BILL ANALYSIS SENATE COMMITTEE ON EDUCATION Gloria Romero, Chair 2009-2010 Regular Session BILL NO: AB 2560 AUTHOR: Brownley AMENDED: June 15, 2010 FISCAL COMM: Yes HEARING DATE: June 23, 2010 URGENCY: Yes CONSULTANT:Kathleen Chavira SUBJECT : 2010 Federal Tax Credit Bond Volume Cap KEY POLICY ISSUE What conditions should be imposed upon the distribution of the state's 2010 federal tax credit bond volume cap for Qualified School Construction Bonds? SUMMARY This bill, an urgency measure, provides for the distribution of the state's 2010 federal tax credit bond volume cap for Qualified School Construction Bonds (QSCBs). BACKGROUND The American Recovery and Reinvestment Act of 2009 (ARRA) has authorized $22 billion in Qualified School Construction Bonds (QSCBs) nationally, providing for the issuance of $11 billion of QSCBs by states and large local educational agencies (LEAs) in 2009 and $11 billion in 2010. The ARRA provides for an allocation to each state, along with separate allocations for large LEAs with the amount of the allocation determined via a statutory formula based upon each state's share of Title I Basic Grant funds. The 2010 allocations include $6.6 billion of bonding authority to the 50 states and the remaining $4.4 billion (40 percent) of volume cap directly to 103 large LEAs. States with LEAs that receive QSCB allocations directly from the federal government have the overall state allocation reduced by that amount. An LEA that receives a direct allocation may AB 2560 Page 2 reallocate any of its unused QSCB allocations to its state. If an allocation to a state is unused for a calendar year, the state may carry it forward to the next calendar year. QSCBs are subsidized by the federal government. Investors who buy these bonds receive federal income tax credits at prescribed tax credit rates in lieu of interest that would normally be paid by states and districts to holders of these taxable bonds. These tax credits essentially allow state and local governments that issue bonds to borrow without incurring interest costs. QSCBs can be used for the construction, rehabilitation, or repair of a public school facility. In addition, a portion of the proceeds of such a bond may be used for the acquisition of land on which a public school facility is to be constructed. ANALYSIS This bill : 1) Authorizes the assignment and distribution of the state's 2010 federal tax credit bond volume cap for QSCBs. Specifically it: a) Authorizes the California Department of (CDE) to assign and distribute $651 million the state's 2010 federal tax credit bond volume cap for QSCBs to, or for, the benefit of school districts and county offices of education. b) Authorizes the California School Finance Authority (CSFA) to assign and distribute, or to further assign and distribute to one or more issuers in the state, $68 million of the state's 2010 federal tax credit bond volume cap for QSCBs to, or for, the benefit of charter schools. 2) Establishes the following conditions on the assignment and distribution of the 2010 QSCBs by the CDE: a) Requires a school district or AB 2560 Page 3 county office of education to meet specified criteria in order to be eligible. Specifically the district is required to: i) Apply for and received Division of the State Architect approval of the project before submission of the QSCB application. ii) Fund the project with local voter approved bonds issued by the school district (but authorizes other forms of financing for county offices of education and school districts with enrollment of 2,500 or less with the submission of a resolution adopted by the governing board authorizing issuance of the alternate financing). iii) Adopt a local governing board resolution committing to ensuring that all their school facility construction projections will meet or exceed Collaborative for High Performance Schools (CHPS) or Leadership in Energy and Environmental Design (LEED) standards. b) Prohibits a school district or county office of education that received a 2009 federal tax credit bond volume cap for QSCBs from the CDE or as a direction allocation from the federal government from applying. c) Requires the CDE to post the application form on its Internet website five business days after the enactment of this bill and additionally requires an application be submitted via certified mail postmarked no sooner than 20 business days after the enactment of the bill and include the total overall enrollment for the 2008-09 school year and the total number of these students that qualify for the federal free and reduced priced meal program. AB 2560 Page 4 d) Requires the return of an application to an applicant not meeting these conditions. e) Requires that applications meeting these conditions be accepted on a first come first served basis by date of postmark. f) Provides that, in the event the program is oversubscribed, order of allocation shall be based first upon the earliest date of postmark and second upon the greater percentage of students enrolled in the 2008-09 school year that qualify for free and reduced meals, to be certified as specified. g) Prohibits authorization of the 2010 federal tax credit bond volume cap by the CDE prior to December 1, 2010. h) Requires the CDE to maintain a waiting list of eligible applicants pursuant to the ordering criteria established by the bill. i) Caps the amount that an applicant may request at $25 million from the 2010 federal tax credit bond volume cap. j) Requires an applicant to certify in its application that it will fulfill with all federal program bond requirements. aa) Requires issuance of all federal QSCB within 6 months of the date of authorization, requires reversion of any unused authorizations to the CDE, and prohibits provision of any extensions. 