BILL ANALYSIS Ó
SENATE COMMITTEE ON EDUCATION
Carol Liu, Chair
2013-2014 Regular Session
BILL NO: AB 1979
AUTHOR: Nazarian
AMENDED: May 28, 2014
FISCAL COMM: Yes HEARING DATE: June 11, 2014
URGENCY: No CONSULTANT:Kathleen Chavira
SUBJECT : California School Finance Authority.
SUMMARY
This bill expands the definition of "project," for purposes
of the California School Finance Authority Act (Act), to
include reimbursement of specified educational facility costs
to be financed or refinanced, expands the authority to use
the intercept repayment method beyond payments for debt
service to include other bond-related costs, and consolidates
the caps on the total amount of revenue bonds that may be
issued and outstanding at any time under the Act.
BACKGROUND
Current law establishes the California School Finance
Authority (CSFA) to oversee the statewide system for the sale
of revenue bonds to reconstruct, remodel or replace existing
school buildings, acquire new school sites and buildings to
be made available to public school districts (K-12), charter
schools, and community college districts, and to assist
school and community college districts by providing access to
financing for working capital and capital improvements. (EC
17170-17199.6)
Current law defines a "project" for purposes of the
California School Finance Authority Act (Act) to mean the
acquisition, construction, expansion, remodeling, renovation,
improvement, furnishing, or equipping of an educational
facility to be financed or refinanced. (EC § 17173)
Current law authorizes a school district, charter school,
county office of education, or community college district, to
guarantee or provide for payment of bonds and related
obligations under the Act through an intercept repayment
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mechanism, under specified conditions. These include
requirements that notice of such action be provided to the
Controller, and that a trustee (appointed by the school
district, charter school, county office of education, or
community college district, or by the CSFA) act to interface
between the party and the Controller for purposes of
repayment through the interception of revenue limit, or
charter school block grant apportionments. (EC § 17199.4)
Current law caps the total amount of revenue bonds which may
be issued and outstanding under the Act, at $400 million,
other than those revenue bonds issued for purposes of
guaranteeing or providing for repayment of bonds and related
obligations on behalf of local educational agencies, charter
schools, and community college districts. Current law caps
the total amount that may be outstanding at any time under
the Act for this purpose at $4 billion. (EC § 17199.3)
ANALYSIS
This bill :
1) Expands the definition of "project," under the
California School Finance Authority Act, to include the
use of revenue bonds issued by the CSFA to reimburse for
specified costs related to the financing or refinancing
of educational facilities under the Act.
2) Repeals provisions that authorize a public credit
provider (defined as financial institutions which
include a public retirement system) to require a school
district, charter school, community college district, or
county office of education to use a specified process
for repayment through the interception of revenue limit
apportionments, community college general
apportionments, or charter school block grant
apportionments.
3) Modifies provisions that outline conditions to be met by
a school district, charter school, county office of
education, or community college district electing to
guarantee or provide for payment of bonds and related
obligations through the intercept repayment mechanism
under the Act. More specifically it:
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a) Expands the costs which may be
covered via the intercept repayment method to
include payment on authority bonds, payments under
credit enhancement or liquidity support agreements
and amounts pledged or assigned under these
agreements, payments to fund reserves for these
items, fees and charges, and any other costs
necessary or incidental to financing or refinancing
activity under the Act.
b) Modifies the process to be followed
by a borrower in order to initiate the intercept
repayment method to reflect current practice.
c) Establishes the rules by which the
Controller shall conduct the intercept and provides
that the Controller may rely on the requests for
intercept made by investors, bondholders, trustees,
borrowers, and credit providers without liability
if these requests are made in compliance with the
bill's provisions.
d) Establishes the following new
authorities for the CSFA:
i) Authorizes the CSFA to
require participation in the intercept
repayment under the terms of
financing/refinancing under the Act.
ii) Authorizes the CSFA to impose limits
on new participation in the intercept
repayment process.
iii) Authorizes the CSFA to require
school districts, county offices of education,
charter schools, and community college
districts to apply to CSFA in order to
participate in the intercept repayment
process.
e) Declares that these provisions do
not obligate the State of California to provide
additional appropriations to fund debt service
obligations beyond those specifically designated
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for apportionment to the participating school
district, charter school, county office of
education, or community college district.
4) Eliminates the distinction in the cap between revenue
bonds issued and outstanding under the Act and the cap
on the total amount outstanding for purposes of the
intercept repayment mechanism, and consolidates these
caps into a single total amount of revenue bonds that
may be issued and outstanding at any time under the Act.
Specifically it:
a) Eliminates the $4 billion cap on the
amount of bonds outstanding for purpose of the
intercept repayment mechanism.
b) Eliminates the $400 million cap on
the total amount of revenue bonds that may be
issued and outstanding at any time for any purpose
under the Act.
c) Caps the total amount of revenue
bonds that may be issued and outstanding under the
Act at $4.4 billion.
STAFF COMMENTS
1) Need for the bill . The California School Finance
Authority was created in 1985 to finance educational
facilities and working capital for school and community
college districts. Since 2002, its primary focus has
been on assisting charter schools to meet their facility
and working capital needs. According to the sponsor
(Treasurer's Office) this bill makes several statutory
changes in order to facilitate charter school access to
financing and working capital for school facility
construction projects. These changes include the
authorization to reimburse for project costs incurred
prior to bond issuance, the expansion of bond related
costs which may be repaid through the intercept process,
and the consolidation of caps on the allowable amount of
revenue bonds outstanding for the CSFA.
