BILL ANALYSIS                                                                                                                                                                                                    Ó



          SENATE COMMITTEE ON APPROPRIATIONS
                             Senator Ricardo Lara, Chair
                            2015 - 2016  Regular  Session

          AB 1198 (Dababneh) - School facilities:  California School  
          Finance Authority:  California Credit Enhancement Program
          
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          |Version: May 6, 2015            |Policy Vote: ED. 9 - 0          |
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          |Urgency: No                     |Mandate: No                     |
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          |Hearing Date: August 24, 2015   |Consultant: Jillian Kissee      |
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          This bill meets the criteria for referral to the Suspense File.


          Bill  
          Summary:  This bill establishes the California Credit  
          Enhancement Program (CCEP) within the California School Finance  
          Authority (CSFA) to provide lower cost alternatives for public  
          school facilities financing.


          Fiscal  
          Impact:  
           CSFA indicates a need for one position and $160,000 to support  
            start-up activities, including developing regulations and  
            administering the CCEP until enough revenue is generated from  
            fees to support the program.  (General Fund)
           Unknown, likely significant cost pressure at least in the  
            millions to support the program.  Without an identified  
            funding source, this bill puts pressure on the state to  
            provide funding.  (General Fund) 
           To the extent adequate funding is provided at the state level,  
            there could be potential savings to participating charter  







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            schools as they may obtain better financing terms due to  
            insured school facility bonds through the CCEP.


          Background:  Existing law establishes the California School Finance  
          Authority Fund to be administered by the CSFA.  The CSFA may  
          pledge any or all of the moneys in the fund as security for  
          payment of the principal of, and interest on, any particular  
          issuance of bonds. (EC 17181)
          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.  


          Proposed Law:  
            This bill establishes the CCEP to insure facility bonds issued  
          by CSFA to provide lower cost alternatives for public school  
          facilities financing.  This bill also establishes the California  
          Credit Enhancement Account (Account) within the CSFA.
          This bill requires the CSFA to adopt regulations to implement  
          this bill.  The regulations must include various components,  
          including: (1) eligibility criteria for participating public  
          schools,  in which a public school that is fiscally sound and  
          that has a good credit rating may participate in the CCEP; (2)  








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          parameters and procedures for credit enhancement to eligible  
          financing transactions; (3) the application process and fee  
          schedule; (4) a definition of "default" so that funds from the  
          Account are paid out only after all other sources of payment and  
          credit enhancement to an eligible financing transaction are  
          exhausted; (5) options, in the event of a default, to ensure  
          that the first priority of the facility is the continued use for  
          public school purposes; and (6) the structure and guidelines for  
          investing in the CCEP.


          The CSFA is required to deposit funds identified for the CCEP in  
          the Account.  The CSFA may deposit fees collected from  
          participants in the Account, in addition to the funds authorized  
          to be collected pursuant to the California School Finance  
          Authority Fund.  


          This bill specifies that the CCEP must not be deemed to  
          constitute a debt or liability of the state, and must not be  
          deemed to be a pledge of the faith and credit of the state,  
          other than the CSFA.  Bond insurance, credit enhancement, or  
          other guarantees of the authority must be payable solely from  
          funds available in the Account.  Issuance of bond insurance,  
          credit enhancement, or other guarantees must not directly,  
          indirectly, or contingently obligate the state, to levy or  
          pledge any form of taxation, or make any appropriation for their  
          payment.




          Staff  
          Comments:  According to the CSFA, in 2010 it administered the  
          federally-funded Credit Enhancement for Charter School  
          Facilities Program.  The grant award of $8.3 million was awarded  
          to 38 charter schools.  This program funded debt service reserve  
          accounts for eligible charter schools to reduce borrowing costs  
          by the amount of the reserve account and associated interest.   
          Though this program successfully reduced charter school  
          borrowing costs, it did not increase the overall credit quality  
          of the financing, which appears to be the intent of the proposed  
          CCEP.  If adequate funding is provided, which is difficult to  
          determine at this time, it may be possible that the CCEP could  








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          help reduce the overall bond financing amount and therefore  
          further reducing charter school borrowing costs.


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