BILL ANALYSIS Ó
SENATE COMMITTEE ON EDUCATION
Carol Liu, Chair
2013-2014 Regular Session
BILL NO: AB 182
AUTHOR: Buchanan
AMENDED: May 21, 2013
FISCAL COMM: No HEARING DATE: June 26, 2013
URGENCY: No CONSULTANT:Kathleen Chavira
NOTE: This bill has been referred to both the Senate
Education and the Senate Governance and Finance Committees.
A do pass motion should include a referral to the Senate
Governance and Finance Committee.
SUBJECT : Capital Appreciation Bonds.
SUMMARY
This bill establishes new conditions and disclosure
requirements to be met when a district issues general
obligation bonds or capital appreciation bonds, and
eliminates the ability of school districts to issue bonds
under Government Code provisions.
BACKGROUND
Current law authorizes the governing boards of school
districts and community college districts to order and
submit to voters the order to issue bonds for school
facility construction purposes. Current law establishes
conditions over the issuance and sale of these bonds by
school and community college districts. Current law, under
the Education Code authorizes school districts and
community college districts to issue bonds with a maximum
interest rate of 8 percent and a maximum maturity
of 25 years. (Education Code § 15100,
§ 15140- § 15150)
In addition, current law authorizes any city, county, city
and county, school district, community college district, or
special district to issue general obligation bonds, secured
by the levy of ad valorem taxes, and establishes a process
for such issuances under the Government Code. Among other
things, the Government code authorizes the issuance of
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bonds with a maximum interest rate of 12 percent and a
maximum maturity of 40 years.
(Government Code § 53506-53509-5, § 53531)
ANALYSIS
This bill :
1) Establishes the following new conditions on the
issuance of bonds by a school district:
a) Prohibits the ratio of total debt
service to principal for each bond series from
exceeding 4:1.
b) Requires that a capital
appreciation bond that has a maturity date
greater than 10 years, provide the issuer the
option of "calling" the bond, i.e. that the bond
be subject to redemption by the issuer before its
fixed maturity date, with or without a premium.
2) Modifies disclosure requirements for school and
community college districts if the bond sale includes
a capital appreciation bond by requiring that, before
the sale, the board adopts a resolution as an agenda
item at a public meeting that:
a) Identifies that Capital
Appreciation Bonds (CABs) are being proposed.
b) Presents an analysis containing
the overall total cost of the CAB.
c) Presents a comparison to the
overall cost of current interest bonds.
d) Provides the rationale for
recommending a CAB.
e) Includes a copy of the disclosure
made by the underwriter, in compliance with
specified federal regulations.
3) Authorizes a school district or community college
district which issued a bond anticipation note (BAN)
prior to December 31, 2013, to seek a waiver from the
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debt ratio, call features, or disclosure requirements
outlined in (1) and (2) from the State Board of
Education or the Chancellor of the Community Colleges,
respectively, if
a) Proceeds from the issuance subject
to the waiver will be used only for paying the
BAN.
b) The district has provided the
State Board of Education, or the Chancellor, as
applicable, an analysis from an unaffiliated
financial adviser, as described, showing the
total overall costs of the bond, how the bond
issuance is the most cost-effective method to
retire the BAN, and the reason the district is
unable to meet the requirements outlined in (1)
and (2).
4) Deletes the authority of a school district to issue
bonds under Government Code provisions, thereby
eliminating the authority of school districts to pay
interest of up to 12 percent on bonds issued, or to
issue bonds with a maturity of up to 40 years.
STAFF COMMENTS
1) What's the problem ? According to the author, this bill
was introduced due to concerns about the increasing
use of Capital Appreciation Bonds (CABs) by school
districts and community college districts. The author
reports that, according to the California Debt
Investment Advisory Commission (CDIAC), of the 650
CABs issued since 2007, 85.5 percent were issued by
school districts, 12.7 percent were issued by
community college districts, and only about 2% were
issued by other local government entities. According
to the author, due to the downturn in the housing
market and consequently low assessed property
valuations, districts have resorted to using CABs,
bonds which shift tax payments into the future, in
order to generate adequate bond dollars to meet their
facility construction needs today, while staying
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within the tax levy constraints established by
companion legislation to Proposition 39, AB 1908
(Lempert, Chapter 44, Statutes of 2000).
