BILL ANALYSIS Ó
AB 182
Page 1
Date of Hearing: March 20, 2013
ASSEMBLY COMMITTEE ON EDUCATION
Joan Buchanan, Chair
AB 182 (Buchanan and Hueso) - As Amended: March 12, 2013
SUBJECT : Bonds: school districts and community college
districts
SUMMARY : Deletes the authority for school districts and
community college districts to issue general obligation (GO)
bonds under the Government Code and establishes additional
parameters for GO bond issuances under the Education Code.
Specifically, this bill :
1)Specifies that the ratio of total debt service to principal
for each bond series shall not exceed four to one.
2)Specifies that a capital appreciation bond (CAB) maturing more
than 10 years after its date of issuance shall be subject to
mandatory tender for purchase or redemption before its fixed
maturity date, with or without a premium, at any time at the
option of the issuer, or from time to time, beginning no later
than the 10th anniversary of the date the CAB was issued.
3)Provides that if the sale of bonds includes CABs, the agenda
of the governing board meeting approving the sale shall
identify that CABs are proposed. Requires the governing board
to be presented with the following information:
a) An analysis containing the total overall cost of the
CABs.
b) A comparison to the overall cost of current interest
bonds (CIBs).
c) The reason CABs are being recommended.
d) A copy of the disclosure made by the underwriter as
required by Rule G-17 adopted by the federal Municipal
Securities Rulemaking Board.
4)Strikes the authority for school districts and community
college districts to issue bonds or refunding bonds under the
Government Code.
AB 182
Page 2
EXISTING LAW : Authorizes school districts and community college
districts to issue GO bonds upon approval by voters and
establishes a process and guidelines for such issuances under
the Education Code. Authorizes any city, county, city and
county, school district, community college district, or special
district to issue GO bonds, secured by the levy of ad valorem
taxes, and establishes a process for such issuances under the
Government Code.
FISCAL EFFECT : This bill is keyed non-fiscal by the Legislative
Counsel.
COMMENTS : Background . School districts and community college
districts pay for the construction and rehabilitation of school
and community college facilities through a combination of state
education bond funds, developer fees, and local bond funds. GO
bonds must be approved by voters, who agree to an ad valorem
(per assessed value of property) tax to pay for the bonds.
Prior to 2001, passage of a local bond required a 2/3
supermajority vote. In 2000, voters approved Proposition 39,
which provided an option for approval of a local education bond
based on a 55% vote rather than a 2/3 vote. Concurrent to the
initiative, the Legislature passed AB 1908 (Lempert), Chapter
44, Statutes of 2000, that required school districts to appoint
a local bond citizens' oversight committee to oversee bond
expenditures and review the required performance and financial
audits required of a Proposition 39 bond, and imposed
limitations on bonded indebtedness and tax rates as follows:
-------------------------------------------------------------
| |Limit on |Limit on Tax Rate |
| |Bonded |per Assessed |
| |Indebtedness |Valuation |
|--------------------------+---------------+------------------|
|Elementary and High |1.25% |$30/$100,000 |
|School Districts | | |
|--------------------------+---------------+------------------|
|Unified School Districts |2.5% |$60/$100,000 |
|--------------------------+---------------+------------------|
|Community College |2.5% |$25/$100,000 |
|Districts | | |
-------------------------------------------------------------
AB 182
Page 3
Proposition 39 also requires school districts and community
college districts to identify the school facility projects that
would be funded by the bond, among other provisions.
Bond issuance . Once bonds are authorized or approved by voters,
districts can issue or sell the bonds. Bonds can be sold in
increments or in total. It is not unusual for an authorized
bond to take many years before the amount of total authority is
exhausted. The bonds can be sold through a competitive sale or
a negotiated sale. Under a competitive sale, the issuer (school
district or community college district) determines the terms of
the sale in a sealed bid and a bidder offering the lowest
interest cost is awarded the bid. In a negotiated sale, the
issuer selects an underwriter who purchases the bonds from the
issuer and then resells the bonds to investors.