3) Establishes the following conditions on the assignment and distribution of the 2010 QSCBs by the CSFA: a) Requires application of the parameters AB 2560 Page 5 specified in the February 10, 2010 application and referenced in the CSFA Resolution 10-04 to all applications submitted to CSFA. b) Requires that a charter school comply with all requirements of the Charter School Facilities Program if it uses any of the 2010 federal tax credit bond volume cap in conjunction with a bond that will serve as a local match for the Charter School Facilities Program. 4) Finds and declares that the federal tax credit bond volume cap for QSCB's do not constitute federal moneys, federal funds, or fund of any kind for any purpose under the Education Code. 5) Declares the act to be an urgency statute. STAFF COMMENTS 1) Need for the bill . California has been allocated $720 million of the Qualified School Construction Bonds (QSCBs) authorized nationally by the federal government for distribution by the state in 2010 as part of the federal ARRA of 2009. Although the ARRA authorizes "the state" to make these federal tax credit allocations, it does not specify which entity in the state is the responsible entity. In response to concerns raised by school district bond counsel over the sale of QSCBs in 2009, statutory clarification by the state was necessary in order to ensure that LEAs had received them from a legally authorized entity and could legitimately be sold by them. The CDE was granted the authority to distribute the 2009 tax credits to school districts and county offices of education while the CSFA was granted authority to distribute them to charter schools. This bill provides statutory authority for the CDE and CSFA to issue the 2010 program tax credits and administer the QSCB program. It also establishes new criteria to be met by applicant LEAs and charter schools to receive these allocations in 2010. AB 2560 Page 6 2) 2009 vs. 2010 . Of the $22 billion in QSCBs authorized by the federal Government under AARA, California received authorization for $1.3 billion in tax credits in 2009 and $1.26 billion in 2010. The table below summarizes the disposition of those QSCBs in 2009 and the proposed distribution in 2010. For 2009, with requests of over $3 billion for the $700 million available, CDE conducted a lottery and made allocations of QSCBs to 43 school districts. This bill proposes a different process for CDE's allocation of the 2010 tax credits. It requires that projects be "construction ready," be built to "green" standards, and use local voter-approved debt instruments (local bonds or Mello Roos). Allocations will be made on a first come, first served basis based on postmark date. In the event that the program is oversubscribed, second priority will be assigned based upon the proportion of students eligible for free and reduced price meals. Projects will continue to be limited to a maximum $25 million allocation per district. Finally a district must issue bonds within 6 months of the date of the authorization or the credits revert to the CDE for redistribution. Consistent with the distribution of these credits in 2009, about 10 percent of the state's allocation of QSCBs has been made available to CSFA for charter schools. The CSFA's process for allocations to charter schools remains the same for both 2009 and 2010. 3) Status of 2009 allocations . The total 2009 QSCB allocated by the CDE was about $700 million. Of that amount, about $81 million has been issued to the following five districts; Windsor Unified, San Leandro Unified, Placentia Yorba Linda Unified, Washington Unified, and San Dieguito Union High. The remaining balance is approximately $693 million. Districts have until July 23, 2010, to request that their 2009 allocation be issued. After that time, QSCB allocations made by the CDE will revert to the agency for redistribution. AB 2560 Page 7 The CSFA, although authorized to distribute approximately $73.5 million has $19 million in QSCBs awaiting allocation. About $20.5 million has been issued to three charter school projects. Charter schools must enter into a binding agreement for at least ten percent of the proceeds of the bonds within six months of the QSCBs issuance date, and are required to spend the remainder within three years of this date. Subject to CSFA's sole discretion, any authorization to borrow QSCB proceeds is contingent on the issuance of the QSCBs by December 31, 2010, after which time the authorization expires and CSFA may give the authority to another qualified applicant. 4) CSFA's parameters . This bill makes reference to parameters outlined in the CSFA's 2010 application for an allocation of tax credits as the conditions to be met by an applicant charter school. Eligible charter schools must be operated as or by a non-profit entity, have an approved charter in place current from the time of application to the date of bond issuance, must be in good standing with the chartering authority and in compliance with the terms of its charter, provide a level of classroom based instruction consistent with requirements for participating in other state funding programs, and have completed at least three full school years of instructional operation as of June 30, 2009. The CSFA has set a minimum of $2 million and a maximum of $25 million per project. If oversubscribed, priority will be assigned to charters that are deemed "credit worthy" and that are "shovel ready." 5) Prior legislation . SB 205 (Hancock, Chapter 11, Statutes of 2010), an urgency measure, provided statutory authority for the CDE and the CSFA, to administer the 2009 QSCB's federal tax credit program authorized through the federal ARRA of 2009. The bill assigned specified amounts for distribution to school districts and county offices of education and to charter schools, and extended the timeframe for districts that were notified of eligibility for this program on or before December 31, 2009, to issue AB 2560 Page 8 qualifying local bonds until 120 days after its enactment. SUPPORT County School Facilities Consortium State Superintendent of Public Instruction Jack O'Connell State Treasurer's Office OPPOSITION None received.