BILL ANALYSIS Ó
SENATE COMMITTEE ON EDUCATION
Senator Carol Liu, Chair
2015 - 2016 Regular
Bill No: AB 1195
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|Author: |Ridley-Thomas |
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|Version: |February 27, 2015 Hearing Date: |
| | July 15, 2015 |
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|Urgency: |No |Fiscal: |No |
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|Consultant:|Lenin Del Castillo |
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Subject: California Debt Limit Allocation Committee: American
Recovery and Reinvestment Act of 2009
SUMMARY
This bill allows the California Debt Limit Allocation Committee
(CDLAC) to administer the federal private activity bond
authority and issue federal tax-exempt bond funds to finance
public school facilities.
BACKGROUND
Existing law:
1)Establishes the CDLAC as the state's allocating agency for the
award and administration of the limited federal private
activity bond authority, called the Private Activity Volume
Ceiling. (Government Code § 8869.80)
2)Provides for a separate volume ceiling for qualified public
education facilities bonds (QPEFBs), which are designed to
provide tax-exempt conduit financing for turnkey private
development of public elementary and secondary school
facilities. The federal Internal Revenue Code (IRC) requires
CDLAC to be authorized by the Governor's proclamation or state
legislation to administer and allocate the volume ceiling for
QPEFBs. (IRC § 142(k))
3)Provides for the establishment of charter schools in
California for the purpose, among other things, to improve
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student learning and expand learning experiences for pupils
who are identified as academically low achieving. A charter
school may be authorized by a school district, a county board
of education, or the State Board of Education, as specified.
A charter school is typically created or organized by a group
of teachers, parents and community leaders, community-based
organizations, or an education management organization.
(Education Code § 47605, et seq.)
4)Establishes the Charter School Facility Grant Program which is
intended to provide assistance with facilities rent and lease
costs for pupils in charter schools.
(EC § 47614.5)
ANALYSIS
This bill permits the California Debt Limit Allocation
Commission (CDLAC) to allocate federal tax-exempt qualified
public education facilities bonds (QPEFBs) for the development
of public education schools and related improvements by adding
references to its authorizing statute in federal law-Internal
Revenue Code (IRC) 142(k), including the following:
1) The definition of "private activity bond" to include IRC §
142(k).
2)The definition of "state ceiling" to include the amount
specified by IRC § 142(k).
3)The requirement that any allocation of ceiling is irrevocable
upon issuance of bonds, and prohibiting any allocation carry
forward without the California Debt Limit Allocation
Commission's (CDLAC) approval.
4)The requirement on a state or local agency to notify the CDLAC
in writing after any election to carry forward an allocation.
5)Designation of the Treasurer as the State official to certify
that the QPEFBs meets the IRCs requirements.
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The bill also makes conforming changes to legislative findings
and declarations stating CDLACs purposes.
STAFF COMMENTS
1)Need for the bill. According to the author's office, "public
elementary and secondary schools have limited financing
options for the construction or improvement of their
facilities. In contrast, private developers have more
flexibility in their ability to finance transactions and
access to resources. In acknowledgement of these differences,
Section 142(k) of the federal IRC created a type of tax-exempt
private activity bond that can be used to finance school
facilities called QPEFB. These bonds are designed to provide
tax-exempt conduit financing for turnkey private development
of public elementary and secondary school facilities. The
tax-exempt private activity bond proceeds can be used to fund
the following project: school buildings, any functionally
related and subordinate facility and land with respect to a
school building, including any stadium or other facility
primarily used for school events, and any property subject to
accelerated depreciation under Section 168 of the IRC for use
in a school facility. QPEFBs are apportioned to the states
but fall outside the current limits the federal government
places on private activity bond authority. Federal law
requires that each state designate an entity to administer
QPEFBs in order to allocate the bonds."
