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ARIZONA STATE SENATE
Fifty-Sixth Legislature, Second Regular Session
public schools; guaranteed debt obligations
Purpose
Establishes the Arizona Credit Enhancement Eligibility Board (Board), the Arizona Credit Enhancement Program (Program) and the Arizona Credit Enhancement Fund (Fund) to assist school districts and charter schools in obtaining more favorable financing terms by guaranteeing the payment of principal and interest on guaranteed financing issued by or on behalf of participating schools. Outlines Board duties and membership, requirements for the State Treasurer (Treasurer) in administering the Program and reporting requirements.
Background
The Division of School Facilities (Division) and School Facilities Oversight Board (SFOB) in the Arizona Department of Administration assess school facility deficiencies and provide capital funding for school districts through grant administration. The Division maintains a database of school facilities that includes all buildings that are owned by school districts. Each school district must annually report information required by the Division for the administration of the Building Renewal Grant Fund and by the SFOB for the computation of New School Facilities Formula distributions (A.R.S. Title 41, Chapter 56, Article 1).
The Arizona Public School Credit Enhancement Program and Arizona Public School Credit Enhancement Eligibility Board assist achievement district schools in obtaining more favorable financing by guaranteeing the payment of principal and interest on guaranteed financing issued by or on behalf of achievement district schools. An achievement district school must submit an application as outlined and the Board must meet regularly to evaluate applications and approve or reject submitted applications. The Treasurer must, if an application is approved by the Board, use Arizona Public School Credit Enhancement Fund monies to make payments of principal or interest on guaranteed financing. If a school does not expect to make a timely payment of principal or interest on its guaranteed financing, the school must provide notification as specified and the Treasurer must pay the amount. The school must reimburse any payment made by the Treasurer for the timely payment as prescribed (A.R.S. Title 41, Chapter 56, Article 11).
There is no anticipated fiscal impact to the state General Fund associated with this legislation.
Provisions
Arizona Credit Enhancement Eligibility Board
1. Establishes the Board.
2. Determines that the Board is a body corporate and politic that consists of:
a) the Governor, or the Governor's designee;
b) the Treasurer, or the Treasurer's designee; and
c) the Superintendent of Public Instruction (SPI), or the SPI's designee.
3. Specifies that Board members are:
a) not eligible to receive compensation for services performed;
b) public officers with respect to Board service; and
c) subject to prescribed conflict of interest requirements.
4. Determines that the Board is a public body and subject to public meeting and proceedings requirements.
5. Requires ADE to provide staff to support the Board and the administration of the Program.
6. Allows the Board to:
a) sue and be sued;
b) adopt a corporate seal;
c) contract; and
d) take any other action necessary or appropriate to carry out Program requirements or that may be deemed necessary or proper to protect Fund monies.
Arizona Credit Enhancement Program and Fund
7. Establishes the Program to assist school districts and charter schools in obtaining more favorable financing terms by guaranteeing the payment of principal and interest on guaranteed financing issued by or on behalf of participating schools.
8. Requires the Board to administer the Program and adopt rules governing the operation of the Program.
9. Establishes the Fund.
10. Requires the Treasurer to:
a) administer the Fund and disburse monies as outlined;
b) separately account for monies received from each Fund source; and
c) invest and divest Fund monies.
11. Credits monies earned from Treasurer investments to the Fund.
12. Allows the Treasurer to establish accounts and subaccounts as necessary.
13. Allows a school district or charter school to apply to the Board, on the form and in the manner prescribed by the Board, to participate in the Program.
14. Directs the Program application to require:
a) for charter schools, verification that the charter school:
i. is assigned an annual achievement profile letter grade of A or B;
ii. has proven instructional strategies and curricula that demonstrate high academic outcomes;
iii. has a verifiable enrollment demand, including a waiting list of prospective students;
iv. has a sound financial plan that contemplates operational costs and future enrollment growth;
v. has shown a commitment to provide technical assistance, including business services, curriculum development and teacher training, to an underperforming public school;
vi. is rated at least "BB" or a comparable rating by a nationally recognized bond rating agency;
vii. has a charter holder with experience in operating and managing charter schools with high academic outcomes for at least two consecutive years; and
viii. acknowledges that the guaranteed financing will require a debt service reserve fund equal to at least the maximum amount allowed by federal law for the issuance of tax-exempt obligations, require written notice if the charter school withdraws from the debt service reserve fund within 10 days after the withdrawal and meet any other criteria established by the Board;
b) for school districts, verification that the school district meets any Board-established criteria;
c) evidence of financial stability for at least two years, based on financial metrics determined by the Board, including:
i. days' cash on hand;
ii. the ratio of operating revenues to debt service; and
iii. the ratio of financed property value to dent secured by the property;
d) information about the proposed guaranteed financing, including:
i. the relevant timeline;
ii. sources and uses of monies;
iii. dates and estimated values of principal and interest payments by payment date;
iv. plans for funding reserves; and
v. expected ratings, if any;
e) identification of any property that will be used as collateral for the proposed guaranteed financing; and
f) any other information that the Board request or that is relevant to the application.
