BILL ANALYSIS ------------------------------------------------------------ |SENATE RULES COMMITTEE | AB 2560| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ THIRD READING Bill No: AB 2560 Author: Brownley (D) Amended: 8/20/10 in Senate Vote: 27 - Urgency SENATE EDUCATION COMMITTEE : 5-2, 06/23/10 AYES: Romero, Alquist, Liu, Price, Simitian NOES: Huff, Emmerson NO VOTE RECORDED: Hancock, Wyland SENATE APPROPRIATIONS COMMITTEE : 7-4, 8/12/10 AYES: Kehoe, Alquist, Corbett, Leno, Price, Wolk, Yee NOES: Ashburn, Emmerson, Walters, Wyland ASSEMBLY FLOOR : 76-0, 5/13/10 (Consent) - See last page for vote SUBJECT : Education finance: federal tax credit bond volume cap SOURCE : Author DIGEST : This bill authorizes the California Department of Education and the California School Finance Authority to distribute the states 2010 volume cap for the Qualified School Construction Bonds (QSCB) tax credit program authorized through the federal American Recovery and Reinvestment Act of 2009. Senate Floor Amendments of 8/20/10 expand eligibility to CONTINUED AB 2560 Page 2 receive a QSCB allocation. ANALYSIS : 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 in 2009 and $11 billion in 2010. The ARRA provides for an allocation to each state, along with separate allocations for large local educational agencies 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 local educational agencies. States with large local educational agencies that receive QSCB allocations directly from the federal government have the overall state allocation reduced by that amount. A large local educational agency that receives a direct allocation may 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. 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 Education AB 2560 Page 3 (CDE) to assign and distribute $651 million of 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 county office of education may apply for the federal tax credit bond volume cap for qualified school construction bonds if project is funded by local voter-approved bonds issued by the school district or bond anticipation notes pursuant to existing law. B. Provides that a school district or county office of education that received a 2009 allocation but did not make any issuance may apply for 2010 federal tax credit bond volume cap for QSCBs nine months after the effective date of this bill. C. Requires the CDE to post the application form on its Internet Web site five business days after the enactment of this bill and additionally requires an application be submitted via certified mail postmarked no sooner than 30 business days after the enactment of the bill and include the total overall enrollment for the 2008-09 school y ear and the total number of these students that qualify for the federal free and reduced priced meal program. 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. AB 2560 Page 4 F. Provides that, in the event the program is oversubscribed, order of allocation shall be based first upon the earliest date of postmark, second upon prior approval by the Division of the State Architect, and third 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 this 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 all of the federal program bond requirements, including both of the following requirements: (1). Within six months of the date of issuance, the school district or county office of education shall enter into a contract or contracts for use of an amount of bond proceeds equal to 10 percent of the authorization. (2) Within three years of the date of issuance, the school district or county office of education shall spend 100 percent of the bond proceeds for a qualified purpose. K. Requires issuance of all federal QSCBs within six months of the date of authorization, requires reversion of any unused authorizations to the CDE, and prohibits provision of any extensions. 3.Established the following conditions on the assignment and distribution of the 2010 QSCBs by the CSFA: AB 2560 Page 5 A. Provides that a charter school may apply for the federal QSCBs volume cap if it meets all of the following criteria: (1) The charter school is operated as, or is operated by, a nonprofit entity. (2) The charter school has an approved charter in place that is current at the time of application and continuously through the date of bond issuance. (3) The chartering authority certifies that the charter schools is in good standing and is in compliance with the terms of its charter. (4) The charter school provides the level of class-room based instruction specified in current law. (5) The applicant must have completed at least three full school year of instructional operation as a charter school as of the end of the previous school year. B. In the event that the program is oversubscribed, priority will be assigned first tot hose charter schools that are best able to demonstrate to the CSFA that they will be capable of accessing the capital markets or be privately placed with an investor. The order of allocation shall be