BILL ANALYSIS                                                                                                                                                                                                    



                                                                     AB 912


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          Date of Hearing:  April 8, 2015


                           ASSEMBLY COMMITTEE ON EDUCATION


                              Patrick O'Donnell, Chair


          AB 912  
          (Wilk) - As Introduced February 26, 2015


          SUBJECT:  Local educational agencies:  school bonds:  notices


          SUMMARY:  Expands the requirement for reporting issuances of  
          non-voter-approved debt to include voter-approved debt.   
          Specifically, this bill:  


          1)Requires a governing board of a school district to do the  
            following:


             a)   Notify the county superintendent of schools and the  
               county auditor upon approval of the issuance of all bonds,  
               not just revenue bonds, by the governing board.


             b)   Notify the county superintendent of schools and the  
               county auditor, no later than 30 days before the approval  
               by a governing board of a school district to issue all  
               bonds.


          2)Requires the superintendent of the school district to provide  
            the repayment schedules for that debt obligation, evidence of  
            the ability of the school district to repay that obligation,  








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            and the issuance costs, to the county auditor, the county  
            superintendent, the governing board, both before an issuance  
            and upon approval by the governing board of an issuance.     


          3)Requires a county superintendent of schools to do the  
            following:


             a)   Notify the Superintendent of Public Instruction (SPI)  
               upon approval of the issuance of all bonds, not just  
               revenue bonds, by the county board of education.


             b)   Notify the SPI, no later than 30 days before the  
               approval by the county board of education to issue all debt  
               instruments that are secured by real property.


          4)Requires the county superintendent of schools or the  
            superintendent of a school district for which the county board  
            serves as the governing board to provide information necessary  
            to assess the anticipated effect of the debt obligation, the  
            repayment schedules, the evidence of the ability of the county  
            office of education or school district to repay that  
            obligation, and issuance costs to the SPI, both before an  
            issuance and upon approval of an issuance.   


          EXISTING LAW:  


          1)Requires that upon approval by the governing board of a school  
            district or a county office of education to proceed with the  
            issuance of revenue bonds or entering an agreement for school  
            facility financing through the California School Finance  
            Authority, the school district shall provide notification to  
            the county superintendent and county auditor.  A county  
            superintendent and district superintendent for which the  








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            county board serves as the governing board shall provide  
            notification to the SPI.                                        
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                                                                            
                     

          2)Requires the superintendent of the school district to provide  
            to the county superintendent of schools, the county auditor,  
            the governing board and the public, the repayment schedules  
            for that debt obligation and evidence of the ability of the  
            school district to repay that obligation.  Requires the county  
            superintendent or the district superintendent for whom the  
            county board serves as the governing board to provide to the  
            SPI, the governing board and public, the repayment schedules  
            for that debt obligation and evidence of the ability of the  
            county office of education or school district to repay that  
            obligation.

          3)Provides that within 15 days of the receipt of the  
            information, the county superintendent and the county auditor  
            may comment publicly to the governing board of the school  
            district regarding the capability of the school district to  
            repay that debt obligation, and the SPI may comment publicly  
            to the county board of education regarding the capability of  
            the county board of education or school district to repay that  
            debt obligation.

          4)Provides that no later than 30 days before a governing board  
            of a school district or a county office of education approves  
            the issuance of certificates of participation (COPs) and other  
            non-voter-approved debt instrument secured by real property,  
            the superintendent of the school district shall notify the  
            county superintendent of schools and the county auditor, and  
            the county superintendent of schools shall notify the SPI.









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          5)Requires the superintendent of the school district to provide  
            to the county superintendent of schools, the county auditor,  
            the governing board and the public, information necessary to  
            assess the anticipated effect of the debt issuance, including  
            the issuance costs, the repayment schedules for that debt  
            obligation, and evidence of the ability of the school district  
            or county office of education to repay that obligation.  

          6)Provides that within 15 days of the receipt of the  
            information, the county superintendent of schools and the  
            county auditor may comment publicly to the governing board of  
            the school district, and the SPI may comment publicly to the  
            county board of education regarding the capability of the  
            school district to repay that debt obligation.

          FISCAL EFFECT:  The Legislative Counsel has keyed this bill as a  
          state-mandated local program.


          COMMENTS:  Existing law requires the superintendent of a school  
          district to notify the county superintendent of schools, and the  
          county superintendent of schools to notify the SPI, at least 30  
          days prior to approving a COP or other debt instruments that are  
          secured by real property and do not require the approval of  
          voters.  This provision was enacted by AB 2197 (Mullin),  
          Chapter, 128, Statutes of 2008, following reports of districts'  
          over-reliance of COPs that could put school districts' or county  
          offices of educations' general funds at risk.  


          A COP is a form of lease purchasing using properties (e.g.,  
          facilities and equipment) as collateral to borrow funds for  
          physical capital needs.  COPs do not require voter approval and  
          are commonly used by local governmental entities to secure  
          immediate resources.  An independent party, sometimes another  
          public entity or a nonprofit organization, known as a lessor,  
          executes the lease agreement.  The borrower, also known as the  
          lessee, purchases the property from the lessor and makes annual  
          payments for the principal and interests, which are tax exempt.   








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          When the debt is retired, the lessee receives ownership of the  
          property.  A trustee, usually a bank or trust company, holds  
          title to the property and sells the COPs to investors.  If the  
          lessee defaults on the payments, the property used for  
          collateral will be sold to reimburse investors.  Interest rates  
          and issuance (administrative) costs for COPs can be higher than  
          those for general obligation (GO) bonds.


