December 17, 2008 Crisis Looms: State Funding of School District Construction Frozen The Pooled Money Investment Board (PMIB) met today at 10:00 am. Based upon the action taken by the Board, it is the recommendation by the Coalition for Adequate School Housing (C.A.S.H) that it is vital to districts that each critically evaluate their facility funding resources and cease entering into construction contracts or making other commitments of resources until each has an accurate picture of the impacts of today’s action by the PMIB. If a district has yet to receive anticipated funding such will probably not occur until the cash flow crisis emanating from the combination of the state budget failure and the economy is resolved, although the PMIB asked staff for further analysis of the projects impacted and further recommendations. The PMIB was polite but all business this morning. After addressing a number of items and hearing reports the Board came to an item entitled “Discussion and consideration regarding the impact of cash management requirements on approval of AB 55 loans.” Staff to the Board thereafter provided a verbal staff report closely following the written report provided to the Board. The report (see attached) identified the process for the state to authorize loans in order to fund GO bonds and commercial paper notes in order to address federal arbitrage statute and thereafter identified clearly in a succinct statement that “the combined cash demands of the general funds, the special funds and AB 55 loans cannot be met absent a resolution to the budget and restoration of states ability to access the bond funds.” Staff went on to comment that the existing situation compels the Board to conserve on cash expenditures in order to meet required high priority demands such as schools (general fund), debt service and special funds. At that point the staff began to articulate recommendations for the Board’s action (see page 3 of the attached report). The board heard public testimony from C.A.S.H., a contractor representative, a work force representative, a community college representative and Kathleen Moore, Director of the School Facilities Division of the California Department of Education. C.A.S.H. was the first to speak under public comment recognizing the dire nature of the state’s cash flow crisis on school construction projects, indicating to the board that we are working to alert districts to the crisis and to admonish them to analyze their particular circumstances with regard to projects that are at the various stages of planning or construction. We conveyed to the Board that consideration be given for school projects under contract where districts may be compromised by potential default and in certain financial hardship situations. It was shared with the Board that C.A.S.H. brought this issue of the cash flow crisis to the SAB at its meeting in Anaheim on Wednesday, December 10, 2008. We indicated further that we had requested that the SAB work with us to try to alleviate the impacts on districts within the SFP regarding the chain reaction of the state’s crisis on districts with construction projects underway. The Chair, State Treasurer Bill Lockyer, asked that we compile information that will assist in understanding the extent of the problem for schools and share it with them as soon as possible. It was also shared that a review is being conducted of the time limits within the SFP for purposes of identifying time constraints in statute or regulation that may befoul a district that remains unfunded in the wake of the state level crisis. The contractor and work force representatives each addressed the Board expressing deep concern that in a worsening economy a virtual shut down of public works projects will deepen the recession and bring the construction industry to its knees, in that public works are the only viable projects in the market at this time. The community college representative comments reflected those made by C.A.S.H. about project impacts as did a representative of the state judicial system charged with building new courthouses. Kathleen Moore’s testimony was compelling in linking contracts for construction for which state funding fails to be provided with a school district’s general fund solvency, the latter being an issue that CDE is responsible for monitoring and addressing. The board, with clear reluctance, took the actions recommended, removing only Item 1 for consideration at a meeting that would take place in early January and amended Item 2 at the Treasurer’s request that a convening of the next meeting of the Board be within the first two weeks of January rather than the first week in order for the staff work group addressing this matter’s overall impact to have more time for analysis. Mr. Lockyer, however, made a sobering comment that it is his belief that 90% of public works projects under construction throughout the state were at risk of default and litigation. The implications of the Board’s action are most serious. C.A.S.H. recommends that district superintendents and boards immediately cease making financial commitments. It is not possible at this time to know which districts will be impacted. We are preparing a review list for use in assessing district circumstances and making critical decisions. That review list will be sent out by the end of the week. Tom Duffy