Ariz. Admin. Code § R7-8-201 - Arizona Public School Credit Enhancement Program

A. Authority. This rule is adopted pursuant to A.R.S. § 15-2153(B)(9).

B. Purpose. The purpose of this rule is to implement the legislative intent, as expressed in Chapter 129, Laws of 2016, to administer the Arizona Public School Credit Enhancement Program.

C. Scope.

1. The scope of this Rule is the scope of A.R.S. Title 15, chapter 16, article 11 as it relates to Arizona public school credit enhancement. This rule is applicable to any district public school or charter public school operating in the State of Arizona that applies for a Guaranteed Financing from the Board.

2. The statutory authority for this rule, A.R.S. Title 15, chapter 16, article 11, does not provide for exemptions therefrom for person or agents of persons subject thereto, and no such exemption is intended or should be presumed by this rule or any provision thereof.

D. Repeal. This rule does not repeal any known prior rule, memorandum, bulletin, directive or opinion on this subject matter. If such prior rule or directive exists and is in conflict herewith, the same is repealed hereby.

E. Definitions

1. "Achievement District School" has the meaning of A.R.S. § 15-2151(1).

2. "Applicant" means an Achievement District School that has submitted an Application to the Board, either directly or through its charter holder or operator or school district.

3. "Application" means an application for a Guaranteed Financing submitted by an Achievement District School to the Board.

4. "Board" has the meaning of A.R.S. § 15-2151(2).

5. "Guaranteed Financing" has the meaning of A.R.S. § 15-2151(4).

6. "School" means a district public school or a charter public school that qualifies as a "school" pursuant to section 15-101(22).

F. Arizona Public School Credit Enhancement - Application

1. An Achievement District School seeking a Guaranteed Financing, pursuant to A.R.S. § 15-2155, shall file an Application with the Board on Form B, which may be modified from time to time by the Board. In the alternative, a School may apply to become an Achievement District School and for a Guaranteed Financing contemporaneously by filing an Application with the Board on Form C. Applications may be submitted either in paper format or electronically through the Governor's Office of Education website.

2. Applications failing to comply with the requirements of A.R.S. § 15-2155 shall be denied without prejudice to the subsequent filing by such School of an application complying with such requirements.

3. The accuracy and completeness of information in an Application shall be certified to by the Chief Executive Officer or Chief Financial Officer of the School. Electronic Applications shall include a section for the provision of an electronic signature.

G. Arizona Public School Credit Enhancement - Application Criteria. In completing Applications, Applicants must explain or provide the following information:

1. Unless the Application is a combined Application, for proof as approval as an Achievement District School, certification that the information previously submitted to the Board in the Applicant's Achievement District School application pursuant to A.R.S. § 15-2155(B)(1) is still accurate in all respects.

2. For exhibited sustainability of the Achievement District School's financial operations, in addition to the items required by A.R.S. § 15-2155(B)(2), the following documents:

a. At least the two immediate past years' audited financial statements. The audits must include an unqualified opinion and may not identify any "going concern" issues. If an audit has not been completed for the most recent year, internally generated financial statements, including at least a statement of revenues and expenditures or a balance sheet by line-item or category totals that align with the submitted financial statements must be provided. The Board may request an additional year of audited financials

b. The School's current year budget with line items or category totals that align with the submitted audited financial statements. For applications made after the first quarter of a fiscal year, a current balance sheet and year-to-date revenues and expenditures compared to budget by budget category.

c. Additionally, for charter public schools:

i. The Applicant must include a listing of the names, positions and experience of the charter public school's corporate board of directors and its senior staff.

ii. The Applicant must include information on any material or substantial lawsuits, threatened or potential litigation brought by any outside party, either currently or in the past three years, or any failure to have its charter re-approved, if any.

iii. The Applicant must include a projection of revenues, expenditures and net cash flows for the ensuing three-year period.

iv. The Applicant shall also provide student enrollment statistics by grade for each grade level served, for the shorter of either the period the School has been in operation or for the most recent five years, for the current year, and projected student enrollment for the next five years.

v. The Applicant must demonstrate sufficient liquidity as evidenced by providing a statement showing the School has either:

a. At least 45 days unrestricted cash on hand based on the most recently completed fiscal year and for each of the years under the projections provided; or

b. At least 30 days cash on hand based on the most recently completed fiscal year, a net increase in cash and cash equivalents for such year compared to the prior fiscal year, and that its days cash on hand is projected to increase to 45 days cash on hand within two fiscal years based on the provided projections.

vi. If the Applicant has outstanding debt that is rated by a municipal bond rating agency, documentation showing the rating.

vii. A list of all of its current outstanding debts, accompanied by a statement that the Applicant is not currently in default on any outstanding debt.

