BILL ANALYSIS �
AB 1979
Page 1
CONCURRENCE IN SENATE AMENDMENTS
AB 1979 (Nazarian)
As Amended August 5, 2014
Majority vote
----------------------------------------------------------------------
|ASSEMBLY: |73-0 |(May 8, 2014) |SENATE: |35-0 |(August 18, 2014) |
----------------------------------------------------------------------
------------------------------------------------------------------------
|COMMITTEE VOTE: |5-0 |(August 26, 2014) |RECOMMENDATION: |concur |
|(Ed.) | | | | |
------------------------------------------------------------------------
Original Committee Reference: ED.
SUMMARY : Expands the definition of "project" under the California
School Finance Authority (CSFA) Act (Act) to include the
reimbursement for the costs of acquisition, construction,
expansion, remodeling, renovation, improvement, furnishing, or
equipping of an educational facility to be financed or refinanced;
expands the authority to use the intercept repayment method to
include other bond-related costs, and consolidates the caps on the
total amount of revenue bonds that may be issued and outstanding at
any time under the Act.
The Senate amendments :
1)Require the reimbursement from bond proceeds to comply with
federal tax law in accordance with an opinion of counsel that
supports special treatment under federal tax law for the bonds
issued for the applicable financing or refinancing.
2)Add language modifying the provisions that outline conditions to
be met by a school district, charter school, county office of
education, or community college district electing to guarantee or
provide for payment of bonds and related obligations through the
intercept repayment mechanism under the Act. Specifically, this
bill:
a) Expands the costs which may be covered via the intercept
repayment method to include payment on authority bonds,
payments under credit enhancement or liquidity support
agreements and amounts pledged or assigned under these
AB 1979
Page 2
agreements, payments to fund reserves for these items, fees
and charges, and any other costs necessary or incidental to
financing or refinancing activity under the Act.
b) Modifies the process to be followed by a borrower in order
to initiate the intercept repayment method to reflect current
practice.
c) Establishes the rules by which the State Controller
(Controller) shall conduct the intercept and provides that the
Controller may rely on the requests for intercept made by
investors, bondholders, trustees, borrowers, and credit
providers without liability if these requests are made in
compliance with the bill's provisions.
d) Establishes the following new authorities for the CSFA:
i) Authorizes the CSFA to require participation in the
intercept repayment under the terms of financing/refinancing
under the Act.
ii) Authorizes the CSFA to impose limits on new
participation in the intercept repayment process.
iii) Authorizes the CSFA to require school districts, county
offices of education, charter schools, and community college
districts to apply to CSFA in order to participate in the
intercept repayment process.
e) Declares that these provisions do not obligate the State of
California to provide additional appropriations to fund debt
service obligations beyond those specifically designated for
apportionment to the participating school district, charter
school, county office of education, or community college
district.
3)Add language eliminating the distinction in the cap between
revenue bonds issued and outstanding under the Act and the cap on
the total amount outstanding for purposes of the intercept
repayment mechanism, and consolidates these caps into a single
total amount of revenue bonds that may be issued and outstanding
at any time under the Act. Specifically, this bill:
a) Eliminates the $4 billion cap on the amount of bonds
outstanding for purpose of the intercept repayment mechanism.
AB 1979
Page 3
b) Eliminates the $400 million cap on the total amount of
revenue bonds that may be issued and outstanding at any time
for any purpose under the Act.
c) Caps the total amount of revenue bonds that may be issued
and outstanding under the Act at $4.4 billion.
4)Add double jointing language to avoid chaptering out provisions
contained in SB 971 (Huff) of the current legislative session.
FISCAL EFFECT : According to the Senate Appropriations Committee,
pursuant to Senate Rule 28.8, negligible state costs.
COMMENTS : The CSFA was established as a conduit to secure
financing for working capital and facilities projects for school
districts, charter schools and community college districts. The
CSFA operates under the State Treasurer's Office, who is the
sponsor of this bill. According to the Treasurer's Office, because
school districts and community colleges are able to issue general
obligation bonds on their own, the CSFA has provided financing
mostly to charter schools. Over the last four years, CSFA has
issued $279.6 million bonds for 120 charter school facilities.
Charter schools are the obligor and make bond payments through an
intercept process whereby the State Controller intercepts or
redirects state funds allocated to charter schools to make bond
payments. According to the CSFA, bonds are typically sold to large
institutional investors, with interest rates ranging between 4.19%
to 7.58% over the last four years.
Under the CSFA Act, "project" is defined as the acquisition,
construction, expansion, remodeling, renovation, improvement,
furnishing, or equipping of an educational facility to be financed
or refinanced. According to the Treasurer's Office, "when
borrowers embark on a bond sale to fund a capital project, the
governing board of the entity adopts an inducement resolution that
starts the clock on the project. The resolution enables the entity
to begin to incur project-related expense and pay for these
expenses out of existing operating or other funding sources and
reimburse itself with bond proceeds once the bonds are sold.
Almost all financings issued through CSFA utilize this resolution
to begin work on projects in advance of bonds closing with the
expectation that costs will be reimbursed once the sale of bonds
takes place."
AB 1979
Page 4
When bonds are issued, the Attorney General (AG), who serves as the
legal counsel for the CSFA, provides an issuer's opinion to protect
the CSFA in the bond sale. The AG's Office opined last year that
the CSFA Act authorizes the proceeds of bond funds to be used for
financing or refinancing of projects, but does not expressly
provide authority to reimburse borrowers for costs incurred prior
to issuance of the bond.
This bill expands the definition of "project" to include the
reimbursement for the costs of acquisition, construction,
expansion, remodeling, renovation, improvement, furnishing, or
equipping of an educational facility to be financed or refinanced.
This language is consistent with the authority provided to other
boards, commissions and authorities under the Treasurer's Office,
such as the California Health Facilities Financing Authority, the
California Educational Facilities Authority, and the California
Pollution Control Authority.
In light of the AG's opinion, the AG's Office stopped providing
legal opinions on bonds, and the Treasurer's Office has retained
outside counsel. This has resulted in higher costs to the
borrowers due to much higher fees charged by outside counsel (e.g.,
$170 per hour for the AG and $500/hour for outside counsel). The
Treasurer's Office states that any savings derived from this bill
could be better used for classroom purposes.
Amendments adopted in the Senate make changes to the intercept
process. According to the sponsor, the AG has interpreted current
law as authorizing the intercept process to be used only to service
debt payments and not for other bond-related costs. This bill
authorizes an optional intercept to be used for other costs
associated with bond financing such as bond counsel and
underwriting costs, making this financing more attractive to
borrowers and investors. The bill also prescribes the process for
participation in the intercept process.
Amendments adopted in the Senate also consolidate the caps on the
amount of debt authorized to be issued. Current law divides CSFA's
maximum bond authority into two categories: $400 million for debt
that is not intercepted and $4 billion for debt that is
intercepted. According to the Treasurer's Office, CSFA has issued
approximately $295 million in charter school debt over the last
three years, of which, only one financing for $7 million did not
use the intercept method. In addition, the Treasurer's Office
reports that the intercept repayment option is typically preferred,
AB 1979
Page 5
if not required, by potential investors. This bill combines both
categories of debt under a single cap, authorizing a total of $4.4
billion in bonds, regardless of the repayment method, in
recognition of the current environment at CSFA with respect to
charter school financings.
Analysis Prepared by : Sophia Kwong Kim / ED. / (916) 319-2087
FN: 0005489