BILL ANALYSIS Ó
AB 182
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ASSEMBLY THIRD READING
AB 182 (Buchanan and Hueso)
As Amended April 2, 2013
Majority vote
EDUCATION 6-0
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|Ayes:|Buchanan, Campos, Chávez, | | |
| |Nazarian, Weber, Williams | | |
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| | | | |
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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, or from
time to time, at the option of the issuer, beginning no later
than the 10th anniversary of the date the CAB was issued.
3)Authorizes a school district or community college district
with a bond anticipation note (BAN) issued prior to December
31, 2013, to seek from the State Board of Education (SBE) or
the Chancellor of the California Community Colleges, a
one-time waiver from one or more requirements of this bill, if
both of the following are satisfied:
a) The proceeds of the issuance subject to the waiver will
be used only for the purpose of paying the BAN.
b) The school district or community college district has
provided to the SBE or the Chancellor's office an analysis
from a financial advisor unaffiliated with the school
district or community college district showing the total
overall costs of the proposed bond, how the issuance is the
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most cost-effective method, and the reasons why the school
district or community college district is unable to meet
the requirements of this bill.
4)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.
5)Strikes the authority for school districts and community
college districts to issue bonds or refund bonds under the
Government Code.
FISCAL EFFECT : None. This bill is keyed non-fiscal by the
Legislative Counsel.
COMMENTS : School districts and community college districts pay
for the construction and modernization 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. Proposition 39 also requires school
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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.
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 two to one for CIBs, but can be 10 to 20
times the principal for CABs.
Why districts 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
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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 the bill does : 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
five 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
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. 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. 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%), but allowing a
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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.
5)The bill gives districts or community college districts that
had issued BANs prior to December 31, 2013, the authority to
seek a one-time waiver from the provisions of this bill from
the SBE or Chancellor of the California Community Colleges
under specified conditions.
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 : 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
effective. The opposition suggests amendments to expand the
term of CABs to 30 years, restore the term of 40 years for CIBs,
increase the total debt service to principal ratio to six to one
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and apply the ratio to bond authorization, grandfather in bonds
that are already approved but not issued, and allow districts to
seek a waiver from the SBE to increase the tax rates.
Analysis Prepared by : Sophia Kwong Kim / ED. / (916) 319-2087
FN: 0000059