BILL ANALYSIS �
AB 1858
Page 1
Date of Hearing: April 25, 2012
ASSEMBLY COMMITTEE ON EDUCATION
Julia Brownley, Chair
AB 1858 (Alejo) - As Introduced: February 22, 2012
SUBJECT : School finance: emergency loans: South Monterey
County Joint Union High School District
SUMMARY : Reduces the rate of interest that the South Monterey
County Joint Union High School District (District) is required
to pay on its emergency loan. Specifically, this bill :
1)Reduces the rate of interest paid by the District on an
emergency loan received by the district in 2009 from 5.44% to
1%.
2)States the intent of the Legislature that this rate reduction
not be deemed precedent or in conflict with existing law
governing the repayment of emergency loans.
EXISTING LAW provides for emergency loans to school districts
that are unable to meet their current operating expenses. Such
loans are provided by legislation enacted at the request of the
district. Existing law requires districts that request and
agree to receive an emergency loan to agree to statutory terms
and conditions regarding repayment of the loan and the steps to
be taken to return the district to financial solvency.
If a district receives an emergency loan of up to 200% of its
recommended budget reserve, then the Superintendent of Public
Instruction (SPI) is required to appoint a trustee who has the
authority to stay and rescind any action of the district
governing board and who serves until the loan is repaid and the
district has adequate fiscal systems and controls in place. If
a district receives an emergency loan of more than 200% of its
recommended budget reserve, then the API is required to assume
all legal rights, duties, and powers of the governing board and
to appoint an administrator to act on his or her behalf in
exercising this authority. The SPI may return power to the
governing board after specified conditions are met. The costs
of the trustee and administrator and other related oversight and
monitoring activities are borne by the district.
Emergency loans may be funded through one of two mechanisms:
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lease financing or an advanced apportionment from the state
General Fund. Lease financing loans are provided in two parts:
an interim "bridge" loan from the General Fund followed by a
lease financing loan from the California Infrastructure and
Economic Development Bank (I-Bank). Lease financing loans are
funded through the sale of bonds to investors. The General Fund
interim loan is repaid with funds from the I-Bank loan at the
rate of interest earned by moneys in the Pooled Money Investment
Account (PMIA) on the date of the initial disbursement.
The I-Bank lease financing loan may be for a period of up to 20
years, which may be extended up to 10 years, and is repaid at a
rate of interest determined by the bond issue. The lease
financing may also include funds necessary for reserves,
capitalized interest, credit enhancements, and the cost of
issuance. The lease financing method of financing emergency
loans was established by AB 1554 (Keene), Chapter 263, Statutes
of 2004.
Prior to AB 1554, emergency loans were financed through advanced
appropriations from the state General Fund and repaid at the
interest earned by the PMIA on the date of disbursement. AB
1544 retained that method of financing as an alternative to
lease financing, and provided that the determination as to which
method of financing to use shall be based on the availability of
funds in the General Fund and not on any cost differential
between the two financing mechanisms.
FISCAL EFFECT : Unknown
COMMENTS : The District (which at the time was the King City
Joint Union High School District) received an emergency loan
through the enactment of SB 319 (Denham), Chapter 20, Statutes
of 2009. SB 319 provided for a bridge loan from the General
Fund of $5 million followed by an I-Bank lease finance loan.
In addition, SB 319 authorized the District to borrow up to an
additional $8 million through lease financing, creating a
floating line of credit. On April 7, 2010 the I-Bank issued
$14,395,000 in lease revenue bonds to fund the emergency loan.
That amount includes the $13 million loan plus the cost of
issuance and credit enhancements. SB 319 required the District
to comply with existing law regarding the terms of loan
repayment. The rate of interest the District pays on the loan
is 5.44%, based on the interest paid on the lease financing
bonds.
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This bill reduces the interest rate to 1%, which, according to
the author, was the PMIA rate at the time the loan was made.
The author states that reducing the interest rate from $5.44% to
1% would save the District $375,000 per year in interest costs.
This is equal to about 1.9% of the District's total expenditures
in the current year. The district is already making this
payment. The effect of this bill would be to increase funds
available for discretionary expenditures by $375,000.
Three school districts-Vallejo, Oakland, and West Contra
Costa-are required by statute to repay their emergency loans at
the PMIA rate even though their loans are financed with I-Bank
lease revenue bonds. However, their circumstances are unique.
Specifically, these districts had already received emergency
loans pursuant to the law prior to the enactment of AB 1554.
Those loans were made from the General Fund and were being
repaid at the PMIA rate. AB 1554, in addition to creating the
lease financing method of financing emergency loans, required
Vallejo, Oakland, and West Contra Costa school districts to
refinance their loans through the I-Bank, which carried a higher
rate of interest. In order to grand-parent in the rates of
these pre-existing loans, AB 1554 provided that their new lease
financing loans would be repaid at the original PMIA rate.
Those rates are 1.5% for Vallejo, 1.778% for Oakland, and 1.532%
for West Contra Costa. AB 1554 also codified language
expressing the intent of the Legislature that these financing
subsidies not be deemed precedent, because those districts
requested loans prior to its enactment. The debt on those loans
is paid through an intercept mechanism, whereby the funds for
loan repayment are subtracted from each district's apportionment
before it goes out. The difference between the debt service
actually paid by each district at its statutory rate and the
amount it would pay if it paid at the full I-Bank rate is
subsidized by the General Fund and credited towards the state's
Proposition 98 minimum funding requirement.
This bill adds the South Monterey County Joint Union High School
District to the other three districts receiving financing
subsidies and retains the Legislature's intent that it not be
deemed precedent, but deletes from statute the language that
explains why the Legislature declared it not to be a precedent
in the cases of Vallejo, Oakland, and West Contra Costa. The
bill is silent on the mechanism for repayment, but the I-Bank
indicates that the repayment method would likely be identical to
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the apportionment intercept method currently used for other
loans, with the interest rate subsidy ultimately coming out of
the Proposition 98 guarantee. The Committee may wish to
consider whether the precedents of Vallejo, Oakland, and West
Contra Costa are relevant to this District and whether this bill
establishes a new precedent for General Fund (Proposition 98)
subsidies of emergency loans for school districts.
Related legislation. SB 1240 (Cannella), currently pending in
the Senate, is identical to this bill. AB 1898 (Alejo),
currently pending in the Assembly, requires emergency loans of
$25 million or less to be financed from the state's Pooled Money
Investment Account.
REGISTERED SUPPORT / OPPOSITION :
Support
California School Employees Association
California Teachers Association
Monterey County Office of Education
Small School Districts' Association
Opposition
None received
Analysis Prepared by : Rick Pratt / ED. / (916) 319-2087