BILL ANALYSIS Ó ------------------------------------------------------------ |SENATE RULES COMMITTEE | AB 794| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ THIRD READING Bill No: AB 794 Author: Wieckowski (D), et al. Amended: 9/2/11 in Senate Vote: 21 PRIOR VOTES NOT RELEVANT SUBJECT : Local education facility bonds: anticipation notes SOURCE : California Public Securities Association DIGEST : This bill, instead of allowing the interest on the school bond anticipation notes to be paid from the tax levied to pay the principal of and interest on the bonds, allows the interest on the notes to be paid from a property tax levied for that purpose if authorized by a resolution of the governing board and provides that this tax is authorized by law. This bill also allows the premium received on the sale of the bonds to be used to pay the interest on the notes. ANALYSIS : Existing law authorizes the governing board of a school or community college district to order an election and submit to the electors of the district the question whether the bonds of the district shall be issued and sold for the purpose of raising money for various facilities purposes, for refunding bonds, or for the purchase of schoolbuses. Existing law limits the total amount of bonds that a school or community college district may issue to CONTINUED AB 794 Page 2 1.25 percent of the taxable property of the school or community college district. Existing law also authorizes the governing board of a school district or community college district to issue bond anticipation notes. Existing law requires a bond anticipation note to be payable not more than five years from the date of the original issuance of the note. Existing law allows the interest on the notes to be payable from the proceeds of the sale of bonds or from the tax levied to pay principal of and interest on the bonds. This bill, instead of allowing the interest on the notes to be paid from the tax levied to pay the principal of and interest on the bonds, allows the interest on the notes to be paid from a property tax levied for that purpose if authorized by a resolution of the governing board and provides that this tax is authorized by law. The bill also allows the premium received on the sale of the bonds to be used to pay the interest on the notes. FISCAL EFFECT : Appropriation: No Fiscal Com.: No Local: No SUPPORT : (Verified 9/6/11) California Public Securities Association (source) ARGUMENTS IN SUPPORT : The bill's sponsor, the California Public Securities Association, indicates that Education Code Section 15150(d) is ambiguous because on the one hand, it clearly indicates that interest on Bond Anticipation Notes (BANs) can be paid from proceeds of a tax levy, but on the other hand it indicates that the tax levy from which the BANS is payable consists of the "tax lawfully levied to pay principal of and interest on the bonds." They believe this quoted language is problematic because the reference to "the bonds" is not clear. Some counties have taken the position that the term "the bonds" in Section 15150(d) refers to bonds that the district has previously issued - in other words, if a district has previously issued its general obligation bonds and subsequently issues BANs, a tax may be levied to pay debt service on the previously issued bonds and if such a t ax creates a surplus, such CONTINUED AB 794 Page 3 surplus can be used to pay interest on the BANs. One problem with this interpretation is that if a school has not previously issued its general obligation bonds, it is effectively prohibited from levying a tax to pay the BANs. Another problem with this interpretation is that the provisions of the Education Code that authorize the levy of taxes to pay bonds indicated that such taxes are to be used to pay principal and interest on such bonds (see Education Code 15251-such taxes "shall be used for the payment of the principal and interest of the bonds and for no other purpose"). "Another possible interpretation of the term 'the bonds' in Section 15150 (d) is that it refers to bonds that the district will eventually issue to pay off the BANs. This interpretation suffers the same problem discussed above under Education Code Section 15251, and also raises problems under Education Code Sections 15250 and 15252 which generally indicate that property taxes are only supposed to be levied to pay debt service coming due on bonds in the year in which the taxes are levied. The most restrictive interpretation is that the reference to "the bonds" in Section 15150(d) simply does not allow a tax to be levied to pay interest on the BANs. This view has been adopted by a number of counties in response to the interest ambiguity in Section 15050(d). Unfortunately, this interpretation completely defeats the clear intent in Section 15150(d) that interest on BANs can be paid from a tax levy of some sort. The ambiguity of Education Code Section 15150(d) and the decision by several counties to prohibit the levy of a tax for the payment of interest on BANs results in higher overall repayment costs for BANs or the bonds that are used to pay off the BANs. This is because not having the ability to levy a tax for payment of interest on BANs necessities issuing the BANs with sufficient original issue premium to provide the source of interest payments to investors in the form of 'capitalized' interest (which results in higher borrowing costs), or issuing the BANs as capital appreciation bonds which are payable at maturity at a higher interest cost than if the BANs were issued instead as current interest bonds which have semi-annual interest payments that require a tax levy." CONTINUED AB 794 Page 4 DLW:mw 9/6/11 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END **** CONTINUED