S&P - Public Finance Criteria (2007). - The Global Clearinghouse

State Credit Enhancement Programsfiduciary capacity to promptly notify that state of alocality’s failure to make the required payment.California Health Facility ConstructionLoan Insurance Program (‘A+’)Governing statutes: The program began in 1969and is managed by the Office of Statewide HealthPlanning & Development. The rating moves in conjunctionwith the state rating.Eligibility requirements: The program is open tohealth care institutions participating in theCalifornia Health Facility Construction LoanInsurance Program.Program provisions: The bonds are guaranteedby the insurance fund but the ultimate backing forthe loans is the full faith and credit of the state.Thus, Standard & Poor’s assigns the state’s GO ratingto participants in the California Health FacilityConstruction Loan Insurance Program. The HealthFacility Construction Loan Insurance fund(HFCLIF) is funded by a one-time fee, not in excessof 3% of the principal and interest payable over thelife of the loan. These reserves, along with theHFCLIF, are the only financial resources availableto make up payment deficiencies in the portfolioprior to any state involvement. In the event of adefault, the state can continue to make regularlyscheduled debt service payments or issue debentureshaving a total face value of and bearing interest atthe rate of the respective bonds that they replace.Five days before an interest payment date, thetrustee must notify the office of any deficiencies.The office must make up any shortfall three daysbefore the payment date—first by drawing from thedebt service reserve fund, and then, from theConstruction Loan Insurance Fund. Since the inceptionof the program, there has been one default thatwas cured by payment from the Construction LoanInsurance Fund.California Infrastructure BankSchool Aid Intercept Program (‘A+’)Governing statutes: The program began in 2005,and is managed by the state’s California InfrastructureBank. The interception of state aid, if necessary,is authorized under state law AB 1554, asamended by AB 1303. The statutory provisionsintercept state general fund money distributed tolocal school districts under Proposition 98, as wellas various forms of state categorical aid.Proposition 98 is a voter initiative, passed in 1988,that amended the state constitution to require,among other provisions, that the percentage of stategeneral fund revenues devoted to K-14 schoolspending be no less than the prior year, unless overriddenby a two-thirds vote of the state legislature.Proposition 98 school aid constitutes a continuingappropriation, even in the event of a late statebudget. State statutory law prohibits school districtsparticipating in the program from filing for federalbankruptcy protection. This program rating movesin conjunction with the state.Eligibility requirements: Only school districtsthat have received emergency state loans to remainin operation participate in the program. The stateuses the intercept program to refinance loans madeto the failing districts. Schools receiving emergencyloans must consent to state oversight until the loansare repaid.Program provisions: Each bond issue under theprogram is separately secured under a separatelease and bond indenture. Each lease requires therespective school district to make lease paymentsequal to debt service, plus operating costs for itsleased asset, usually school buildings and land.When school districts participate in the program,they provide the state controller with a schedule offuture lease payments, and the state controllerintercepts state school aid in an amount equal todebt service and remits it directly to the bondtrustee, before providing the balance of state aid tothe individual school district.Proposition 98 state aid to school districts isapportioned under a statutory formula that sets arevenue limit per pupil for each district, and backfillsstate aid to the extent local property tax revenuedoes not achieve the revenue limit. Revenuelimit state aid is distributed in seven equal monthlyinstallments from July through January in the lastthree to five business days of each month. It isanticipated that each school district’s rental payments,under its individual lease, will be due thelast day of July, August, September, October,November, and December. The program ratingassumes debt service will be structured to be paidFebruary 15 and August 15, consistent with existingdebt issued under this program. Under the statestatutes, the state controller transfers pledged leaserental payments to the trustee prior to transferringother state aid funds to a participating district.Rental deficiencies from interceptable state aid, ifany, are rolled over into the next month. Schooldistricts are still required to make pledged leasepayments from their general fund if interceptablestate aid is not sufficient.Lease payments, and hence interceptable stateaid, may be abated under the respective school districtleases to the extent there is damage or destructionto the leased assets. To cover for this risk,participating school district leases will need to havepledged leased assets equal at least to the par valueof the bonds and require under their leases casualtyinsurance, excluding earthquake insurance, equal tothe replacement value of leased structures. Due towww.standardandpoors.com89