Types of bonds . Current interest bonds (CIBs) are the
traditional type of bonds sold. CIBs are similar to traditional
home mortgages whereby the issuer makes interest (and principal)
payments almost immediately and on an ongoing semi-annual basis.
CABs are another form of bond (or other debt issuance). Under
a CAB, the issuer can delay payments, thereby also delaying the
need to collect tax payments for a number of years. Frequently,
although not always, CABs cannot be refinanced (callable).
Concerns with CABs. According to the authors, this bill was
introduced due to concerns about the use of CABs, the large debt
that result through CABs, and the tax burden to future tax
payers. CABs are more costly. They work by extending the term
of a bond. The longer the term, the more expensive it gets.
Since investors do not reap benefits immediately, they are
willing to purchase CABs anticipating larger returns. Even
though payments are not made immediately, interest is accrued
and compounded until maturity, at which time, the investor
receives a single payment for both interest and principal. The
total debt service (principal and interest) to principal ratio
is typically around 2 to 1 for CIBs, but can be 10 to 20 times
the principal for CABs. According to data provided by the
California Debt and Investment Advisory Commission (CDIAC), the
total debt service to principal ratio was as high as 23.4 to 1
for one school district issuance located in San Bernardino
County. The district received $283,600 in bond funds in 2010,
but will be paying a total of $6.6 million by the end of 28
years. This example represents the highest total debt service
AB 182
Page 4
to principal ratio. The majority of the CABs had lower ratios,
but compared with CIBs, were still more costly. If the amount
borrowed is large and the term of the bond is long, the overall
cost for the CAB can be massive. For example, the total debt
service to principal ratio of Poway Unified School District's
2011 CAB that has been highlighted by the media is under 10 to 1
(9.3 to 1). The large dollar amount - almost $1 billion cost to
borrow $105 million - highlight how high the cost can be for
borrowing today while paying later. Homeowners in Poway today
are getting a free ride, while homeowners living in the area
years later will be paying the almost $1 billion price tag for
facilities that will be 20- to 40-years-old.
Why use CABs ? CABs became a more popular vehicle for generating
facility revenue after the housing downturn. CABs also became
more do-able after a bill enacted in 2009 eliminated a 10% limit
on the annual amount of debt increase. Because the rate of the
tax levy is capped and is based on property assessed valuations,
low housing market prices reduce the amount of funds that can be
generated. For example, a home that was valued at $600,000 in
2005 located in a unified school district with a $60 per
assessed valuation cap would have yielded $360 per year ($60 x
6) whereas the same home might yield $240 today if the home has
dropped to an assessed value of $400,000. When coupled with a
limit on bonded indebtedness based on a percentage of the
taxable property of the district, districts argue that the only
way to generate the funds needed to house students or modernize
facilities is by deferring the payments with the prediction that
property values will rise to a sufficient level in the future to
pay the debt. This mechanism is risky. There is no guarantee
that the projected growth in property value will be realized.
What does the bill do . According to the authors, this bill was
introduced to impose parameters on bond issuances to limit
costly CABs. It does not prohibit CABs, although it is likely
that there will be a reduction in the use of CABs. The bill has
four main components:
1)The bill removes the authorization for school districts and
community college districts to issue local GO bonds under the
provisions of the Government Code. Under current law, school
and community college districts can issue GO bonds under the
AB 182
Page 5
provisions of the Education Code or under the provisions of
the Government Code, which governs bond issuances for any
city, city and county, special district, as well as school
district or community college district. There are some
notable differences between the two codes. The Government
Code authorizes the term of bonds to be up to 40 years,
whereas the Education Code limits term of bonds to 25 years.
The Government Code authorizes issuers to issue on their own,
whereas the Education Code requires school districts to go
through county boards of supervisors. The Government Code
authorizes a maximum interest rate of 12% whereas the
Education Code limits interest rates to 8%. By requiring
school districts and community college districts to issue
bonds under the provisions of the Education Code, costly CABs
that have up to 40 year terms can no longer be issued.
