Arizona Public School Credit Enhancement Program
Funding Public Schools’ Waitlists
Governor Ducey is committed to broadening access to in-demand high-performing schools for all of Arizona’s K-12 students by helping Arizona’s best public schools replicate and expand. One barrier for expansion is the cost of capital construction. The Arizona Public School Credit Enhancement Program improves the school’s credit rating on bonds, enabling financing at lower interest rates resulting in lower borrowing costs.
Click here to see enabling legislation.
Click here to download powerpoint overview of Credit Enhancement Program. This presentation will be available until December 22, 2016.
HOW THE PROGRAM WORKS
Public schools commonly issue bonds to finance school construction. The interest rates they pay depend on investors’ assessments of the risks associated with the bonds and vary from school to school.
The Arizona Public School Credit Enhancement Program (Program) will reduce borrowing costs by making bonds less risky for investors by ensuring that bonds will be repaid even if the school is not able to make a payment. The Program creates an “insurance fund” for the purpose of repaying participating public schools’ principal and interest payments on debt-financing in the event a school defaults. The State of Arizona is not liable for any school default nor does it have any impact to the State’s credit rating.
The Program is funded at a fixed and limited amount of $100 million -- derived from two sources: a) $20 million previously appropriated for this purpose and b) $80 million from the state treasurer's pool of investments. It is expected that the $100 million in the Fund will enhance approximately $350 million of bonds issued by public schools’ participating in this program.
The Public School Credit Enhancement Program has received preliminary indication from Standard & Poor’s that bonds issued by eligible schools would be assigned a credit rating of “AA“ rather than whatever rating the bonds would secure if they were not in the Program. The savings in interest costs could either serve as a benefit to the taxpayers or be reallocated for school instructional or operational expenses, such as classroom-related expenses or soft capital.
Eligible schools who wish to finance new construction or refinance existing school construction debt must submit an application to the Credit Enhancement Eligibility Board. The Credit Enhancement Eligibility Board will review applications and approve school program participants. The Governor’s Office of Education will provide administrative support.
SCHOOL ELIGIBILITY FOR THE ACHIEVEMENT DISTRICT
To be eligible to participate in the credit enhancement program, schools must be admitted as a member school in the Achievement District. The eligibility criteria include:
- The assignment of a letter grade of A, or an equivalent successor classification, pursuant to section 15-241.
- Proven instructional strategies and curricula that demonstrate high academic outcomes.
- Verifiable enrollment demand, including the placement of prospective pupils on waiting lists.
- A sound financial plan that contemplates operational costs and future enrollment growth.
- A commitment to provide technical assistance, including business services, curriculum development and teacher training, to an underperforming school in the state.
PROGRAM ELIGIBILITY AND REQUIREMENTS
The Credit Enhancement Eligibility Board (Board) will be comprised of the Governor, Treasurer and the Director of the Arizona Department of Administration. The decision to accept or reject a school’s application for the program will be made by the Board. The application form and process will be designed by the Board and based on general guidelines and requirements established in law. The Board will use various metrics to evaluate applicants, including:
- Membership in the Achievement District (see above).
- Applicant’s financial position, including evaluation of financial metrics such as day’s cash on hand, debt service ratio, etc.
- Terms of the proposed financing.
- Whether the financing has a fully funded debt service reserve fund (charter schools are required to have a debt service reserve fund to be able to sell bonds)
- Value of property pledged as collateral.
- Impact of the proposed financing on the overall enhancement fund leverage ratio (no more than 25 percent of enhanced financings in aggregate may have an underlying credit quality of less than BB-)
Charter schools are required to pay an annual participation fee equal to or at least .25% of the school’s total outstanding principal that is enhanced through the Program. Participation fees will be set by the Board.
TIMELINE FOR IMPLEMENTATION
(Subject to change)
June - October 2016 Development of Program Rules and Documentation (application
forms, technical assistance documents)
November 2016 Credit Enhancement Board Meeting to initiate rulemaking and
collect public comment for 30 days
December 2016 Revision of Program Rules and Documentation (based on
submitted public comment)
February 7, 2017 Credit Enhancement Board Meeting to adopt final rules
March 13, 2017 Application Period Begins (Online Submissions Only)