BILL ANALYSIS Ó
AB 1198
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Date of Hearing: April 29, 2015
ASSEMBLY COMMITTEE ON EDUCATION
Patrick O'Donnell, Chair
AB 1198
(Dababneh) - As Amended March 26, 2015
SUBJECT: School facilities: California School Finance
Authority: California Credit Enhancement Program
SUMMARY: Establishes the California Credit Enhancement Program
(CCEP). Specifically, this bill:
1)Establishes the California Credit Enhancement Program within
the California School Finance Authority (CSFA) to provide
lower cost alternatives for public school facilities financing
through a leveraged public-private partnership program.
2)Authorizes the CSFA to leverage its funding for the CCEP in
such a way that the amount of credit insurance provided
pursuant to the CCEP exceeds the amount of funds on deposit in
the California Credit Enhancement Account within the
California School Finance Authority Fund.
3)Establishes the CCEP Advisory Board, which shall be appointed
by the CSFA and shall be made up of subject matter experts,
including, but not limited to, in the fields of municipal bond
insurance, municipal finance, and charter school law to advise
the CSFA on the creation and administration of the CCEP.
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4)Establishes the California Credit Enhancement Account within
the California School Finance Authority Fund. Requires the
CSFA to deposit funds for the CCEP in the California Credit
Enhancement Account, and in addition to funds authorized to be
collected in the California School Finance Authority Fund,
authorizes the CSFA to deposit fees collected in accordance to
this bill in the California Credit Enhancement Account.
Authorizes the CSFA to designate and hold separately one or
more subaccounts within the California Credit Enhancement
Account.
EXISTING LAW:
1)Establishes the CSFA Act, and makes findings and declarations
regarding the interest of the state and its people for the
state to reconstruct, remodel or replace existing school
buildings that do not meet structural safety requirements;
acquire new schoolsites and buildings for school districts,
charter schools and community college districts; and assist
school districts and community college districts by providing
access to financing for working capital and capital
improvements. (Education Code (EC) Sections 17170 and 17171)
2)Establishes the CSFA, comprised of the Treasurer or his/her
designee, who serves as the Chairperson; the director of the
Department of Finance or his/her designee; and the
Superintendent of Public Instruction or his/her designee. (EC
Sections 17172 and 17174)
3)Defines "bonds" or "revenue bonds" as bonds, notes, lease
obligations, certificates of participation, commercial paper,
and any other evidence of indebtedness. (EC Section 17173
(d))
4)Specifies the powers and authorities of the CSFA, including
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the authority to issue revenue bonds to provide funds for the
financing or refinancing of a single, a series or several
projects, or financing of working capital for a single party
or several participating parties. Expresses the intent of the
Legislature to provide financing only for projects
demonstrated by the participating party to be financially
feasible, and specifies that revenue bonds are not and shall
not be deemed to constitute a debt or liability of the state,
obligate the state to pay the principal and interest, or
obligate the state to levy or pledge any form of taxation or
make any appropriation for their payment. (EC Sections 17180,
17183 and 17185)
FISCAL EFFECT: Unknown
COMMENTS: Background on CSFA. 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.
What is the purpose of the bill? According to the sponsor, the
California Charter Schools Association Advocates, the purpose of
this bill is to establish an account within the CSFA that can be
used as credit insurance or credit enhancement. The credit
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insurance is used to back the bonds CSFA issues on behalf of
charter schools. If a charter school defaults on bond payments,
the account set up by this bill will be used to pay the debt.
According to the sponsor, having a source to guarantee bonds
will hopefully lead to lower interest rates for the construction
or renovation of charter school facilities. The author states,
"The funds would be used to pay for bond payments in the event
of a default which would allow the charter schools to receive a
higher investment grade rating?. This in turn will provide more
favorable financing terms on charter school construction bonds
which will provide the charter school significant savings in the
long-run and allow them to spend more money "in" the classroom
and not "on" the classroom."
According to the author, the CCEP would be funded from multiple
sources, both public and private, including fees from charter
schools; potentially one-time appropriation of Prop 98 funds,
upon appropriation in the Budget; funds from private
not-for-profit foundations and organizations for the purposes of
funding the social impact bonds; any federal fund dollars
received by the state for the program's purposes; and monies
from past charter school bond transaction fees.
