BILL ANALYSIS �
SENATE COMMITTEE ON EDUCATION
Alan Lowenthal, Chair
2011-2012 Regular Session
BILL NO: SB 1240
AUTHOR: Cannella
INTRODUCED: February 23, 2012
FISCAL COMM: Yes HEARING DATE: April 25, 2012
URGENCY: No CONSULTANT: Daniel Alvarez
SUBJECT : School Finance, Emergency Loans: South Monterey
County Joint
Union High School District.
SUMMARY
This bill changes the interest rate from 5.44 percent to
one percent (1%), for purposes of determining the cost of
the original emergency loan, for the South Monterey County
Joint Union High School District (formerly known as the
King City Joint Union High School District).
BACKGROUND
SB 130 (Denham), Chapter 20, Statutes of 2009, appropriated
$5 million from the General Fund to the Superintendent of
Public Instruction (SPI) for apportionment to the King
City Joint Union High School District for the purpose of an
emergency loan and authorized lease-back bond financing
through the Infrastructure and Economic Development Bank
(I-Bank) of up to $13 million, plus expenses, as an
emergency loan, and requires the SPI to assume all the
rights, duties, and powers of the governing board of the
district. With principal, accrued interest, and issuance
costs, the lease revenue bonds issued through the I-Bank
totaled $14.4 million. The State Controller's
responsibility in the lease financing of bonds is to
withhold (or intercept) the required amount of general
apportionment funding of the school district to insure
lease payments are made in amounts determined by the
I-Bank. And the intercept is considered a "senior" lien to
any other payment or apportionment of the school
districts'. (Note: the King City Joint Union High School
District was renamed the South Monterey County Joint Union
High School District in July 2011.)
SB 1240
Page 2
Existing law establishes a process for state oversight and
financial assistance for schools in financial trouble, and
authorizes the governing board of a school district that
determines that its revenues are insufficient to meet its
current year obligations to request an emergency
apportionment (loan) from the state through the SPI.
Further, existing law, requires that acceptance of an
emergency loan constitutes agreement by the school district
to specified conditions, including the following:
The SPI assumes all the legal rights, duties, and powers
of the governing board of the district.
An audit, for the fiscal year in which the emergency
apportionments are disbursed and each year thereafter, is
to be conducted of the books and accounts of the
district, in lieu of the required annual school district
audit; this audit may be conducted by the State
Controller's Office (SCO), or an auditor selected by the
school district and approved by the SCO.
The SPI may appoint an administrator to act on behalf of
the SPI.
The school district governing board becomes advisory
only.
The authority of the SPI and the state-appointed
administrator continues until specified conditions have
been met, including SPI determination that future
compliance with recovery plans is probable.
(Education Code � 41320, et. seq.)
ANALYSIS
This bill changes the interest rate from 5.44 percent to
one percent (1%), for purposes of determining the cost of
the original emergency loan, for the South Monterey County
Joint Union High School District (formerly known as the
King City Joint Union High School District). The new rate
would also apply to any repayments made subsequent to June
30, 2011.
In addition, the bill specifies legislative intent stating
that the financing cost subsidies funded are not to be
SB 1240
Page 3
deemed precedent due to the unique fiscal situation of
these districts.
Furthermore, the bill contains a legislative finding
declaring the a special law is necessary and that a general
law cannot be made applicable within the meaning of the
California Constitution because of the unique circumstances
related to the fiscal emergency in the South Monterey
County Joint Union High School District.
STAFF COMMENTS
1) Need for the bill . The author states, "although
current law prevents LEAs emergency loans from
imposing a fiscal impact upon the state's General
Fund, it inadvertently placed an undue financial
burden on any future fiscally insolvent LEAs in need
of a state-issued emergency loan. At a time when a
LEAs is at great fiscal risk and is seeking to regain
their financial footing, AB 1554 requires an already
struggling district to pay a higher loan interest rate
than what it would have otherwise been expected to pay
had AB 1554 not been adopted."
2) The district has done much, but have they exhausted
all options? The district has made strides in
reducing various expenditures. However, given the
fiscal condition the district was in, much needed to
be done. Generally, there are three general ways
toward savings or revenues: (1) expenditure
reductions, (2) examine ways to possibly refinance or
restructure the loan in order to possibly lower
overall annual costs - this would likely require some
additional assurances to convince bondholders of any
change, and (3) revenue enhancements beyond state
apportionments - for example, a local parcel tax that
could be devoted to reducing district debt and
enhancing education program offerings or both. It is
not clear whether the district has attempted all
options before requesting the state provide additional
relief. The dire fiscal situation was created by poor
local decision-making; shouldn't all local options be
exhausted prior to more state fiscal intervention?
It would seem unlikely that in the absence of this
measure the district would default on necessary bond
SB 1240
Page 4
payments, since the State Controller's responsibility
in the lease financing of bonds is to withhold (or
intercept) the required amount of general
apportionment funding of the school district to insure
lease payments are made in amounts determined by the
I-Bank. And the intercept is considered a "senior"
lien to any other payment or apportionment of the
school districts'
If the district has not exhausted all options, what
message would the change contemplated in this measure
send to other districts that teeter on the edge of
financial insolvency - that no matter what, the state
will continue to provide "additional" funding
irrespective of the fact that poor decisions were made
at the local level that put the solvency of the
district and the education of the students in
jeopardy?