15. Requires the Board to:
a) meet regularly to evaluate and approve or deny each application that the Board receives; and
b) notify each applicant within 10 business days after the Board approves or denies the application.
16. Authorizes the Board to approve an application if:
a) approval of the application will not cause the Program leverage ratio to exceed the ratio of three and one-half to one; and
b) for each application submitted by a charter school, the proposed guaranteed financing is rated at least "BB" or a comparable rating by a nationally recognized bond rating agency.
17. Requires the Board, if the Board approves an application, to enter into a written agreement with the participating school that provides the essential terms and conditions for the guaranteed financing, including the remedies available to the Board if the participating school defaults on the guaranteed financing payments or other Program obligations.
18. Directs the Treasurer to use Fund monies to pay the principal or interest payments on guaranteed financing or, as directed by the Board, to pay for:
a) the Board's operational or administrative expenses, including fees for advisers, rating agencies and professionals retained by the Board;
b) municipal bond insurance premiums for insurance to guarantee the timely payment of all or a portion of any guaranteed financing; and
c) principal and interest payments for Program funding obligations.
19. Determines that Fund monies may only be used for:
a) guaranteeing or making principal and interest payments for guaranteed financings;
b) Program expenses; and
c) the Board's expenses.
20. Specifies that the Fund consists of monies from:
a) Program participation fees;
b) reimbursements from participating schools;
c) the proceeds of Program funding obligations issued by the Board;
d) gifts, grants and donations received from any public or private source to carry out the Program;
e) interest earnings and investment income earned on Fund monies;
f) monies transferred to the Fund from the Permanent State School Fund; and
g) any other monies distributed, paid or deposited in the Fund by law, including monies received pursuant to a contract that is related to a guaranteed financing.
21. Requires, if there are insufficient Fund monies for Program expenses, the Treasurer to transfer monies from the Permanent State School Fund to the Fund in the amount necessary to fund Program expenses.
22. Requires each participating school to pay an annual Program participation fee until the guaranteed financing is fully satisfied.
23. Determines that Program participation fees are an annual amount determined by the Board that the participating school pays to the Treasurer to deposit in the Fund.
24. Specifies that, unless otherwise provided by the Board, the Program participation fee must be paid in equal amounts on the same date that interest is due and payable to investors under the debt obligation issued by or on behalf of the participating school.
25. Requires a participating school, if the participating school cannot timely pay principal or interest, or both, of guaranteed financing, to notify the Board and Treasurer in writing at least five days before the payment is due.
26. Requires the Treasurer to distribute Fund monies to a participating school that provides written notice of untimely payment of guaranteed financing by the second business day after receiving the written notice.
27. Specifies that Fund monies distributed to a participating school that provides written notice of untimely payment of guaranteed financing may be used only to pay the principal or interest, or both, of the guaranteed financing.
28. Requires a participating school that receives Fund monies for untimely payment of guaranteed financing to reimburse the Program in an amount equal to the amount of Fund monies received plus interest at a rate that is 100 basis points higher than the true interest rate on the guaranteed financing, as determined by the Board.
29. Requires a participating school, unless otherwise provided by the Board, to reimburse the Program by paying equal installments to the Treasurer every month for one year.
30. Specifies that, after one year, any monies that a participating school must reimburse to the Program are a legal obligation of the participating school and the participating school must satisfy the obligation using any monies legally available to the participating school.
31. Specifies that Fund monies are subject to legislative appropriation and exempt from lapsing.
32. Requires Fund monies and assets to be held and disbursed separately from all other monies or assets of the state or of any political subdivision of the state.
Reporting Requirements
33. Requires the Division, in consultation with the Board and within 30 days after the last day of each calendar quarter, to report to the Speaker of the House of Representatives, the President of the Senate, the Director of the Joint Legislative Budget Committee and the Director of the Governor's Office of Strategic Planning and Budgeting.
34. Requires the quarterly Program report to include:
a) a list of all outstanding guaranteed financings, including, for each guaranteed financing:
i. the name of the participating school that is associated with the guaranteed financing;
ii. the date that the guaranteed financing was issued;
iii. the original value of the guaranteed financing, including principal and expected interest;
iv. the interest rate;
v. the term length;
vi. the credit rating;
vii. the outstanding principal and interest for the current fiscal year;
viii. the current outstanding principal of the guaranteed financing; and
ix. the purpose for which the debt obligation for each guaranteed financing was issued, including whether the debt obligation was issued to construct new capital facilities, renovate existing capital facilities or refinance existing debt obligations;
b) a list of all guaranteed financings for which the Treasurer distributed Fund monies to a participating school that provides written notice of untimely payment of guaranteed financing during the previous quarter, including the required reimbursement amount and any default by a participating school;
c) the current balance of the Fund; and
d) the current Program leverage ratio.
Miscellaneous
35. Defines terms.
36. Becomes effective on the general effective date.
Prepared by Senate Research
February 12, 2024
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