BILL ANALYSIS                                                                                                                                                                                                    






                         SENATE COMMITTEE ON EDUCATION
                             Alan Lowenthal, Chair
                           2011-2012 Regular Session
                                        

          BILL NO:       SB 1491
          AUTHOR:        Negrete McLeod
          INTRODUCED:    February 24, 2012
          FISCAL COMM:   Yes            HEARING DATE:  April 18, 2012
          URGENCY:       No             CONSULTANT:    Daniel Alvarez

           SUBJECT  :  Education Finance: Fairness in Educational 
          Deferral Funding Act.
          
           SUMMARY  

          Requires any inter-year (i.e., across fiscal years) K-12 
          apportionment deferral to be calculated in a manner that 
          would lessen the amount of the deferral for school 
          districts that have higher percentages of students that are 
          eligible for the free and reduced lunch program. In 
          addition, the bill would reimburse school districts for the 
          lending costs of any deferral, as specified. 

           BACKGROUND  

          Due to the state's fiscal crisis, cash management at the 
          state level has become a major component to balancing the 
          budget.  In order to have more cash on hand, the state 
          enacted a series of apportionment deferrals for school 
          districts and local governments.  These deferrals are 
          scheduled to continue, with some changes. For example, SB 
          82 (Chapter 12, Statutes of 2011) a budget trailer bill to 
          the 2011 Budget Act, implemented an additional $2.2 billion 
          in inter-year deferrals for K-14 education. 

          The state has enacted two types of deferrals: inter-year 
          (across fiscal years) and intra-year (within the fiscal 
          year).  Inter-year deferrals defer payments required to be 
          made in one fiscal year to the subsequent fiscal year.  For 
          example, in 2011-12, the state moved specified monthly 
          payments for K-12 schools from April 2012 to August 2012 
          and from March 2012 to August 2012.  According to the 
          Legislative Analyst Office (LAO), in the current year a 
          total of $10.4 billion in Proposition 98 (K-14) payments 
          are inter-year deferrals.                  




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          Intra-year deferrals defer state payments within a fiscal 
          year.  For example, prior to the enactment of the cash 
          management legislation in the 2008-09 fiscal year, the 
          state paid school districts at several points in the year, 
          with large allocations occurring in July, October, and 
          March.  Legislation enacted in 2009-10 deferred these 
          payments to later in the same fiscal year, which allows the 
          state to conduct less internal borrowing for the purposes 
          of having available cash.  

           


          ANALYSIS
           
          This bill requires the Superintendent of Public Instruction 
          (SPI),  to calculate any inter-year (i.e., across fiscal 
          years) K-12 apportionment deferral in a manner that would 
          lessen the amount of the deferral for school districts that 
          have higher percentages of students that are eligible for 
          the free and reduced lunch program.  More specifically:

          1)   Requires the Superintendent of Public Instruction 
               (SPI) to determine the deferral amount for each school 
               district in the following manner:

                  a)        Calculate a poverty factor equal to 100 
                    percent minus the percentage of pupils in the 
                    school district who are eligible for the federal 
                    Free and Reduced Lunch program divided by 10.

                  b)        For all school districts, calculate an 
                    equal per average daily attendance (ADA) amount, 
                    known as the base deferral amount, so that the 
                    sum for all the school districts of this base 
                    deferral amount, multiplied by the school 
                    district's poverty factor, multiplied by the 
                    school district's ADA, will equal the new 
                    deferral amount.

          1)   Specifies that if a school district does not receive 
               the necessary state funds for the deferral, as 
               specified in any measure that required the deferral, 
               the SPI may defer the necessary amount from any budget 
               allocation or allocations for that school district to 




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               make sure the total amount for that school district is 
               deferred. 

          2)   Requires, for any new deferral, the state to include a 
               lending cost apportionment to reimburse school 
               districts for lending cost of the deferral.  The 
               lending cost shall include all appropriate costs, 
               including interest costs.  The SPI determines whether 
               the lending cost apportionment is sufficient to 
               reimburse schools for their costs.  If the SPI 
               determines the lending cost is insufficient, the SPI 
               may reduce the time period of the deferral 
               accordingly, as specified. 

          3)   Prohibits categorical programs from receiving both a 
               deferral and a reduction in the same year, as 
               specified.

          4)   Specifies if local property tax revenues are increased 
               after January of a fiscal year because of actions by 
               state agencies or officials, any resulting reduction 
               in apportionments to school districts before January 
               because of this increase shall be treated as a 
               deferral.