2) Charter schools/CSFA. According to the Treasurer's
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Office, because school districts and community colleges
are able to issue general obligation bonds on their own,
the CSFA has provided financing mostly to charter
schools. Over the last four years, CSFA has issued
$279.6 million bonds for 120 charter school facilities.
According to the CSFA, bonds are typically sold to large
institutional investors, with interest rates ranging
between 4.19% to 7.58% over the last four years. The
CSFA administers several charter school programs to
provide no to low-cost facilities financing including
the Charter School Facility Grant Program, the Charter
School Revolving Loan Program and the Conduit Bond
Program.
3) Reimbursement provisions . According to the sponsor, the
adoption of an inducement resolution by a local
governing board typically starts the lock on a capital
project to be funded through a bond sale. This enables
an entity to begin to incur project-related expenses,
generally paid for out of existing operating or other
fund sources, and to reimburse itself from bond proceeds
once they are sold. In July 2013, CSFA was informed by
the Attorney General's Office, which acts as their
Issuer Counsel, that current law does not authorize
reimbursement of costs incurred prior to a bond
issuance. In light of the AG's opinion, the AG's Office
stopped providing legal opinions on bonds, and the
Treasurer's Office has retained outside counsel.
This has resulted in higher costs to the borrowers due
to much higher fees charged by outside counsel (e.g.,
$170/hour for the AG and $500/hour for outside counsel).
According to the sponsor, charter schools typically use
operating dollars, which would otherwise be used in the
classroom, for these costs.
This bill expands the definition of "project" to include
the reimbursement for the costs of acquisition,
construction, expansion, remodeling, renovation,
improvement, furnishing, or equipping of an educational
facility to be financed or refinanced.
4) What is being reimbursed ? Federal law governs
reimbursement for eligible costs from bond proceeds for
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tax exempt bonds. These costs must be incurred no more
than 60 days prior to the issuer (CSFA) adopting an
official intent to approve the bond issuance. Qualified
reimbursements includes capital expenditures, costs of
issuance, extraordinary working capital items, and
grants and certain loans, and may also include financing
and refinancing costs. Any bond proceeds applied to
finance costs associated with the issuance of these
bonds are limited to 2 percent of the bond issue.
According to the CSFA, the new authority to reimburse
charter schools for expenses incurred prior to bond
issuance would be subject to these federal provisions if
the bonds issued were tax exempt bonds, but would not
necessarily be applicable to taxable bonds issued.
In order to ensure that only eligible costs incurred
with the specified time frames are reimbursed, staff
recommends the bill be amended to require that
reimbursement from bond proceeds must be required to
comply with federal tax law if an opinion of counsel
supports special treatment under federal tax law for the
bonds issued for the applicable financing or
refinancing.
5) Public credit providers . Current law provides for a
separate intercept process for "public credit
providers," defined as financial institutions which
include a public retirement system. These provisions
allowed a public credit provider to impose an intercept
repayment process on a borrower.
This bill deletes these provisions. According to the
sponsor, there are no public credit providers currently
involved in CSFA's financing and, should a borrower
obtain credit support from a public credit provider who
wished to use the intercept, CSFA would be able to apply
the modified intercept repayment provisions established
by the bill for this purpose. Deletion of these
provisions eliminates unnecessary and redundant
provisions.
6) Other optional bond-related expenses for intercept .
Currently, charter schools that issue bonds through CSFA
utilize an intercept method whereby the Controller
intercepts the amount needed from authorized state funds
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for the charter school to service debt payments on
outstanding funds. According to the sponsor, the
Attorney General has interpreted these statutes as
authorizing the intercept only to service debt payments
and not for other bond-related costs. This bill
authorizes an optional intercept to be used for other
costs associated with bond financing such as bond
counsel and underwriting costs, making this financing
more attractive to borrowers and investors.
While it is the intent that the use of the intercept
option for payment of other bond-related requests be
optional, these provisions also establish that the CSFA
may require participation in the voluntary intercept
process under the terms of any financing or refinancing
under the Act. Staff recommends that these provisions
be amended to clarify that the use of the intercept
process for payment of bond related costs other than
debt service is optional.
7) Consolidation of caps . Current law divides CSFA's
maximum bond authority into two categories; $400 million
for debt that is not intercepted and $4 billion for debt
that is intercepted. According to the Treasurer's
Office, CSFA has issued approximately $295 million in
charter school debt over the last three years, of which,
only one financing for $7 million did not use the
intercept method. In addition, the Treasurer's Office
reports that the intercept repayment option is typically
preferred, if not required, by potential investors.
This bill combines both categories of debt under a
single cap, authorizing a total of $4.4 billion in
bonds, regardless of the repayment method, in
recognition of the current environment at CSFA with
respect to charter school financings.
8) Conflicting legislation . Legislative Counsel has noted
a potential conflict between this bill and the
provisions of SB 971 (Huff) which was heard and passed
by this committee in March 2014 by a vote of 7-0, as
both bills propose to amend the same section of the
Education Code. SB 971 is currently awaiting action in
the Assembly Education Committee
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SUPPORT
Bill Lockyer, Treasurer, State of California
California Charter Schools Association Advocates
OPPOSITION
None received.