BILL ANALYSIS Ó AB 1198 Page 1 Date of Hearing: May 20, 2015 ASSEMBLY COMMITTEE ON APPROPRIATIONS Jimmy Gomez, Chair AB 1198 (Dababneh) - As Amended May 6, 2015 ----------------------------------------------------------------- |Policy |Education |Vote:|7 - 0 | |Committee: | | | | | | | | | | | | | | |-------------+-------------------------------+-----+-------------| | | | | | | | | | | | | | | | |-------------+-------------------------------+-----+-------------| | | | | | | | | | | | | | | | ----------------------------------------------------------------- Urgency: No State Mandated Local Program: NoReimbursable: No SUMMARY: This bill creates the California Credit Enhancement Program (CCEP), administered by the California School Finance Authority (CSFA), for the purposes of establishing a fund to be used to insure facility bonds issued by the authority to achieve lower AB 1198 Page 2 cost alternatives for school facilities financing. Specifically, this bill: 1)Creates the California Credit Enhancement Account within the existing CSFA Fund. Requires CSFA to deposit funds and fees identified for the CCEP in this account. Authorizes CSFA to designate and hold separately one or more subaccounts. Specifies nothing shall be construed to require the authority to deposit, or the Legislature to appropriate, funds for the purposes of the CCEP. 2)Authorizes the CSFA to leverage its funding for the CCEP so the amount of credit insurance provided by the program exceeds the amount of funds on deposit in the California Credit Enhancement Account. 3)Requires CSFA to adopt regulations to implement the CCEP and specifies they may consult with subject matter experts in the development of the regulations. 4)Specifies bond insurance, credit enhancement, or other guarantees issued under this program shall not be deemed to constitute a debt or liability of the state and shall not be deemed to be a pledge of the faith and credit of the state other than the authority. Bond insurance, credit enhancement, or other guarantees of the authority shall be payable solely from funds available in the California Credit Enhancement Account. Further, requires a statement on its face that neither the State of California nor the authority is obligated to pay the principal or interest of the bonds covered by the CCEP. AB 1198 Page 3 FISCAL EFFECT: No direct state costs. Cost pressures on the California School Finance Authority Fund absent sufficient funds on deposit in the new California Credit Enhancement Account. CSFA will also have upfront administrative costs to promulgate regulations and create the new California Credit Enhancement Program (CCEP); however, CSFA is currently supported through fee revenue. COMMENTS: 1)Background. 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. 2)Purpose. According to the sponsor, the California Charter Schools Association Advocates, the purpose of this bill is to AB 1198 Page 4 establish an account within the CSFA that can be used as credit insurance or credit enhancement. The credit 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. 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. Nothing in the bill requires the use of state funding to support this program. This program is modeled after similar programs in Texas and Colorado. The Texas Credit Enhancement Program (TCEP) received a $10 million federal grant to establish a credit enhancement program for charter schools. 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. AB 1198 Page 5 Analysis Prepared by:Misty Feusahrens / APPR. / (916) 319-2081