BILL ANALYSIS Ó
SENATE COMMITTEE ON EDUCATION
Senator Carol Liu, Chair
2015 - 2016 Regular
Bill No: AB 1198
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|Author: |Dababneh |
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|Version: |May 6, 2015 Hearing |
| |Date: July 15, 2015 |
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|Urgency: |No |Fiscal: |Yes |
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|Consultant:|Lenin Del Castillo |
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Subject: School facilities: California School Finance
Authority: California Credit Enhancement Program
SUMMARY
This bill establishes the California Credit Enhancement Program
within the California School Finance Authority (CSFA) to provide
lower cost alternatives for public school facilities financing
through public-private partnerships.
BACKGROUND
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 school sites 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 § 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.
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(EC § 17172 and § 17174)
3)Specifies the powers and authorities of the CSFA, including
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 or interest, or
obligate the state to levy or pledge any form of taxation or
make any appropriation for their payment. (EC § 17180, §
17183 and § 17185)
ANALYSIS
This bill:
1)Makes various findings and declarations regarding charter
school facilities and the programs administered by the CSFA,
as specified.
2)Establishes the California Credit Enhancement Program (CCEP)
within the California School Finance Authority (CSFA) for the
purpose to establish a fund to be used to insure facility
bonds issued by the CSFA in order to achieve lower cost
alternatives for public school facilities financing.
3)Authorizes the CSFA to leverage its funding for the CCEP so
the amount of credit insurance provided pursuant to the
program exceeds the amount of funds on deposit in the
California Credit Enhancement Account, as proposed to be
established by this measure within the existing CSFA Funds.
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4)Requires the 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 that nothing
shall be construed to require the CSFA to deposit, or the
Legislature to appropriate, funds for the purposes of the
CCEP.
5)Requires CSFA to adopt regulations to implement the CCEP and
specifies that they may consult with subject matter experts in
the development of the regulations, including eligibility
criteria for participating public schools, e.g., financial
performance, organizational and governance criteria,
parameters and procedures for the provision of credit
enhancement to eligible financing transactions, and the
application process and fee schedule.
6)Provides that a public school that is fiscally sound and that
has a good credit rating may participate in the CCEP.
7)Requires the regulations to include a definition of "default"
for purposes of the CCEP, and 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 transaction
are exhausted.
8)Specifies that bond insurance, credit enhancement, or other
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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.
9)Requires that each bond insurance policy, credit enhancement
instrument, or other guarantee of the CSFA issued under the
CCEP shall include a statement on its face that neither the
State of California nor the CSFA is obligated to pay the
principal or interest of the bonds covered by the CCEP.
10)Provides that the issue of bond insurance, credit
enhancement, or other guarantees shall not directly,
indirectly, or contingently obligate the state or any
political subdivision thereof, to levy or pledge any form of
taxation, or make any appropriation for their payment.
STAFF COMMENTS
1)Need for the bill. The author's office indicates that "the
biggest challenge currently faced by charter schools is
finding a suitable facility and funding for that facility.
Charter public schools typically do not receive local funding
through bonds, as traditional public schools do, and must pay
for their facility out of their general operating expenses,
taking money out of the classroom to pay for that classroom.
As a result, many charter schools turn to private financing
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and bond transactions in order to pay for a long-term
facilities solution." According to the bill's sponsor, the
California Charter Schools Association, the purpose of this
measure is to establish an account within the California
School Finance Authority (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. The sponsor
indicates that having a source to guarantee bonds will
hopefully lead to lower interest rates for the construction or
renovation of charter school facilities.
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 (SB 740). 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.
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 for charters to finance their facilities,
this bill could provide an additional means to help address
their facility needs.
3)California School Finance Authority. The CSFA was established as
a conduit to secure financing for working capital and
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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 California School Finance
Authority (CSFA), bonds are typically sold to large
institutional investors, with interest rates ranging between
4.19% to 7.58% over the last four years.
4)Other states. The program proposed by this measure 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 to finance the acquisition, construction, repair, or
renovation of charter school facilities. As part of this
program, debt service reserve funds are held in the State
treasury solely to provide security for repayment of the
bonds. The funds are not 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.
5)Charter defaults. While the bill requires the regulations to
include a definition of "default" for purposes of the program,
it does not contemplate in a default situation where CSFA has
paid off the remaining debt through this new program, which
entity would hold title to the facility. For this reason,
staff recommends an amendment requiring the CSFA to develop
regulations that create options, in the event of a default, to
ensure that the first priority of the facility is for the
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continued use of school purposes. These options may include,
but not be limited to, the re-let or sale of the facility to
another public school or a mechanism whereby the state has a
right of first refusal to purchase the facility instead of it
being sold in a foreclosure sale.
6)Fiscal impact. According to the Assembly Appropriations
Committee, there would be no direct state costs. There would
be 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; however, CSFA is
currently supported through fee revenue.
SUPPORT
California Charter Schools Association
OPPOSITION
None received.
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