           STAFF COMMENTS  

           1)   Need for the bill  .  According to the author, this bill 
               is needed to make sure that all school districts are 
               treated equally and insure that the state pays for 
               lending cost associated with deferrals.  This is 
               especially important during these difficult fiscal 
               times when our schools have to make sacrifices in 
               order to solve the state's cash flow problem.  Without 
               this bill the school districts with the neediest 
               student will pay more than their fair share. 

           2)   Deferrals versus cuts, there is a difference  .  The 
               state has relied on deferring K-12 and community 
               college payments as a way to achieve budgetary savings 
               in difficult fiscal times and avoid further 
               programmatic reductions.  Deferrals have been used by 
               the state to limit the necessity for making on-going 
               permanent reductions to K-12 and community college 
               districts. However, these payment delays place a 
               larger cash management burden on school districts.  To 




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               access cash, districts can use existing budget 
               reserves or special funds.  If internal resources are 
               insufficient, districts can borrow from private 
               lenders, their county offices of education, or their 
               county treasurer.  If districts borrow from other 
               agencies, they are responsible for covering all 
               transaction and interest costs. Underlying all this is 
               the fact that school districts that receive a larger 
               proportion of their funding from the state bear a 
               larger burden of the deferral - the state cannot defer 
               what it does not allocate. 

           3)   Unfortunately, the State's cash flow problems reign 
               supreme  .  The purpose of the deferrals, among other 
               things, is to improve the State's cash position 
               throughout the fiscal year, provide a higher level of 
               certainty to state bondholders, preserve external 
               borrowing capacity and affordability for the State's 
               bond programs, and provide a level of predictability 
               to affected programs and entities where deferral or 
               delays are required. 
                
                Persistent state budget deficits throughout most of 
               this decade led to the 2003 enactment of a deferral of 
               revenue limit apportionments to school districts and 
               county offices of education; this "inter-year" 
               deferral pushed apportionment payments that the state 
               was obligated to make into the subsequent fiscal year, 
               thus creating a one-time budget savings for the state 
               equal to the amount of the deferral.  Deferrals such 
               as this have been used through the rest of the decade 
               as a tool to deal with budget shortfalls.  

               More recently the state has enacted "intra-year" 
               deferrals that push state obligations to school 
               districts, county offices of education and charter 
               schools to a point later in the same fiscal year.  
               Such intra-year deferrals do not cross fiscal years 
               and thus do not generate a direct budget savings; 
               intra-year deferrals, however, do reduce cash flow 
               pressure on the state, reduce the need for the state 
               to borrow in the short-run to bridge past that cash 
               flow pressure, and thus reduce the state's debt 
               service.  The down side to intra-year deferrals is 
               that the cash flow pressure is transferred from the 
               state to school districts and other recipients of 




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               apportionments, since revenues are received on a 
               deferred schedule even though current expenditure 
               obligations remain.  In most cases a school district 
               would react to this increased cash flow pressure by 
               borrowing either from i) other internal fund sources, 
               ii) the county office of education, or iii) the 
               private capital market.

           4)   Limited exemptions to deferrals  .  Current law includes 
               a hardship waiver process for local education agencies 
               (LEASs) who might not be able to meet financial 
               obligations if payments are deferred. In order to be 
               eligible for a hardship waiver, LEAs would need the 
               certification of the county office of education that 
               the deferral payments will result in the school 
               district being unable to meet its expenditure 
               obligations for the time period during which warrants 
               are deferred. The school district must demonstrate 
               that it has exhausted all internal and external 
               sources of borrowing and will need a state emergency 
               loan in order to meet its financial obligations. A 
               school district that is qualified or negative in 
               certification status is not deemed to automatically 
               meet the necessary criteria.  A cash flow projection 
               of the school district must be included in 
               documentation requesting a waiver. 

           5)   Proposed 2012 Budget begins process of undoing some 
               deferrals  .   The 2012 budget proposes to reduce K-14 
               deferrals by $1.8 billion, which lowers the total 
               ongoing inter-year deferrals to approximately $8.6 
               billion.  This would help mitigate some of the 
               existing cash management problems that many school 
               districts and community colleges face as a result of 
               the state's late payments.  

           6)   Redistribution of deferrals is better ?  This bill 
               attempts to lessen the amount of deferrals of school 
               districts that have larger shares of "poverty" as 
               defined as larger percentages of pupils eligible for 
               free and reduced price meals (FRPM).  Based on the 
               findings and declarations, if school districts with 
               higher percentages of pupils eligible for FRPM were to 
               receive a 10 percent reduction in their deferral, than 
               by default other districts with lower levels of pupils 
               of FRPM would need to make up the difference of any 




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                total  deferral amount.  Further using FRPM as a proxy 
               for poverty may not capture true economic distress in 
               an area - high school districts have historically 
               lower FRPM rates, not necessarily because of 
               ineligibility to the FRPM program, but rather due to 
               social and peer pressure factors of teenagers wanting 
               to participate in the program.  In addition, some 
               school districts have high levels of FRPM, yet have 
               greater local revenues.  Therefore, promoting equity 
               through greater redistribution of an "inequity" is not 
               truly a solution to the general issue, not enough 
               funding for education.  By reallocating the deferral 
               burdens - additional program reductions or increased 
               borrowing fall to other districts. Though it would be 
               ideal to not have any deferral, redistributing the 
               overall deferral amount is not a true solution.  
                
