BILL ANALYSIS �
AB 1898
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Date of Hearing: May 9, 2012
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Felipe Fuentes, Chair
AB 1898 (Alejo) - As Introduced: February 22, 2012
Policy Committee: Education
Vote:6-5
Urgency: No State Mandated Local Program:
No Reimbursable: No
SUMMARY
This bill, beginning January 1, 2013, changes the financing
mechanism for emergency loans made to school districts from the
California Infrastructure and Economic Development Bank (I-Bank)
to the Pooled Money Investment Account (PMIA), as specified.
Specifically, this bill:
1)Applies to school districts seeking an emergency loan for less
than $25 million.
2)Further requires the $25 million threshold to be adjusted each
January 1 by the same percentage increase or decrease as
occurs in the Implicit Price Deflator for State and Local
Government Purchases of Goods and services published by the
United States Department of Commerce.
3)Requires the interest rate for the emergency loan to be the
rate earned by monies in the PMIA as of the date of the
initial loan disbursement to the district.
FISCAL EFFECT
1)Loss of GF/Special Fund revenue, likely in the hundreds of
thousands to millions, by allowing school districts to receive
an emergency loan financed by the PMIA. The PMIA interest rate
is at a historically low level and is not likely to remain
this way for an extended period of time. This bill would
allow school districts to receive an emergency loan up to $25
million at the current PMIA rate of 1%. If this loan were
made today, the 1% interest rate would be locked in for the
life of the loan (generally 20 years). Under these terms and
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if the PMIA interest rate rose to 3%, the state would lose out
on a rate of return of approximately $300,000 annually.
2)To the extent this measure limits the amount of money in the
PMIA the state can utilize to manage its own cash issues, the
state may have to go to the open market to borrow at a higher
interest rate.
COMMENTS
1)Background . AB 1554 (Keene), Chapter 263, Statutes of 2004,
established a new process for issuing emergency loans to
insolvent school districts for the purpose of eliminating
GF/98 exposure in providing a direct loan. Specifically,
Chapter 263 required districts to obtain lease revenue bond
financing from the I-Bank. This financing is over a 20-year
period at an interest rate typically higher than the rate
provided under the Pooled Money Investment Account (PMIA).
Under this process, the State Controller withholds (or
intercepts) the required amount of the district's general
apportionment funding to insure lease payments are made in
amounts determined by the I-Bank. The intercept is considered
a "senior" lien to any other payment or apportionment.
In addition to establishing the I-Bank process for emergency
loans, Chapter 263 established new interest rates based on the
PMIA rate for three districts who had already received
emergency loans (West Contra Costa Unified School District,
Oakland Unified School District and Vallejo Unified School
District). At the time, it was decided these districts'
interest rate would be lowered because their loans were being
moved from an apportionment by the GF/98 to the I-Bank issuing
bonds for this purpose.
Also, Chapter 263 contained specific language stating "It is
the intent of the Legislature that the financing cost
subsidies (i.e., the lower interest rate based on PMIA) funded
in this section not be deemed precedent?, as these districts
requested loans prior to the enactment of this article."
Upon the enactment of Chapter 263, all future emergency loans
were required to be financed through bonds issued by the
I-Bank.
2)Purpose . According to the author, "Under current law,
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fiscally insolvent school districts may seek an emergency loan
from the state. Yet, all emergency loans are financed by the
I-Bank whose high interest rate locks districts into years of
excessive debt service payments as they struggle to recover
financially. As budget cuts continue, more school districts
are contemplating the need of an emergency loan. The intent of
this bill is to help small school districts at risk of fiscal
insolvency save hundreds of thousands of dollars each year in
debt service payments, funneling more resources out of
California classrooms."
This bill, beginning January 1, 2013, changes the financing
mechanism for emergency loans made to school districts from
the I-Bank to the PMIA.
3)The PMIA is an account the State Treasurer (ST) uses to invest
the state's money to manage cash flow and strengthen the
financial security of local governmental entities. PMIA policy
sets as primary investment objectives safety, liquidity and
yield (rate of return). A three member board consisting of
the ST, the State Controller, and the Director of the
Department of Finance governs the PMIA.