Similar programs in other states. According to the sponsor,
Texas and Colorado have similar programs. The Texas Credit
Enhancement Program (TCEP) received a $10 million federal grant
to establish a credit enhancement program for charter schools.
A flyer for the program states, "The TCEP will use the $10
million in Credit Enhancement for Charter School Facilities
grant funds, combined with a $100,000 TEA [Texas Education
Agency] contribution, to establish reserve funds for open
enrollment charter schools that are issuing municipal bonds to
finance the acquisition, construction, repair, or renovation of
Texas charter school facilities. Refinancing of facilities debt
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may be included if it falls within federal program guidelines.
The debt service reserve funds will be held in the State
treasury solely to provide security for repayment of the bonds.
The funds will not be provided directly to the approved charter
schools for construction."
Colorado has the "Moral Obligation Program." According to the
Colorado Department of Treasury Web site, "This program enhances
the credit of a "qualified charter school." A qualified charter
school is one that has obtained an investment grade credit
rating on a "stand-alone" basis. The enhancement enables these
qualified schools to obtain even more favorable financing terms
on their capital construction bonds. The program is funded from
a separate source of monies from which the Treasury would make
bond payments in the case of a default by a charter school.
C.R.S. 22-30.5-407 created the state charter school interest
savings account within the state charter school debt reserve
fund. Each qualified charter school allowed into this program
annually pays ten basis points of the principal amount of bonds
outstanding into this fund. At September 30, 2014, the fund had
a balance of $3.6 million. In the event that a default occurs
that exhausts the balance in the fund, as well as the $1 million
appropriated in FY 2002-2003 from the State Education Fund, the
statute directs the Governor to notify the General Assembly so
that it may consider whether or not to appropriate funds to pay
off the bonds."
Staff does not recommend modeling the program established by
this bill after Colorado's program. Both programs use good
credit rating as a criterion for eligibility. Staff recommends
adopting the same criterion for this bill.
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The bill does not contain detailed parameters. The bill creates
the CCEP and authorizes the CSFA to leverage its funding for the
CCEP in such a way that the amount of credit insurance exceeds
the amount of funds on deposit in the account. The bill
establishes the California Credit Enhancement Program Advisory
Board, appointed by the CSFA and comprised of subject matter
experts, including, but not limited to, in the fields of
municipal bond insurance, municipal finance, and charter school
law to advise the CSFA on the creation and administration of the
CCEP. The bill does not offer any other structure or
parameters for the program. Staff recommends striking the
Advisory Board and instead requiring the CSFA to adopt
regulations in consultation with subject matter experts if
necessary.
Committee amendments:
1)Specify that the purpose of the CCEP is to establish an
account to insure or guarantee facility bonds issued by the
CSFA on behalf of charter schools.
2)Require the CSFA to adopt regulations that shall include, but
not be limited to, the following:
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a) Establish eligibility criteria for participating public
schools, including financial, includes credit rating;
performance; organizational; and governance criteria.
b) Establish the parameters and procedures for the
provision of credit enhancement to eligible financing
transaction, including, but not limited to, establishment
of maximum program limits, and provisions necessary to
accommodate federal, state and local regulatory compliance.
c) Establish the application process and fee schedule.
d) Define "default" for purposes of the program and
establish procedures so that, in the event of a default,
funds from the California Credit Enhancement Account are
paid out only after all other sources of payment and credit
enhancement to an eligible financing are exhausted.
e) Establish the structure and guidelines for investing in
the CCEP.
f) Specify that the credit enhancement or other guarantees
issued shall not constitute a debt or liability of the
state.
3)Specify that nothing in this bill shall be construed to
require the CSFA or the state to deposit or appropriate funds
for the purposes established by this bill.
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4)Delete the Advisory Board and authorize CSFA to consult with
subject matter experts in developing the regulations.
REGISTERED SUPPORT / OPPOSITION:
Support
StudentsFirst
Opposition
None on file
Analysis Prepared by:Sophia Kwong Kim / ED. / (916) 319-2087
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