BILL ANALYSIS                                                                                                                                                                                                    



                                                                       



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                                 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





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          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  







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                (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.







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             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:







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             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.







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             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  







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          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  







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          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  







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          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







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          NO VOTE RECORDED:  Caballero, Norby, Skinner, Vacancy


          CPM:cm  8/23/10   Senate Floor Analyses 

                         SUPPORT/OPPOSITION:  SEE ABOVE

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