BILL ANALYSIS �
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
SB 1491 (Negrete McLeod) - Education Finance: Deferrals.
Amended: April 26, 2012 Policy Vote: Education 7-0
Urgency: No Mandate: No
Hearing Date: May 24, 2012 Consultant: Jacqueline
Wong-Hernandez
SUSPENSE FILE.
Bill Summary: SB 1491 requires the state to reimburse school
districts for a portion of their borrowing costs incurred during
a deferral of payment, as specified. This bill requires the
Superintendent of Public Instruction (SPI) to determine whether
the required supplemental apportionment is sufficient to
reimburse school districts and to allocate the funds.
Fiscal Impact:
Reimbursements: Potentially substantial future state
General Fund costs to reimburse school districts; exact
costs will be partially determined by the SPI.
Administrative costs: Potentially significant on-going
workload for the Department of Education (CDE) to determine
allowable costs, collect data, make payment determinations,
and process actual payments.
Background: As a component of managing the state budget during
the on-going fiscal crisis, the state enacted a series of
apportionment deferrals for school districts and local
governments to increase cash on hand. The state has enacted two
types of deferrals: inter-year (across fiscal years) and
intra-year (within the fiscal year). Inter-year deferrals defer
payments required to be made in one fiscal year to the
subsequent fiscal year. Intra-year deferrals defer state
payments within a fiscal year, in order to have more available
cash for a certain period of time.
Deferrals place a cash management burden on school districts. If
internal resources are insufficient to cover a district's cash
needs, it can borrow from private lenders or certain county
agencies. Districts bear any borrowing costs they may incur.
Existing law includes a hardship waiver process for schools
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districts that might not be able to meet financial obligations
if payments are deferred, but to qualify for a waiver school
districts would also have to prove that they have exhausted all
borrowing options.
Proposed Law: This bill would require the state to issue a
supplemental apportionment to school districts, if the state
defers in the future (at any point after January 1, 2013) an
amount of money greater than the amount projected to be deferred
at the time the Budget Act of 2012. The supplemental
apportionment would reimburse school districts for a portion of
their borrowing costs (including the interest) that does not
exceed the effective annual percentage yield earned in the prior
fiscal year by the Pooled Money Investment Account (PMIA). The
SPI would determine whether the supplemental apportionment is
sufficient to reimburse school districts and would allocate the
supplemental apportionment amounts to the school districts.
Staff Comments: The 2012 Budget Act proposes to reduce K-14
deferrals by $1.8 billion, which lowers the total ongoing
inter-year deferrals to approximately $8.6 billion. This bill
would require the state to pay a portion of school district
borrowing costs for any future Budget deferral that is above
that point-in-time level. This partial reimbursement will result
in substantial future costs to the state if it defers additional
funds to school districts.
This bill may have the unintended consequence of encouraging
borrowing to cover deferrals (instead of drawing down reserves
or exhausting other options) because it would subsidize that
borrowing. If the PMIA interest rate (which is the bill's cap
for reimbursing interest) is comparable to the interest paid on
the loan, it may make financial sense for a district to borrow
funds while potentially earning interest on its reserves. This
bill specifies application to school districts, but does not
include charter schools, county offices of education, or the
community colleges. If enacted as it is, this bill may encourage
deferrals to those entities, since they would not be entitled to
this benefit.
It is not clear how the SPI will define "borrowing costs"
outside of interest paid. The SPI is responsible for both
determining what constitutes a borrowing cost and whether the
supplemental apportionment is sufficient to reimburse school
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districts for those costs. Thus, the SPI will, to some extent,
determine the costs to the state for reimbursement. The CDE has
opined that it would need to, at a minimum, collect significant
new data and contract additional staff with expertise in school
finance lending to determine allowable costs.