established using the following criteria: (1) Applicants who are able to obtain credit enhancement for a QSCB financing, including a bank letter of credit, who contribute substantial equity to a project, or who are otherwise able to obtain investment-grade credit ratings shall receive priority over the applicants. (2) In the event that multiple applicants satisfy the criteria above, priority shall be assigned to applications with the earliest postmark date. An application that is hand delivered and does not have a postmark date will be ranked based on the time the application is received by the CSFA. AB 2560 Page 6 C. Prohibits applicants from applying for more than $25 million of QSCB authorization per project. D. Provides that subsequent application cycles may be considered if borrowing authority for QSCBs remains available after the initial application period. E. Specifies that, subject to the sole discretion of the CSFA, any authorization to borrow qualified school construction bond proceeds is contingent on the issuance of QSCBs by December 31, 2011, after which time the authorization expires and the authority may allocate the authorization to another qualified applicant. F. Allows the CSFA to allocate reverted federal QSCB authorization as it becomes available and until all of the authorization is issued. G. Specifies that if an applicant sues any federal tax credit bond volume cap in conjunction with a bond that will serve as a local match for purposes of the Charter School Facilities Program established in current law, the applicant, in addition to the requirements above, shall comply with all of the requirements of the Charter School Facilities Program. 4.Declares the act to be an urgency statute. Comments California has been allocated $720 million of the QSCBs authorized nationally by the federal government for distribution by the state in 2010 as part of the federal ARRA for 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 local educational agencies had received them from a legally authorized entity and could legitimately be sold by AB 2560 Page 7 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 local educational agencies and charter schools to receive these allocations in 2010. 2009 vs. 2010 . Of the $22 billion in QSCBs authorized by the federal government under ARRA, California received authorization for $1.3 billion in tax credits in 2009 and $1.26 billion in 2010. For 2009, with requests of over $3 billion for the $00 million available, the 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 six 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. Status of 2009 Allocations . The total 2009 QSCB allocated by the CDE was approximately $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 Dieguita Union High. The remaining balance is approximately $693 AB 2560 Page 8 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 distribution. 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 10 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. 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 bonds 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." 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 QSCBs federal tax credit program authorized through the federal ARRA of 2009. The bill assigned and specified amounts for distribution to school districts and county offices of education and to charter schools, and extended the timeframe for districts AB 2560 Page 9 that were notified of eligibility for this program on or before December 31, 2009, to issue qualifying local bonds until 120 days after its enactment. Passed the Senate Floor with a vote of 37-0 on March 22, 2010. FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes Local: No According to the Senate Appropriations Committee: Fiscal Impact (in thousands) Major Provisions 2010-11 2011-12 2012-13 Fund QCSB allocation Allows for allocation of $720 million Federal in federal tax credits SUPPORT : (Verified 8/17/10) (Unable to reverify) Coalition for Adequate School Housing County School Facilities Consortium Small School Districts Association State Superintendent of Public Instruction Jack O'Connell State Treasurer's Office ASSEMBLY FLOOR : AYES: Adams, Ammiano, Anderson, Arambula, Bass, Beall, Bill Berryhill, Tom Berryhill, Blakeslee, Block, Blumenfield, Bradford, Brownley, Buchanan, Charles Calderon, Carter, Chesbro, Conway, Cook, Coto, Davis, De La Torre, De Leon, DeVore, Emmerson, Eng, Evans, Feuer, Fletcher, Fong, Fuentes, Fuller, Furutani, Gaines, Galgiani, Garrick, Gilmore, Hagman, Hall, Harkey, Hayashi, Hernandez, Hill, Huber, Huffman, Jeffries, Jones, Knight, Lieu, Logue, Bonnie Lowenthal, Ma, Mendoza, Miller, Monning, Nava, Nestande, Niello, Nielsen, V. Manuel Perez, Portantino, Ruskin, Salas, Saldana, Silva, Smyth, Solorio, Audra Strickland, Swanson, Torlakson, Torres, Torrico, Tran, Villines, Yamada, John A. Perez AB 2560 Page 10 NO VOTE RECORDED: Caballero, Norby, Skinner, Vacancy CPM:cm 8/23/10 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END ****