3. For a charter Achievement District School's demonstrated experience in operating and managing charter public schools with high academic outcomes for at least two consecutive years, as required by A.R.S. § 15-2155(B)(3), a narrative history covering at least the two most recent years of the Applicant's historical academic outcomes and operations.

4. For information regarding the proposed Guaranteed Financing, the following information:

a. The planned timing of such financing, a schedule of estimated sources and uses of funds for such financing, the expected principal and interest payment dates and amounts by payment date for such financing, and plans for funding reserves, if any.

b. A description of what the Guaranteed Financing will be used for, a description of how the Guaranteed Financing will reduce or impact the Applicant's enrollment demand, whether the Guaranteed Financing will be a refinance of existing debt obligations, and if so, the estimated savings of the refinance and how the Applicant proposes to spend the monies saved as a result of the refinance.

5. For identification of any property being pledged as collateral, as required by A.R.S. § 15-2155(B)(6), the Applicant must disclose whether any property to be financed and secured by a Guaranteed Financing will be owned or leased by the Applicant or, for charter public schools, the Applicant or its charter holder. Real property being pledged as collateral shall be identified by physical address, and a copy of an independent appraisal of the property that reflects current valuation within 90 days of submission, along with a copy of the lease for any leased collateral real property, must be provided to the Board not less than 30 calendar days and not more than 60 calendar days before the issuance of the Guaranteed Financing.

6. Pursuant to A.R.S. § 15-2155(B)(7), information concerning the Applicant's teacher turnover rate and the results from the immediate prior two years of any parent and/or teacher satisfaction surveys conducted by the Applicant. For charter public schools, the Applicant shall also disclose whether any personal benefit will inure to any employee of the School or school operator or an immediate relative, including a parent, spouse, sibling or child, of any such employee or operator.

H. Arizona Public School Credit Enhancement - Required Financial Provisions for Guaranteed Financings. In order for the Board to approve a Guaranteed Financing, the proposed project must meet the following terms and requirements:

1. The debt service on the Guaranteed Financing may include interest-only payments for no more than two fiscal years following the fiscal year of issuance and must include level annual total principal and interest payments thereafter.

2. The Guaranteed Financing must be fully amortizing over a period not to exceed 35 years.

3. For non-general obligation, tax-supported obligations, the Guaranteed Financing must meet one of the following debt service coverage ratio requirements as estimated at the time of the Application and upon issuance of the Guaranteed Financing:

a. The ratio of the net cash flow (i.e. total revenues less operating expenses excluding debt or lease payments on land and facilities and non-cash expenses) for the most recently completed fiscal year to the maximum annual combined payments on existing debt, leases of land and facilities and the Guaranteed Financing must be at least 110%; or

b. The ratio of the net cash flow as defined above for the most recently completed fiscal year to the combined payments on existing debt and leases, but excluding the Guaranteed Financing, must be at least 110%, and the ratio of projected net cash flow as defined above for each of the subsequent five fiscal years to the combined maximum annual payments on existing debt, leases of land and facilities, and the Guaranteed Financing must be at least 110%. For this requirement, the projections must be accompanied by a report from an independent certified public accountant or a financial consultant with demonstrated expertise in public charter school financings confirming that the accountant or consultant has reviewed the Applicant's projections and deems the projections to be fair and reasonable.

4. Tax Base/Collections - District Public Schools

a. For district public school Applicants using a district's voted general obligation bond authorization for a Guaranteed Financing, property tax collections for the three most recent fiscal years must average 90% or more.

b. For district public school Applicants that will not use the property tax base for a Guaranteed Financing, the Applicant must identify the authorized source of payment for the Guaranteed Financing and provide evidence of adequate ongoing dedicated or pledged revenues and budget capacity to service the minimum annual payments to be due under the Guaranteed Financing and any other parity obligations at 110% of the annual payments due.