The PMIA (i.e., the Pool) has three primary sources of funds:
GF; special funds held by state agencies; and moneys deposited
by cities, counties and other entities into the Local Agency
Investment Fund (LAIF). According to the ST, at the end of
March 2012, the PMIA portfolio totaled $64 billion. The daily
investment activity in March 2012 averaged $1,007 billion.
4)The PMIA may not be the appropriate financing source for
insolvent school districts . As referenced above, the main
object of this account is safety, liquidity, and yield (rate
of return), which means it is generally used for the state and
local government's short-term cash management and financing
purposes, not long-term ones as needed by insolvent school
districts. Money in the Pool represents an idle surplus of
state funds and it is invested on a daily basis and for short
periods. According to the ST, the average life of an
investment is 237 days.
Even though the PMIA contains about $64 billion, roughly $21
billion (33%) of this money resides in LAIF (as of March
2012). The ST reports the LAIF had 2,736 participating
agencies as of the end of March 2012. Statute specifically
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prohibits the state from accessing this account for cash
management or lending purposes.
Taking into account the restrictions with LAIF, only
approximately $43 billion in the PMIA is available for state
investment and cash management. Also, according to the ST,
approximately $24 billion in the Pool has been identified for
internal borrowing purposes and as such, is not likely to be
accessed for other purposes. With the LAIF and existing cash
management obligations, there would be little funding in the
Pool left to meet the requirements of this bill.
According to The ST, any type of lending to school districts
for emergency loans as proposed in this bill would likely be
under the AB 55 Loan Program because of the program's
structure and purpose. The ST states: "�AB 55] loans are lines
of credit extended by the PMIA Board to state agencies or
departments to provide funds for startup costs or progress
payments on authorized bond projects. After a vetting process,
the PMIA Board agrees to the department or agency request and
the line of credit is provided by the Pool. All lines of
credit are granted for a period of 364 days, bear the interest
rate of the daily pooled rate from the day before, and may be
increased or extended upon request of the borrower."
Once the bonds are issued for the project, the line of credit
provided to the department or agency is paid back to the Pool.
The ST notes, however, that approximately $310 million of the
$500 million available has already been provided under the AB
55 Loan program. Even if less than 20 school districts needed
an emergency loan of $25 million, the Pool would not be able
to meet this demand and as such, could not meet the
requirements of this bill.
Given the overall purpose and complexities of the PMIA, it
does not appear it is a suitable source for long-term
emergency loans to school districts. Likewise, the state has
experienced severe cash management issues over the last
several years and the state's ability to conduct internal
borrowing and other cash management actions conducted by the
PMIA is critical to the state's fiscal health.
5)LAO assessment of emergency loan process . In April 2012, the
LAO released a report entitled: School District Fiscal
Oversight and Intervention, which concluded: "Despite the
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significant costs to school districts, the state has limited
ability to assist school districts given its ongoing cash
management problems. Although these loans may not be a
significant burden when a small district requires a loan, the
state could face a significant cash problem if it was required
to provide GF loans for large school districts or for a
sizable number of school districts in the same year."
6)Related legislation .
a) AB 1858 (Alejo), pending in this committee, reduces the
interest rate for the emergency loan obtained by the South
Monterey County Joint Union High School District (SMCJUHSD)
in 2099 from 5.44% to 1%.
b) SB 1240 (Cannella), pending in the Senate Appropriations
Committee, also proposes to reduce the interest rate for
SMCJUHSD from 5.44% to 1%, but this change will only be
operative if the district passes a local parcel tax by
January 1, 2015.
c) SB 177 (Wright), pending in Assembly Education
Committee, appropriates $12.9 million from the GF/98 as an
emergency apportionment (loan) for the Inglewood Unified
School District and requires the district to enter into a
lease financing agreement with the I-Bank for the purpose
of financing the emergency apportionment.
Analysis Prepared by : Kimberly Rodriguez / APPR. / (916)
319-2081