Volume I, No. 9

January 15, 2009

State Allocation Board Approves Emergency Regulations

By Ernest Silva -- esilva@m-w-h.com

The State Allocation Board (SAB) approved proposed regulations to create an “Inactive Apportionment” to temporarily suspend the 18-month fund release rules for projects that have: (1) received an apportionment before December 17, 2008, (2) have not received a fund release; and (3) for which the 18-month deadline will expire on or after December 17, 2008. In addition, the SAB approved issuance of a letter cautiously allowing financial hardship districts to utilize bridge financing. 

The discussion itself was enlightening for those trying to figure out where the State is headed.  SAB Chairman, Tom Sheehy, took time to lay out what the Pooled Money Investment Board (PMIB) is, and what shape the Pooled Money Investment Account (PMIA) is in.  In short, Sheehy reported that the PMIA balance today is negative $12 billion dollars (- $12 billion) and is expected to be negative $26 billion (-$26 billion) by the end of January.  Again Sheehy underscored that the PMIA priorities are schools, debt service and special funds.  A number of times Mr. Sheehy reminded the SAB and the audience that this is an unprecedented financial crisis and there is no solution short of rebalancing the current budget and adopting a balanced 2009-2010 budget.

PMIB Exemptions

In addition, there was a detailed discussion of the PMIB exemptions. Assembly Member Brownley specifically asked about the Department of Finance’s (DOF) December 18 Budget Letter that explained some funding would be held for projects with “unacceptable legal liability,” not exclusively education infrastructure.  Sheehy and DOF staff indicated that they will review all program areas and recommend which projects should receive priorities.  Examples provided were: unpaid bills of completed work, staff salaries, health, and safety issues for schools or highways.  This list will be presented to the PMIB by Friday at its January 16th meeting.  DOF is currently surveying school districts to understand their circumstances.

The Office of Public School Construction (OPSC) has provided a list to the DOF of about $31 million in school projects to be considered for exemption because of “health and safety” issues.   Superintendent O’Connell’s representative, Kathleen Moore, suggested that those recommendations should go to the SAB and requested that all future school exemptions be shared with the SAB. Assembly Member Torlakson went as far as suggesting that the SAB should look at future exemptions to have a chance to prioritize with their school partners. There was no formal action taken on this matter.

The Chair also discussed what the PMIB will do at its January 16th meeting.  Mr. Sheehy explained that there is a 12-page list of AB 55 loans that are due. The PMIB will meet to decide on exemptions. The Treasurer will provide an update on access to capital markets.  The Controller will update the PMIB on cash management. Then the big decision to either continue the freeze or approve some level of funding will be made. 

As to the January 28th SAB meeting, Ms. Moore suggested that OPSC bring projects forward for action on exemptions. Sheehy argued strongly that any action on the School Facility Program should wait until after February 1st. At multiple times during the SAB meeting he described the level of budget crisis and the need for immediate action. He echoed the Legislative Analyst’s prediction of a “cash abyss” by summer. He mentioned that without a current year fix by February 1st the Controller would be issuing IOUs and the DOF would be preparing to eliminate exemptions. The members discussed the need for a range of options including “zero dollar apportionments” or the creation of an unfunded approval list of projects that meet all statutory and regulatory requirements for state apportionment. Sheehy committed to having OPSC create a range of options for discussion on the 28th and recognized that another emergency SAB meeting could be scheduled for action as circumstances warrant. 

Other Issues

Another issue raised by members was whether the “inactive apportionment” would affect future funding order for projects. Staff consistently said that first in, first paid would remain the rule. The importance of honoring local bond efforts was recognized by Assembly Member Torlakson. In addition to the issue of priorities, legislative members were concerned about the allocation of risk to financial hardship districts assumed in the OPSC proposals. Members indicated that they would like to continue to discuss these issues over the next few weeks.

During public testimony, Coalition for Adequate School Housing (C.A.S.H.) staff reported that the organization had done a survey which reflects that of 106 school districts responding, 22 indicated that they had apportioned projects for which Fund Releases had been requested but not received.  The total School Facility Project amount outstanding would be approximately $186 million, which does not include the many Los Angeles Unified School District projects.  OPSC responded that their data shows that approximately $1.2 billion of the $2.4 billion in apportioned projects will not have fund releases available.

Testimony from the Small School Districts' Association’s representative focused on small district’s inability to perform significant internal borrowing, which is compounded by the current budget problems.  The Association made three requests. First, that small financial hardship districts receive first priority for PMIA funds.  Second, that a reserve for these projects be established to counter any future freeze.  Third, that legislation be passed to exempt these districts from the revenue limit apportionment deferral that increases their internal borrowing problems.