emergency loan to VCUSD, requires 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 serve during the term of the loan. AB 1554 (Keene), Chapter 263, Statutes of 2004, requires that existing emergency loans for the West Contra Costa Unified School District (WCCUSD), Oakland Unified School District (OUSD) and VUSD, 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. AB 1303 (Daucher), Chapter 97, Statutes of 2005, revises statutes and terms pertaining to the lease financing that the state is using to replace General Fund financing of school district emergency loans. SB 512 (Committee on Education), Chapter 677, Statutes of 2005, AB 1874 Page 6 extended Oakland Unified School District's (OUSD) authority to sell property owned by the district and to use the proceeds from the sale to reduce or retire their emergency loan. Existing law at the time provided this authority to OUSD from June 1, 2003, to June 30, 2005. This bill extended the time period during which OUSD was thus authorized to June 30, 2007. SB 39 (Perata), Chapter 14, Statutes of 2003, provides Oakland Unified School District with a $100 million loan; a state administrator was appointed in the district, an administrator is still serving in that capacity. AB 38 (Reyes), Chapter 1, Statutes of 2002, provides a $2 million emergency loan to West Fresno Elementary School District; a state administrator was appointed in the district. REGISTERED SUPPORT / OPPOSITION : Support Superintendent of Public Instruction Jack O'Connell (Sponsor) Opposition None on file Analysis Prepared by : Gerald Shelton / ED. / (916) 319-2087