2)Charter school facilities. Unlike traditional public school
districts, charter schools are unable to fund facilities with
general obligation bonds approved by local voters. A majority
of charter schools lease their facilities and pay the
associated costs from their operating budgets, with roughly
half of them receiving grants from the Charter School Facility
Grant Program. This program provides funding for charter
schools in non-district facilities that have a specified
percentage of students qualifying for free or reduced-price
meals at their school or in the surrounding school attendance
area. Eligible schools receive funding for lease payments,
building improvements, and maintenance.
A majority of the remaining charter schools that do not lease
private facilities occupy space provided by school districts.
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Proposition 39, approved by voters in November 2000, requires
a school district to provide a charter school having a
projected daily attendance of at least 80 or more students
from that district with "reasonably equivalent" facilities to
accommodate the charter school's needs. A school district can
provide a charter school with existing facilities or use
discretionary funds or other revenues, such as local school
bond funds, to meet this requirement. A small percentage of
charter schools have constructed their own facilities. Given
the continuing growth in charter school enrollment combined
with limited options to finance facilities, this bill could
provide an additional means for charter schools to address
their facility needs.
3)Will it work? This bill authorizes a new form of school facility
finance, which relies on a public-private partnership
agreement. After the issuer sells the bond, the proceeds are
loaned to a private for-profit developer, who then uses the
proceeds to build the school facility. The facility is then
leased to the school on a long-term basis at a cost less than
the amount necessary to repay the bonds. The developer
attempts to make up the difference by leasing the school
facility during off-hours and applying any depreciation
deduction from the school to reduce taxable income from other
sources. The school's ownership is transferred from the
developer to the school when the lease ends.
While qualified public education facility bonds (QPEFBs) were
added to the Internal Revenue Code (IRC) as tax exempt
facility bonds in 2001, none have yet to be issued. A
qualified public educational facility is any school facility
which is part of a public elementary school or a public
secondary school that is owned by a private for-profit
corporation pursuant to a public-private partnership agreement
with a State or local education agency. A public-private
partnership agreement is required under the IRC for each QPEFB
issuance. The IRC defines this as an agreement under which
the corporation agree to construct, rehabilitate, refurbish,
or equip a school facility, and at the end of the term of the
agreement, to transfer the school facility to such agency for
no additional consideration, and the term of which does not
exceed the term of the issue to be used to provide the school
facility. The Treasurer's Office indicates that only Florida
and New York have enacted the necessary statutory and
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regulatory changes, and that the reason for lack of use can be
associated with several factors, one of which has to do with
the requirement for private ownership and that it is
inconsistent with the way in which the current public school
system is structured.
4)CDLAC. According to the Senate Governance and Finance Committee,
the California Debt Limit Allocation Committee (CDLAC) was
created by the Legislature in 1987 to implement the federal
Tax Reform Act of 1986. The CDLAC is a three-member body
comprised of the State Treasurer as Chair, the Governor, and
the State Controller, housed in the Office of the State
Treasurer. CDLAC annually determines the ceiling amount under
federal law, including any carried forward, and then allocates
the annual ceiling to applicants, which include state and
local agencies, joint powers agencies, special districts,
nonprofit public benefit corporations that only issues student
loan bonds, and any other public agency legally empowered to
issue debt. No agency can issue tax-exempt private activity
bonds without the California Debt Limit Allocation Committee's
approval.
5)California School Finance Authority. Schools can apply to the
California School Finance Authority (CSFA) in the State
Treasurer's Office, which almost exclusively provides
financial assistance to charter schools by administering state
bond funds, federal and state grants, a revolving loan fund, a
credit enhancement grant program, and conduit bond financing.
The CSFA was established as a conduit to secure financing for
working capital and facilities projects for school districts,
charter schools and community college districts. The CSFA
operates under the Treasurer's Office. According to the
Treasurer's 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. Charter
schools are the obligor and make bond payments through an
intercept process whereby the State Controller intercepts or
redirects state funds allocated to charter schools to make
bond payments. 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.
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SUPPORT
State Treasurer (sponsor)
OPPOSITION
None received.
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