The California School Finance Authority plans to price $1.4 billion in short-term notes to help public schools and community colleges bridge state aid shortfalls.
California Gov. Gavin Newsom’s proposed fiscal 2022 budget would use a revenue windfall to cover most of the school funding deferred in last year’s budget, but that won’t help school districts cover immediate cash flow needs for this school year.
Anticipating that school districts might face a cash crunch, the CSFA developed a note pool program to provide low interest short-term financing to cover the gap.
The short-term financing pools have generated substantial interest, according to the authority.
The fiscal 2021 state budget deferred $12.5 billion in funding to schools, community colleges and charter schools in the state’s 2020-21 adopted budget. The deferrals mean that the local school districts will receive 64% to 70% of their state funding for the 2020-21 school year, according to a CSHA staff report dated Jan. 28.
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“We are facing the largest deferrals in terms of dollars that we have ever faced,” said former state schools superintendent Jack O’Connell, who spoke during the treasurer’s online presentation.
O’Connell is a partner at Capitol Advisors Group, an educational lobbying firm that approached the treasurer’s office about creating the lending pools.
The program was created to help schools facing economic repercussions resulting from the pandemic, Ma, who chairs the CSFA, said during the webinar.
CSFA, the treasurer’s conduit that would issue the notes, has received 73 applications from K-12 schools and community colleges seeking to borrow $1.2 billion in funding and 75 borrowers representing 114 charter schools seeking $165 million.
The conduit expects to issue up to $1.4 billion in tax anticipation revenue notes in four or five different series in March and April, Johantgen wrote in a January staff report. The Series A will be enhanced by the CSFA’s U.S. Department of Education credit enhancement grant and the Series B notes will be enhanced by letters of credit provided by RBC Capital Markets and Citi, and a third series of notes may be issued for late stand-alone borrowers, according to CSFA’s report.
The finance team for the notes includes RBC Capital Markets as book runner, Citi as co-senior manager and Montague DeRose as municipal advisor. Nixon Peabody is disclosure counsel. Norton Rose Fulbright is notes counsel on the K-12 and community college notes. Orrick, Herrington & Sutcliffe is notes counsel on the charter school notes.
The final number of borrowers may be less than the current number of applicants. The applicants have no obligation to issue notes through the program, according to the CSFA report.
The governor’s fiscal 2022 budget proposal introduced in January seeks to cover the education deferrals made in the prior year’s budget by using part of an estimated $15 billion revenue windfall. The windfall came when the state underestimated the volume of income tax revenue it would receive from white collar workers, who were able to work from home through the lockdown.
The proposal “would use a major portion of the additional revenue to reverse in fiscal 2022 the significant deferrals of school aid that were enacted in fiscal 2021 to balance the budget,” S&P Global Ratings analysts wrote in a Jan. 28 report.
The governor has proposed $59.7 billion, or 36.3% of total general fund spending, go for K-12 education for fiscal 2022.
The CSFA note pool program “would allow school districts to borrow in fiscal 2021 against this future fiscal 2022 state aid, and help insulate them from state aid cuts, in what we essentially view as back-door deficit financing,” S&P wrote.
The deferrals would normally create a scenario where the state would need to follow with a second year of deferrals to avoid repaying the total deferred on top of the amount the state typically pays out, according to the formula.
A revenue windfall, however, “is allowing the governor to propose reducing the amount of deferred state aid from fiscal 2022 that would be paid in fiscal 2023 to $4.1 billion, a significant reduction from the $12.5 billion deferred from 2021 and 2022, and representing a large boost in cash payments to school districts in fiscal 2022,” S&P wrote.
The state has no plans to decrease the $12.5 billion of school aid deferrals currently budgeted in fiscal 2021, S&P wrote, leaving the schools to rely on external note financing to make them whole in fiscal 2021.
“The TRAN pool option gives local school districts an ability to borrow in fiscal 2021 against the state’s promise of receiving the ‘delayed’ school aid in fiscal 2022, albeit with the extra interest cost they will pay on the TRANs,” said David Hitchcock, an S&P director. “Not all school districts are expected to participate in the state TRAN pool, and those that do not participate will either need to cut their budgets in fiscal 2021, draw down on reserves to bridge the gap into fiscal 2022 when increased school aid is expected, or issue their own stand-alone TRANs.”
The school districts who do issue TRANs, either on their own or through the state pool, will in effect be borrowing for operations based on the anticipated state aid to be received next year, Hitchcock said.
“The state will have a state-level intercept of school aid for those districts participating in the state pool to pay their respective districts’ TRAN debt service, so state resources (future state aid) are in effect supporting the TRAN pool,” Hitchcock said. “The state support could potentially lower interest costs for the participating school districts and make TRAN issuance easier.”