2)The bill limits the ratio of total debt service to principal
for each bond series to four to one.
3)The bill gives issuers the option of asking for a callable
feature for any CAB longer than 10 years, beginning no later
than the 10th year from the date of issuance. Many CABs do
not allow refinancing, even if interest rates go down or if a
school district determines that it is able to pay off the bond
before maturity. Callable CABs cost more than a noncallable
CAB. Financial advisors estimate an increase between the
ranges of 10 to 30 basis points (.1 to .3 percent), but
allowing a district to refinance will have longer-term
financial benefits.
4)The bill requires notifications and specified information to
be provided to local governing boards if CABs are proposed to
be used. This is to provide greater transparency. The agenda
of a governing board meeting must indicate that a CAB is
proposed and the governing board must be provided with the
total overall cost of a CAB, compared with the cost of a CIB,
along with the reason a CAB is being recommended. The
governing board must also be provided with the disclosure
required of underwriters by the Municipal Securities
Rulemaking Board reminding clients that underwriters do not
have fiduciary duty to the issuer.
AB 182
Page 6
Why school districts only ? Opponents have expressed concerns
that the bill affects school districts and community college
districts but not other governmental entities. The authors
state that the bill was introduced because school districts are
by far the largest users of CABs. According to CDIAC, of the
490 GO bond CABs that were issued between January 1, 2007 and
November 1, 2012, 481 (98%) were issued by school districts
(85.5%) and community college districts (12.6%), with just 9
(2%) by local government entities.
Why limit term of CIBs ? This bill affects more than just CABs.
The term of CIBs will also be reduced to 25 years. According to
the authors, a basic tenet of financing is to tie the term of
the infrastructure to the term of financing. Since the
education bond program allows modernization funds to be accessed
when buildings are 25 years old, limiting the financing to 25
years achieves this goal and prevents the situation where a
community is paying for the construction of the facilities and
current improvements at the same time. Opponents have expressed
concerns that limiting the term of CIBs will disadvantage school
districts in the competitive markets. CIBs are generally 25 to
30 years. This bill is unlikely to affect CIBs too greatly.
However, the authors may wish to consider increasing the term of
CIBs to 30 years.
Four-to-one ratio . The authors state that they weighed the
options of limiting the ratio of total debt service to principal
versus imposing a four or five percent annual debt increase
limit. After consultation with a number of stakeholders,
including the State Treasurer, the authors concluded that the 4
to 1 ratio limit will provide districts with flexibility to
structure their debt repayments, respond to changing interest
rates, and allow for reasonable payment schedule for tax payers.
Opponents have expressed concerns that limiting the total debt
service to principal ratio to 4 to 1 is too low and applying the
ratio per series will inhibit a district's ability to issue CABs
that are not egregious. Opponents suggest raising the ratio to
6 to 1 and applying the ratio on a per bond authorization basis.
An analysis of the CABs issued between 2007 and 2012 show that
many would have been able to meet both the 25 year term and the
4 to 1 ratio. While the structures of each CAB may be
different, a cursory view indicates that CABs can still be
AB 182
Page 7
issued under the conditions of the bill while limiting their
overall costs. Allowing the ratio to be applied on a per bond
authorization basis will continue the practice of costly CABs.
Limits on bonding capacity and tax rates . One of the main
reasons why districts have turned to CABs is due to the limits
on bonded indebtedness and the fixed tax rates that were
established in 2000 as described above. The statute does not
provide for adjustments over time. Districts have sought and
received waivers to increase their percentage of bonded
indebtedness from the State Board of Education (SBE). The SBE,
however, has not considered increases to the tax rates. It's
been more than 12 years since the enactment of the bonded
indebtedness and tax rates caps. The authors may wish to
consider a review of the need to adjust the limits.
Committee-suggested amendments.