It is an unfortunate after-effect that the current and
future students of this school district are the real
victims of the mismanagement of the school district
fiscal resources; however, other districts that may be
on the brink of encountering similar fiscal
circumstances have begun the timely and painful local
decision-making necessary to lift them from their
unfortunate fiscal situation while maintaining their
educational program.
3) Deterrent effect? Since the King City Joint Union
High School District (now the South Monterey County
Joint Union High School District) emergency
apportionment and subsequent loan, approximately 50
school districts have been watched closely by FCMAT as
districts teetering on the edge of financial
insolvency. In such instances, FCMAT is called upon
to provide information to these school districts on
the processes and consequences when a district is
determined financially insolvent. FCMAT has provided
workshops detailing in painful terms the actions that
a district would be required to follow, including loss
of local governance and control and the necessary
steps an emergency loan entails including the lease
financing of such a loan through the I-Bank. Since
this time, no other district has requested an
emergency apportionment.
SB 1240
Page 5
4) Savings for this district is a cost distributed to
others . Who pays for a change in the interest rate?
According to the State Department of Education (SDE),
the cost difference between the current 5.44 percent
interest rate and the 1 percent interest rate is
approximately $445,000 annually (or approximately $8
million over the life of the loan). The transfer of
the costs will fall to other school districts, in a
loss of available Proposition 98 funding.
5) King City Joint Union HSD and need for an emergency
loan . According to the Fiscal Crisis Management
Assistance Team (FCMAT), from 2002 until the
appointment of the state administrator in July 2009,
inconsistent leadership and ineffective governance,
exacerbated multiple years of financial difficulties
which lead to cash insolvency and the need for state
intervention in the King City Joint Union High School
District.
Under SB 130, the King City Joint Union High School
District (now South Monterey County Joint Union High
School District) was required to enter into a lease
financing arrangement through the I-Bank for the
purposes of financing the emergency apportionment.
According to FCMAT the emergency loan has a repayment
period of 20 years and includes annual debt service
payment of $1.2 million. The annual debt service
payment is approximately 7.5 percent of the district's
projected unrestricted general fund revenue for
2011-12. FCMAT acknowledges there are no standards
for the amount of unfunded debt that is considered
prudent for California school districts; however, debt
service of one to two percent is considered
reasonable. Higher debt service payments typically
requires the use of resources traditionally dedicated
to the current costs of education, such as salaries,
supplies and services. The reason for the district's
high interest rate is due to the fact that the State
did not directly fund the loan, but instead permitted
the sale of bonds through the I-Bank to fund the loan,
the interest rate was dependent on the going bond
SB 1240
Page 6
interest rate at the time of the sale.
6) Additional background . Chapter 263, Statutes of 2004
(AB 1554, Keene), provided the state's General Fund
one-time and potentially on-going savings by requiring
local educational agencies (LEAs) with outstanding
emergency loans, at that time, to refinance these
loans with revenue bonds issued by the California
Infrastructure and Economic Development Bank (I-Bank).
LEAs are required to repay the bonds within 20 years.
The reasoning was to get the State General Fund out of
the business of providing ongoing long-term loans to
financially insolvent school districts. As a result,
rather than receive a loan from the state General Fund
with an interest rate equivalent to the Pooled Money
Investment Account (PMIA) earned investment rate, AB
1554 required LEAs deemed fiscally insolvent to obtain
a lease revenue bond financing with an interest rate
that varies (usually higher) from the PMIA's earned
investment rate.
This type of arrangement was used to refinance the
emergency loans to Oakland, Vallejo, and West Contra
Costa school districts; however, in these instances
the original emergency loans for these districts were
executed prior to the passage of AB 1554.
7) Related legislation .
AB 1858 (Alejo), this measure is nearly identical to
SB 1240. The bill has been scheduled for hearing in
Assembly Education Committee on April 18.
In addition, SB 477 (Wright) pending in Assembly
Education Committee would appropriate $12.9 million
from the General Fund as an emergency apportionment
(loan) for the Inglewood Unified School District, and
requires the district to enter into a lease financing
agreement for the purpose of lease financing the
emergency apportionment.
8) In 1992, the Richmond Unified School District (now the
West Contra Costa Unified School District) announced
that it would close its schools 6 weeks early due to
financial hardship. The court (Butte v. State of
California, 1992) ruled that the state constitution
SB 1240
Page 7
and previous case law made the state ultimately
responsible for ensuring that public education was
equitably provided to all California students. As a
result of the court ruling, the state provided an
emergency loan to the district in order to keep the
doors open and assigned a trustee to oversee the
district.
As previously mentioned, legislation established a
process for districts in dire fiscal situations, where
a request for an emergency loan results in the
forfeiture of local school board authority and the
appointment of a state administrator. The board may
gain control of responsibilities based on district
progress measured against recovery benchmarks and the
SPI's determination that the district's future
compliance with approved recovery plans is probable.
SUPPORT
State Superintendent of Public Instruction (sponsor)
OPPOSITION
None on file.