Proposed Student Housing Details Under Consideration by Legislature

As part of the Governor’s May Revision update for the FY 2024-25 budget, the Department of Finance recently released draft trailer bill language to implement the state lease revenue bond financing program for the Higher Education Student Housing Grant Program. Legislative staff have indicated that they plan to adopt “placeholder trailer bill language” as part of their budget package this week. This is a largely symbolic action that will allow policymakers to continue working on the details in the coming days and weeks.

Thirteen community college student housing projects are proposed to be financed by the state lease revenue bond program. Nine of these projects received a General Fund appropriation in the 2022 Budget Act, and four received authorization to proceed under the new state lease revenue bond program in the 2023 Budget Act. Additionally, three projects were identified as not fitting within the state lease revenue bond approach, and will instead utilize General Fund dollars from the 2023 Budget Act (Santa Rosa Junior College, Napa Valley College, and Imperial Valley College). For three additional intersegmental projects, UC will issue the bonds for the full project cost (Cabrillo College/UC Santa Cruz, Riverside City College/UC Riverside, Merced College/UC Merced).

Please click here for the full text of the proposed trailer bill to implement the state lease revenue bond program. This proposal was developed by the Department of Finance and the Administration, and the Legislature is now reviewing the language.

Additionally, the Department of Finance provided the following overview of the proposed state lease revenue bond program at a recent Assembly Budget Subcommittee #3 on Education Finance hearing:

• The proposed state lease revenue bond program would shift the financing from General Fund support to bond financing for the college projects.
• The state lease revenue bond program will necessitate a project construction delivery agreement between the State Public Works Board (SPWB), the Chancellor’s Office, and the community college district. The college will grant a ground lease and easements to the Chancellor’s Office.
• Once the housing project is completed, the SPWB will lease the site and project from the Chancellor’s Office. The SPWB will lease back to the Chancellor’s Office, and the Chancellor’s Office will sublease it to the college. Lease payments made by the Chancellor’s Office (under the SPWB lease to the Chancellor’s Office) will secure the SPWB bonds.
• Before issuing the bonds, the SPWB will obtain interim financing for the projects. Any projects that received a funding allocation in the 2022 Budget Act will use that allocation until the SPWB can obtain interim financing, in order to cover the project’s cash flow requirements.
• Colleges will return unused funds from the 2022 allocation plus funds from the interim financing to cover the Education Code Section 17201 obligation. (This is the primary section of existing law that governs the Higher Education Student Housing Grant Program.)

While complex, this proposal is consistent with how former state lease revenue bond programs have operated. As such, CCFC believes this structure should work for most if not all of the student housing projects that are proposed for conversion to the state lease revenue bond program. However, this financing framework does not appear to be included in the proposed trailer bill language. As such, CCFC is requesting for the financing structure to be added to the trailer bill language or other written documentation, such as a template of the state/college agreement.

Here are some of CCFC’s initial thoughts on the proposed trailer bill language:

• Deed restriction on affordability – The trailer bill requires a deed restriction on the property to enforce affordability restrictions for the life of the facility. These affordability restrictions are contained in the existing SB 169 statute. CCFC has asked if it is possible to limit this deed restriction to the term of the state lease revenue bond repayment, rather than indefinitely, or to remove the deed restriction entirely and instead include the affordability restriction in the state-college agreement. While the affordability requirements would still exist in statute for the life of the facility, including them in the deed restriction could ultimately limit the potential flexible use of the facility to meet the needs of communities 50-plus years in the future.
• Division of the State Architect (DSA) and State Fire Marshal review – The trailer bill appears to confirm that plan review by DSA is permissive (i.e. it is optional), in alignment with AB 358 (chaptered in 2023). However, it specifies that State Fire Marshal review is required.
• Scope adjustments – The trailer bill allows the SPWB to approve a reduction in a project’s bed count by up to 10%. Scope reductions in excess of 10% shall be reported by the SPWB to the Joint Legislative Budget Committee. This is a great recognition of the cost increase that colleges have experienced since submitting their initial applications. Given that we have seen construction cost increases of approximately 20% over 2022 and 2023 (after most of the applications were submitted), CCFC has asked to adjust the Budget Committee reporting requirement to scope changes in excess of 20% of the project’s beds.
• Funding adjustments – The trailer bill gives the SPWB the ability to pay for costs in excess of the statutorily-identified project cost amount, as long as the total program costs don’t exceed the total bond authorization amount of $804,725,000. This appears to provide a mechanism to target up to $81.3 million in additional funding to mitigate cost escalation for individual projects.
• Non-LRB projects – It appears that the three projects that are not proposed to convert to state lease revenue bond financing (Napa, Santa Rosa, Imperial Valley) would be funded by the 2023 housing support funding allocation, which is revised to $50.5 million General Fund in the trailer bill language (this is the exact amount of those three projects). CCFC has indicated that it may be helpful to include language to clarify that those three projects are funded by the General Fund allocation and not subject to the state lease revenue bond program.

Next Steps

The Legislature is poised to adopt their own version of the budget in the coming days. This sets up the conditions for final negotiations between the Legislature and the Governor, working to adopt a final budget for FY 2024-25 by the constitutional deadline of June 15. Work may continue after that date to refine details of the budget.

Rebekah Kalleen
CCFC Executive Director