BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 794 HEARING: 6/13/12
AUTHOR: Wieckowski FISCAL: No
VERSION: 9/2/11 TAX LEVY: No
CONSULTANT: Grinnell
BOND ANTICIPATION NOTES
Clarifies property tax rates may be increased to pay
interest on bond anticipation notes.
Background and Existing Law
The California Constitution requires counties, cities, and
school districts to obtain voter approval to issue
long-term debt. Counties, cities, school districts,
community college districts, and some special districts can
issue general obligation (GO) bonds, secured by ad valorem
property tax revenues, with 2/3-voter approval.
Proposition 39 (2000) allows school districts to issue GO
bonds to build, rehabilitate, or replace schools with 55%
voter approval subject to certain conditions.
School districts cannot issue debt in excess of 2.5% of the
assessed valuation of the taxable property in their
districts. School districts using the Proposition 39
method are also subject to a tax limitation of no more than
$60 for a unified school district, and $30 for other school
districts, per $1,000 of assessed valuation.
When a district's voters authorize a bond, they're also
directing the county to increase the property tax rate
necessary in the district to generate revenues sufficient
to repay the bond. Governing boards of school and
community college districts are authorized to sell GO bonds
under both the Education and the Government Code. The
Government Code allows districts to sell bonds directly,
while the Education Code requires the county board of
supervisors to approve the district's sale by resolution,
so long as the district does not have a qualified or
negative certification in its most recent interim report.
In either case, the district provides a repayment schedule
to the county tax collector, who in turn increases taxes
AB 794 -- 9/2/11 -- Page 2
according to the schedule.
Currently, school districts and school facility improvement
districts may sell bond anticipation notes (BANs), which
are short term debt instruments issued prior to the sale of
a bond, or a portion of a bond. The district sells notes
to investors, who provide cash to the district, which the
district subsequently repays plus interest from the
proceeds of the bond sale or from issuing another BAN.
School districts and school facility improvement districts
must use note proceeds for the same purposes as the bond,
or to repay previously issued BANs. Districts cannot issue
BANs in an amount that exceeds that of the unsold
authorized bonds. The Legislature first authorized BANs in
1999, but restricted their maturities to one year (SB 1118,
Alarcon), then expanded the allowable maturity to five
years (AB 1368, Mullin, 2007).
Existing law is unclear whether counties must increase
property tax rates at the direction of the issuing school
district to pay BAN investors interest prior to maturity.
Some counties increase the property tax rate so that
districts can pay interest on the BANs prior to maturity,
leading to lower interest rates. However, other counties
interpret the law to prohibit the county from increasing
the tax to pay interest on the BANs before the district
sells the bond.
Proposed Law
Assembly Bill 794 provides that school districts may pay
interest and principal on the notes from a property tax
levied for that purpose if the resolution of the district
governing board so provides. AB 794 states that the tax
for payment of the principal or interest of the notes is a
tax authorized by law for payment of the bonds in
anticipation of which the notes are issued. The district
must give the county the authorizing resolution and the
debt service payment schedule so the auditor and treasurer
can enact the tax rates and necessary funds or accounts for
the bonds. The measure also allows that any premium
received on the sale of the bonds to be used to pay BAN
interest.
State Revenue Impact
AB 794 -- 9/2/11 -- Page 3
No estimate.
Comments
1. Purpose of the bill . According to the author, "AB 794
clarifies the law regarding Bond Anticipation Notes (BANs).
Education Code Section 15150(d) is ambiguous because on
the one hand, it clearly indicates that interest on BANs
can be paid from the 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." This quoted
language is problematic because the reference to "the
bonds" is not clear. This bill addresses this ambiguity.
By clarifying that the tax levied to pay principal and
interest on the bond can also be used to pay the interest
on the BAN, the overall repayment cost will be lower - and
save school districts money as a result."
2. The ties that bind . One feature that distinguishes
short-term, cash flow borrowing from longer-term borrowing
is the timing of interest payments. For shorter term
notes, investors usually can wait until the note matures,
at which time the issuer pays both principal and interest,
although regular interest payments generally will reduce
the interest rate investors demand because they don't have
to wait until maturity. Investors are generally reluctant
to defer interest payments on a long-term bond until
maturity, although they are occasionally willing to do so
at much higher interest rates. AB 794 clarifies the law
to allow districts to pay interest periodically, leading to
lower interest rates as investors will demand less
compensation when repaid earlier, all things equal.
3. Suggested amendment . Committee staff suggests the
following amendment to ensure consistency within the
section:
On page 5, line 21, striking "shall" and inserting
"may."
Assembly Actions
Not relevant to this version of the bill.
AB 794 -- 9/2/11 -- Page 4
Support and Opposition (6/7/12)
Support : California Public Securities Association,
Coalition for Adequate School Housing
Opposition : None received.