                In addition, this bill provides that basic aid 
               districts must receive a proportion share of any 
               statewide deferral, based on the new criteria.  Under 
               current practice, basic aid districts do have some of 
               their apportionments deferred.  A general issue that 
               arises is that if the calculated deferral is too 
               large, the state may be in violation of the State 
               Constitution which requires these districts receive 
               approximately $120 per pupil.  The state has generally 
               counted funding for categorical programs toward the 
               minimum $120 per pupil amount.
                
                However, shifting the state's cash burden to school 
               districts is increasing the lending costs imposed on 
               school districts - as long as the school district is 
               borrowing in order to sustain educational programs.  
               Arguably shifting the cost of borrowing from the state 
               to school districts seems unfair, particularly since 
               the state is reaping the cash flow benefits.  It would 
               not seem unreasonable that a portion of a school 
               district's lending costs should be borne by the state. 
                 

               If it is the desire of the committee to move this 
               bill, staff recommends the following amendments:
               
               a)        Narrow the scope of the findings and 
                    declarations consistent with the recommended 
                    amendments.




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               b)        Clarify that for any new deferral enacted 
                    after January 1, 2013, a portion of the lending 
                    cost shall be reimbursed by the state at a level 
                    not to exceed the State Pooled Money Investment 
                    Account (PMIA) 

               c)        Strike out remaining provisions of the 
                    measure. 

           7)   More information on cash options for school districts  . 
                To alleviate cash shortfalls, many school districts 
               consider the following options:

               a)        Interfund borrowings  .  Current law provides 
                    that moneys held in any fund or account may be 
                    temporarily transferred to another fund or 
                    account for payment of obligations, with certain 
                    limitations, such as repayment of any transferred 
                    funds in the same fiscal year, or in the 
                    following fiscal year if the transfer takes place 
                    within the final 120 calendar days of a fiscal 
                    year. (Education Code  42603)

                b)        Short-term borrowings from external sources  . 
                     If it is not possible to alleviate temporary 
                    cash shortfalls by interfund borrowing, it may be 
                    necessary for LEAs to borrow funds on a 
                    short-term basis from external sources. Following 
                    are some possible sources:

                     i)             Tax Revenue Anticipation Notes  . 
                         Tax Revenue Anticipation Notes (TRANs) are 
                         short-term, interest bearing notes issued 
                         by a government in anticipation of tax 
                         revenues that will be received at a later 
                         date. The notes are retired from the tax 
                         revenues to which they are related. Many 
                         LEAs issue TRANs for cash flow management 
                         purposes every year.

                     ii)            County Office of Education  . 
                         Current law authorizes county offices of 
                         education to loan funds to school 
                         districts. The funds must be repaid either 
                         within the fiscal year or within the next 




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                         fiscal year, depending on the type of loan 
                         that is granted. Certain other 
                         restrictions apply, as indicated in the 
                         applicable statutes. Such loans are 
                         discretionary and are subject to 
                         availability of funds at the county office 
                         level.   (EC  42621 and 42622)


           1)   K-12 principal apportionments .  Approximately 80% of 
               state payments to school districts are distributed 
               through the principal apportionment system. Under this 
               system, school districts receive payments for 21 
               programs, with funding distributed according to 
               monthly payment schedules set by law. The 
               apportionment schedule for most school districts is 
               generally uniform throughout the year, but has smaller 
               payments in July and August. (Current law also 
               authorizes two alternative payment schedules that 
               provide larger payments in the beginning of the fiscal 
               year. These schedules are used for small school 
               districts that receive a large percentage of their 
               funding from property taxes and, therefore, are more 
               cash poor at the beginning of the fiscal year.) 

               State revenue limit payments, which provide general 
               purpose funding for districts, represent about 80% of 
               the principal apportionment payment. In addition, 
               current law requires that 15 specified categorical 
               programs be paid using the principal apportionment 
               system. At its discretion, SDE makes payments for five 
               other categorical programs through the principal 
               apportionment.
           
          SUPPORT  

          EdVoice
          Public Advocates
          San Bernardino City Unified School District

           OPPOSITION

           None on file.







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