BILL ANALYSIS �
AB 1898
Page 1
Date of Hearing: April 25, 2012
ASSEMBLY COMMITTEE ON EDUCATION
Julia Brownley, Chair
AB 1898 (Alejo) - As Introduced: February 22, 2012
SUBJECT : Education finance: emergency apportionments
SUMMARY : Changes, commencing January 1, 2013, the method of
financing emergency loans to school districts for loans that are
less than or equal $25 million. Specifically, this bill :
1)Requires that emergency apportionments (loans) that are less
than or equal to $25 million be financed from the Pooled Money
Investment Account (PMIA), commencing January 1, 2013.
2)Requires the $25 million threshold to be adjusted each January
1 by the same percentage increase or decrease as occurred in
the Implicit Price Deflator for State and Local Government
Purchases of Goods and Services published by the U. S.
Department of Commerce.
3)Provides that the interest paid on the loan be equal to the
rate earned by moneys in the PMIA as of the date of the
initial disbursement of the funds to the school district.
4)Requires that, if the interest charged by the Infrastructure
and Economic Development Bank (I-Bank) is lower than the
interest earned by the PMIA, then the district shall pay the
lower rate.
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
AB 1898
Page 2
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:
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 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 : Since 1990, eight school districts have received
emergency loans from the state. They are:
West Contra Costa Unified (formerly Richmond Unified),
$28.5 million, 1990
Coachella Valley Unified, $7.3 million, 1992
AB 1898
Page 3
Compton Unified, $19.9 million, 1993
Emery Unified, $2.3 million, 2001
West Fresno Elementary, $2 million, 2003
Oakland Unified, $100 million, 2003
Vallejo City Unified, $60 million, 2004
South Monterey County Joint Union High (formerly King
City Joint Union High, $13 million, 2009
All of these districts, except South Monterey, received their
loans prior to the enactment of AB 1554 and their interest is
set at the PMIA rate. (West Contra Costa, Oakland, and Vallejo
were required by AB 1554 to refinance their loans through the
I-Bank, but they were "grand-parented" in at their former PMIA
rates.)
This bill effectively reduces the interest costs to districts
with emergency loans of less than $25 million by requiring that
the loan be made from the PMIA and repaid at the PMIA rate,
which is generally lower than the I-Bank rate. The bill
provides that the rate of interest paid on a loan from the PMIA
shall be equal to the rate of interest earned by the PMIA on the
date of the initial disbursement. The State Treasurer's Office
reports that interest earned by the PMIA is at an all-time
low-0.389% in February 2012. In the early 1980's it was over
12%. It is likely that interest rates will rise again in the
future. If the interest paid by a district receiving an
emergency loan is locked in at the current low rate, and the
rate earned by the PMIA goes up, then the PMIA-or the General
Fund-will absorb the difference between the rate it is currently
earning and the rate paid by the district.
The PMIA. The Pooled Money Investment Account is directed by
the Pooled Money Investment Board, which consists of the State
Treasurer, the State Controller, and the Director of Finance and
is managed by the State Treasurer's office. The PMIA has three
primary sources of funds:
1)The state General Fund
2)State special funds
3)Cities, counties, and other local government agencies
PMIA funds are invested to manage the state's cash flow and
strengthen the financial security of local government entities.
According to the Treasurer's office, a little more than one
third of the moneys in the account are from local governments,
AB 1898
Page 4
and less than 20% are from the General Fund. The primary
investment objectives are safety, liquidity, and yield-in that
order. Liquidity is important to allow the PMIA managers to
make the day-to-day transactions that are needed to meet the
cash needs of the state and local governments. Extending
emergency loans to school districts would tie up funds for 20
years, reducing liquidity.
The PMIA extends lines of credit (called AB 55 loans, after
legislation enacted in 1987) to state agencies or departments to
fund startup costs or progress payments on authorized bond
projects. All lines of credit are for a period of 364 days, but
the average maturity is 240 days, according to the Treasurer's
office. AB 55 loans account for about 0.5% of the funds in the
PMIA. In December 2008 the Pooled Money Investment Board voted
to limit the further servicing of AB 55 loans. This limitation
dropped the cap on AB 55 loans from $14 billion to $500 million,
where it currently remains. According to a statement from the
Treasurer's office at the time the cap was reduced, "when the
draws on these lines of credit encroach on the prudent level of
liquidity for PMIA participants, the PMIB has a legal duty to
consider whether to continue funding AB 55 loans. The State's
cash flow crisis placed the PMIA in exactly that position. And
that is why the PMIB took action on December 17, 2008, to
significantly restrict further expenditures of AB 55 loans."
The inability of the PMIA to exercise fully its current
authority to offer short-term lines of credit casts doubt on its
ability to extend 20-year loans to school districts without
further compromising liquidity.
No mechanism for repayment . This bill provides that, for
emergency loans of less than $25 million, the source of
financing shall be the PMIA. The bill further specifies a rate
of interest. However, the bill does not establish a mechanism
for repayment or for enforcement if a district falls behind. By
contrast, debt service on an I-Bank loan is paid through an
intercept mechanism, whereby funds for repayment are taken
directly from a district's apportionment before the district
receives it.
Potential need for future emergency loans . Pending legislation,
SB 477 (Wright), provides an emergency apportionment of $12.9
million to the Inglewood Unified School District. However,
Inglewood has recently issued a Tax Revenue Anticipation Note,
making an emergency loan from the state unnecessary at least for
AB 1898
Page 5
the current year. Continuing budget cuts are pushing more
districts toward insolvency. County superintendents of schools
review school district budgets and certify them as positive,
qualified, or negative. A negative certification is assigned
when it is determined that a district will not meet its
financial obligations for the current or next fiscal year. In
addition to three districts that have outstanding emergency
loans, four districts have a negative certification in the
current year. A qualified certification is assigned when it is
determined that a district may not meet its financial
obligations for the current or next two fiscal years. In
addition to one district that already has an outstanding
emergency loan, 119 districts have received qualified
certifications in the current year. Historically most districts
with qualified budget certifications have not needed emergency
loans, but the potential impact of continued budget pressures is
unknown.
Related legislation . AB 1858 (Alejo), currently pending in the
Assembly, and SB 1240 (Cannella), currently pending in the
Senate, reduce the rate of interest paid by the South Monterey
County Joint Union High School District on its emergency loan
from 5.44% to 1%. The district's loan is financed from the
I-Bank.
REGISTERED SUPPORT / OPPOSITION :
Support
California Association of School Business Officials
California School Boards Association
California Teachers Associations
Opposition
None received
Analysis Prepared by : Rick Pratt / ED. / (916) 319-2087