          According to school facilities financial consultants, a COP is  
          one of the easiest sources of funding because it does not  
          require approval by voters.  A school district that issues a COP  
          generally anticipates repaying the COP through projected new  
          revenues, such as developer fees, redevelopment agency funds,  
          state bond funds, or the general fund.  If the non-general-fund  
          sources of revenue do not materialize, a district's general fund  
          may be put at risk.  


          Current law also requires a superintendent of a school district  
          to notify the county superintendent of schools and the county  
          superintendent of schools to notify the SPI upon approval of an  
          issuance of a revenue bond.  Similarly, revenue bonds are  
          secured by an anticipated revenue stream and are occasionally  
          used by school districts.  


          Is this bill necessary?  This bill removes the reference to  
          "revenue" bonds and "non-voter-approved" debt so that the  
          notification provisions would apply to all debt instruments,  
          including GO bonds.  Current law requires the notification for  
          revenue bonds and COPs because they do not require voter  
          approval and they could impact a district's general fund.  In  
          these cases, it is a good idea for a county office of education  
          or the SPI to review the proposed debt and be able to comment on  
          whether a school district or county office of education is able  
          to make repayments without jeopardizing a school district or  
          county office of education's general fund.  Voter approved debt,  
          such as GO bonds, Mello Roos, and School Facilities Improvement  








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          Districts, are secured by property taxes and require voter  
          approval.  A bond proposition informs voters of the maximum  
          amount of bonds that can be issued while statute caps the  
          maximum rate that can be assessed for bonds approved by a 55%  
          vote (Proposition 39).  Moreover, governing boards are required  
          to approve the bond issuance at a public meeting.  Any objection  
          can be made at the public meeting.        


          Current law authorizes the county superintendent of schools or  
          the SPI to comment on the proposed debt regarding the capability  
          of the school district or county office of education to repay  
          that debt obligation.  This bill extends this requirement to GO  
          bonds.  It is not necessary because GO bond debt payments are  
          secured by property taxes that are approved by voters. We know  
          districts will be able to pay GO bond debt.      


          Will this bill have the effect intended by the author and  
          sponsor?  If enacted, this bill will require notification both  
          before and after a bond issuance is approved by a governing  
          board.  Districts are required to provide the same information  
          about the bond, including evidence that the school district is  
          able to pay the debt, both before and after a bond issuance is  
          approved.  


          The sponsor, the Howard Jarvis Taxpayers Association, states  
          that notification will allow the county superintendent of  
          schools, the county auditor and the SPI to identify any  
          potential issues prior to a bond approval.  County offices of  
          education have expertise in district general fund budgeting;  
          however, county offices of education do not seek passage or  
          issue GO bonds and likely do not have the expertise to evaluate  
          a GO bond issuance.  Most school districts issue bonds through  
          the provisions of the Education Code, which are issued by the  
          County.  County auditors will already have the information about  
          the proposed bond issuance.  









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          Supporters also state that notification can avert questionable  
          issuances, such as capital appreciation bonds (CABs), which is a  
          costly tool used to get funding now but delay payments for a  
          long period of time, or use bond proceeds to repay non-voter  
          approved debt.  Districts that issued CABs became the subject of  
          media attention a couple of years ago.  Staff notes that county  
          auditors were aware of CABs, but ultimately, CABs had to be  
          addressed by the Legislature, which enacted AB 182 (Buchanan),  
          Chapter 477, Statutes of 2013.  This bill would not have  
          prevented CABs.   


          Under Education Code Section 15150, districts are authorized to  
          issue bond anticipation notes (BANs).  BANs are non-voter  
          approved short-term borrowing that are paid back when GO bonds  
          are sold.  Districts issuing GO bonds to repay this type of  
          non-voter approved debt are not doing something they are not  
          legally allowed to do.  It is not clear why this is a problem or  
          how this bill would address it.  


          Unintended consequence?  GO bond issuance is driven by the  
          market.  A rate is not secured until the bond goes to market.   
          Any delay can potentially prevent a school district from getting  
          a low rate.  This is particularly true for refunding  
          (refinancing) of bonds because rates can change quickly.   
          Similar to refinancing of home mortgages, the purpose of a  
          refinance is to get a better rate.        


          Arguments in support.  The Howard Jarvis Taxpayers Association,  
          the sponsor of the bill, states, "This increase in transparency  
          would benefit several interests.  Local school boards and the  
          general public receive the benefit of the time disclosure of all  
          debt, not just what in non-voter approved."


          Arguments in opposition.  The California Association of School  








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          Business Officials states, "We agree that it is appropriate for  
          local education agencies to report the issuance of non-voter  
          approved debt to the County Auditor and County Superintendent of  
          Schools.  However, when a school district issues voter-approved  
          general obligation bond debt, the final documents are submitted  
          to the district's governing board for approval - at an open  
          meeting - through adoption of a resolution authorizing the debt.  
           It is not clear how AB 912 would enhance transparency to a  
          process that is already open to the public and interested  
          stakeholders."     


          REGISTERED SUPPORT / OPPOSITION:




          Support


          Howard Jarvis Taxpayers Association (sponsor)


          California League of Bond Oversight Committees


          California Taxpayers Association




          Opposition


          California Association of School Business Officials


          Coalition for Adequate School Housing









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          Los Angeles Unified School District


          Small School Districts' Association




          Analysis Prepared by:Sophia Kwong Kim / ED. / (916) 319-2087