5. Guaranteed Financings Secured by Real Property

a. If the Guaranteed Financing will involve property or facilities that will be pledged as collateral for the Guaranteed Financing, the Applicant must provide an independent appraisal to the Board dated not less than 30 calendar days and not more than 60 calendar days before the issuance of the Guaranteed Financing indicating that the "as built" value of the pledged property is equal to or greater than the principal amount of the Guaranteed Financing, net of reserves securing the Guaranteed Financing and transaction costs for the Guaranteed Financing. At the time of Application, the Applicant shall certify that it reasonably believes this requirement will be met at the time of the Guaranteed Financing. For Guaranteed Financings that will refinance prior existing debt obligations of the Applicant, the Applicant may grant a security interest in the pledged property to secure debt obligations under the related financing that are not guaranteed by the Fund, provided that such security interest is subordinate to the security interest granted by the Applicant in such pledged property to secure the Guaranteed Financing.

b. The Applicant must identify or describe the ownership status of the property/facilities that will be funded by the Guaranteed Financing, including whether the property will be owned in fee simple, will be leased, or will be subject to some other control or ownership agreement.

c. For property being leased, the Applicant must provide a copy of the lease and identify the term, renewal options, assignment rights and the payment schedule.

d. For a Guaranteed Financing that will require construction of new facilities or major renovations to existing facilities of $1,000,000.00 or more, the Applicant must acknowledge that the Guaranteed Financing is contingent upon execution of a guaranteed maximum price contract or other acceptable mechanism ensuring project completion, along with a requirement for the contractor to provide a completion bond or its equivalent.

6. Refinancing Guaranteed Financings - for Guaranteed Financings that will refinance a prior existing debt obligation for which the originally pledged property will be pledged as collateral for the Guaranteed Financing, payments on the Guaranteed Financing may not be greater in any fiscal year than the scheduled payments on the prior obligations, and the savings to be generated on a present value basis must equal or exceed 5% of the principal amount of the refinanced obligations.

I. Arizona Public School Credit Enhancement - Evaluation of Applications

1. Applications shall be reviewed to confirm that all required information has been received and the Application is administratively complete. Within 30 days of submission of an Application, the Applicant will be notified of any deficiencies in the Application.

2. Once an Application is determined to be administratively complete, the Board shall evaluate each Application and either approve or deny the Application within 60 days of this determination.

3. In deciding whether to approve or deny an Application, the Board may give preference to:

a. Proposed Guaranteed Financings that fund projects in low socioeconomic areas or to serve low socioeconomic student populations;

b. Proposed Guaranteed Financings based on the geographic distribution of Guaranteed Financings throughout the state;

c. Proposed Guaranteed Financings that fund new classrooms or facilities to meet established enrollment demand; and

d. Proposed Guaranteed Financings that will maintain the overall program requirements imposed by A.R.S. § 15-2155(C).

4. The Board shall meet no less than once every other month to decide upon Applications and for the conduct of any and all other business before the Board. The Board is authorized to call additional meetings in order to evaluate Applications or conduct other business and to cancel meetings if there is no business pending before the Board.

5. Applicants shall be notified of the Board's decision to grant or deny credit enhancement to a proposed Guaranteed Financing within 10 business days of the Board's decision in writing, either by letter, facsimile or electronic mail.

J. Deadline for Issuance of Guaranteed Financing - Once the Applicant is awarded initial approval for a Guaranteed Financing, the Applicant must issue the Guaranteed Financing within 120 days of the date of the letter granting approval for the Guaranteed Financing. The initial approval for the Guaranteed Financing will expire at the end of the 120-day period. The Applicant may request an extension for an additional 60 days by submitting a written request to the Board setting forth the reasons for the requested extension, before the expiration of the initial 120-day period.

K. Arizona Public School Credit Enhancement Participation Fee - In setting participation fees pursuant to A.R.S. § 15-2155(E), the Board shall consider, among other things, the value and type of collateral being pledged, the term of the Guaranteed Financing, projected savings by the School through the Guaranteed Financing, the rating of the proposed Guaranteed Financing without regard to the credit enhancement to be provided, the overall amount of the Guaranteed Financing and whether the Achievement District School is a district public school or a charter public school. The Board may establish the participation fee as a percentage of the Guaranteed Financing or otherwise, depending on the specific terms of the Guaranteed Financing.

Notes

Ariz. Admin. Code § R7-8-201

Adopted by exempt rulemaking at 23 A.A.R. 661, effective 3/1/2017.