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 ----------------------------------------------------------------- | | | | | | ----------------------------------------------------------------- |--------------------------------+--------------------------------| | | | |Version: May 6, 2015 |Policy Vote: ED. 9 - 0 | | | | |--------------------------------+--------------------------------| | | | |Urgency: No |Mandate: No | | | | |--------------------------------+--------------------------------| | | | |Hearing Date: August 24, 2015 |Consultant: Jillian Kissee | | | | ----------------------------------------------------------------- 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 AB 1198 (Dababneh) Page 1 of ? 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) AB 1198 (Dababneh) Page 2 of ? 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 AB 1198 (Dababneh) Page 3 of ? help reduce the overall bond financing amount and therefore further reducing charter school borrowing costs. -- END --