BILL ANALYSIS Ó
AB 1198
Page 1
GOVERNOR'S VETO
AB
1198 (Dababneh)
As Enrolled September 2, 2016
2/3 vote
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|ASSEMBLY: |76-0 |(May, 26, |SENATE: |39-0 |(August 23, |
| | |2015) | | |2016) |
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|ASSEMBLY: |80-0 |(August 29, | | | |
| | |2016) | | | |
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Original Committee Reference: ED.
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 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.
2)Authorizes the CSFA to leverage its funding for the CCEP so
that the amount of credit insurance provided pursuant to the
CCEP exceeds the amount of funds on deposit in the California
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Credit Enhancement Account within the California School
Finance Authority Fund.
3)Requires the CSFA to adopt regulations to carry out the
provisions of this bill. Authorizes the CSFA to consult with
subject matter experts in the development of the regulations,
which shall include, but not be limited to, all of the
following:
a) Eligibility criteria for participating public schools,
including financial, performance, organizational, and
governance criteria. A public school that is fiscally
sound and that has a good credit rating may participate in
the CCEP.
b) Parameters and procedures for the provision of credit
enhancement to eligible financing transactions, including,
but not limited to, maximum credit enhancement limits, and
provisions necessary to accommodate federal, state, and
local regulatory compliance.
c) The application process and fee schedule.
d) A definition of "default" for purposes of the program,
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.
e) Options, in the event of a default, to ensure that the
first priority of the facility is the continued use for
public school purposes. These options may include, but are
not limited to, the relet or sale of the facility to
another public school and a mechanism by which the state
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has a right of first refusal to purchase the facility
instead of it being sold in a foreclosure sale.
f) The structure and guidelines for investing in the CCEP.
4)Establishes the California Credit Enhancement Account within
the California School Finance Authority fund. Requires the
CSFA to deposit funds identified for the CCEP in the
California Credit Enhancement Account. Authorizes the CSFA
to, at its discretion, deposit fees collected in accordance
with the California School Finance Authority Act in the
California Credit Enhancement Account. Authorizes the CSFA to
designate and hold separately one or more subaccounts within
the California Credit Enhancement Account. Specifies that
nothing in this bill shall be construed to require the
authority to deposit, or the Legislature to appropriate, funds
for the purposes of this bill.
5)Specifies 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 thereon, except from revenues of the
CSFA available therefor, and shall also include a statement
that neither the faith or credit, nor the taxing power of the
State of California, or any political subdivision thereof, is
pledged to the payment of the principal or interest of the
bonds covered by the CCEP.
6)Specifies that the issuance of bond insurance, credit
enhancement, or other guarantees under the CSFA Act 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.
The Senate amendments add the provision requiring the
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regulations to include options in the event of a default to
ensure that the first priority of the facility is for the
continued use for public school purposes, that the options may
include the relet or sale of the facility to another public
school, and a mechanism by which the state has a right of first
refusal to purchase the facility.
FISCAL EFFECT: According to the Senate Appropriations
Committee:
1)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)
2)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)
3)To the extent adequate funding is provided at the state level,
there could be potential savings to participating charter
schools as they may obtain better financing terms due to
insured school facility bonds through the CCEP.
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 six years, CSFA has
issued $744.5 million in bonds and notes to almost 30 charter
schools. Charter schools are the obligor and make bond payments
through an intercept process whereby the State Controller
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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 few years.
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 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 has a similar program. The Texas Credit Enhancement
Program (TCEP) received a $10 million federal grant to establish
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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 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."GOVERNOR'S VETO MESSAGE:
To Members of the California State Assembly:
I am returning the following four bills without my signature:
Assembly Bill 1198
Assembly Bill 1783
Assembly Bill 2182
Senate Bill 1113
Each of these bills creates unfunded new programs.
Despite significant funding increases for local educational
agencies over the past few years, the Local Control Funding
Formula remains only 96 percent funded. Given the precarious
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balance of the state budget, establishing new programs with the
expectation of funding in the future is counterproductive to the
Administration's efforts to sustain a balanced budget and to
fully fund the Local Control Funding Formula.
Additional spending to support new programs must be considered
in the annual budget process.
Analysis Prepared by:
Sophia Kwong Kim / ED. / (916) 319-2087 FN:
0005112