1)Bond Anticipation Notes (BANs): A BAN is a short-term debt
that is used to fund facility projects prior to and in
anticipation of the sale of local GO bonds. Districts may
issue BANs as interim financing if, for example, the sale of a
GO bond is not timely (e.g., the assessed valuation is low and
will not yield the amount of revenues a district needs). BANs
may be authorized for no more than five years and have lower
interest rates and payments than GO bonds. Proceeds from the
sale of the GO bonds are used to repay the BANs. Concerns
have been expressed that districts that have issued BANs may
have anticipated the use of CABs to repay the BANs. If a
district is unable to issue a bond, the district would have to
pay the BAN with general funds, which could put a district in
financial risk. According to the CDIAC, approximately 35 BANs
that were issued since 2009 have maturity dates on or after
January 1, 2014.
Staff recommends allowing districts that issued BANs prior to
December 31, 2013 to seek a one-time waiver of one or more
provisions of this bill from the SBE or the Chancellor of the
California Community Colleges for community college districts
if the school district or community college district submits
an analysis conducted by an independent financial advisor not
affiliated with the school district, community college
AB 182
Page 8
district or underwriter used by the district showing the total
overall costs for the proposed issuance, how that issuance is
the most cost effective method, and the reasons why the
district or community college district is unable to meet the
provisions of the bill.
2)Technical amendment: Staff recommends a technical amendment
in the section of the bill giving the issuer the option to
request a callable feature as follows:
"A capital appreciation bond maturing more than 10 years
after its date of issuance shall be subject to mandatory
tender for purchase or redemption before its fixed maturity
date, with or without a premium, at any time at the option
of the issuer , or from time to time, at the option of the
issuer, beginning no later than the 10th anniversary of the
date the capital appreciation bond was issued."
Arguments in support . State Treasurer Bill Lockyer states, "I
understand many districts face a critical need to build or
modernize facilities for their children, and I recognize that
falling property tax assessments, revenue losses, and statutory
debt service limits have all combined to reduce districts' debt
financing options, at least at the present time. However, we
cannot continue to use debt financing tools, such as CABs, that
force tax payers to pay, at times, more than 10 times the
principal to retire these bonds. In too many cases, these
transactions have been structured with 40-year terms that delay
interest and principal payments for decades, resulting in huge
balloon payments. Moreover, school board members and the public
have not always been fully informed about the total costs and
risks associated with issuing capital appreciation bonds. As a
result of such CAB deals and lack of transparency, our future
generations in many California school districts will be burdened
with heavy taxes for years and years to come."
Arguments in opposition . All of the opposition letters
submitted to the Committee have an "oppose unless amended"
position. Generally, the opposition supports more transparency,
but is concerned that the bill will inhibit school districts'
ability to secure funding to house students and provide for
renovations as promised to voters through their bond
initiatives. While some of the opponents do recognize the need
to establish some parameters to prevent extreme CABs, they argue
that CABs, if done appropriately and in a limited way, are
AB 182
Page 9
effective. The requested amendments vary from organization to
organization. They include expanding the term of CABs to 30
years, restoring the term of 40 years for CIBs, increasing the
total debt service to principal ratio to 6 to 1 and applying the
ratio to bond authorization, grandfathering in bonds that are
already approved but not issued, and allowing districts to seek
a waiver from the SBE to increase the tax rates.
REGISTERED SUPPORT / OPPOSITION :
Support
Bill Lockyer, California State Treasurer
California Association of County Treasurers and Tax Collectors
California Taxpayers Association
Dan McAllister, San Diego County Treasurer-Tax Collector
Humboldt County Board of Supervisors
Sierra County Board of Supervisors
Opposition
Association of California School Administrators (Oppose unless
amended)
California Association of School Business Officials (Oppose
unless amended)
Coalition for Adequate School Housing (Oppose unless amended)
Riverside County Superintendent of Schools (Oppose unless
amended)
Small School Districts' Association (Oppose unless amended)
Analysis Prepared by : Sophia Kwong Kim / ED. / (916) 319-2087