Although the payments on a CAB are deferred, interest
continues to accrue and is compounded until maturity,
at which time, the investor receives a single payment
for both interest and principal. Depending upon the
terms of the CAB, the costs to the taxpayer can be
significantly increased over that which would have
been paid with a traditional Current Interest Bond
(CIB) which would typically require semi-annual
payments of both principal and interest at the same
rate over the life of the bond.
2) Why the increase in CABs ? Proposition 39 (passed by
voters in 2000), while lowering the bond threshold for
passage to 55 percent, was accompanied by legislation
that limited the amount of property tax that could be
collected to pay for these bonds. These limits are
summarized in the chart below:
Lowered housing market prices, coupled with the tax
rate caps established by AB 1908 (Lempert, 2000),
yield a reduction in the amount of tax which may be
assessed and therefore collected to repay bonds. In
essence, the downturn in home values means that, for a
unified school district, the maximum rate of $60 would
be calculated against a reduced property value with
the result that the amount of funds that can be
generated to repay a bond issuance are reduced. CABs
provide districts a means to generate the funds needed
to construct or modernize facilities by deferring
principal and tax payments into the future, in the
hope that property values will rise to a level
sufficient to levy future taxes to repay the Capital
Appreciation Bond (CAB).
In addition, it appears that the issuance of CABs was
further facilitated by the enactment of AB 3188
(Hernandez, Chapter 529, Statutes of 2009), which
eliminated a 10% limit on the annual amount of debt
increase.
SB 872 (Kopp, Chapter 841, Statutes of 1993) among
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other things, established the requirement that annual
payments of principal and interest be amortized so
that the maximum annual debt service did not exceed
the minimum payment on the bonds by more than 10%. AB
3188 eliminated this 10% limit.
3) Does this bill solve the problem ? It appears that the
intent of this bill is to ensure that school districts
limit the overall costs to taxpayers associated with
financing school facilities construction projects. The
bill attempts to accomplish this goal by statutorily
restricting the features of a specific debt
instrument. However, statutorily imposed features are
inflexible, do not respond to changing economic
conditions, and outline the specific elements which
the market must consider, and price for, when seeking
to offer a debt instrument that appeals to investors.
These provisions may simply have the effect of
shifting costs or incentivizing the market to develop
instruments or features that are in compliance with
the letter of the law, but still ensure that investors
realize the returns necessary to warrant the
investment risk they are undertaking. In addition,
these statutory restrictions may result in
unanticipated financial consequences for schools
districts as interest rate environments and economic
conditions change. It is likely that the premium for
Capital Appreciation Bonds with the required call
option features will increase. Similarly, some
districts will likely experience increased costs of
issuance to issue more bond series in order to meet
their funding needs while staying within the
constraints imposed by this legislation.
4) Related State Board of Education activity . Districts
have sought and received waivers to increase their
percentage of bonded indebtedness beyond the statutory
limits from the State Board of Education (SBE). At
the May 2013 meeting of the SBE, seven districts
requested and were granted such waivers. The State
Board chose not to prohibit the issuance of CABs as a
condition for the approval of the waiver despite a
recommendation from the California Department of
Education to impose such a condition.
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5) Double referral . The provisions of this bill raise a
number of questions relative to public finance policy.
The bill has also been referred to the Senate
Governance and Finance Committee, which, among other
things has jurisdiction over legislation pertaining to
state and local government revenue mechanisms, and
specifically proposals on state and local bond
indebtedness. That committee may appropriately
consider the following questions:
a) Are the statutory constraints imposed on
school districts by this bill the best way to
address issues of concern around increased costs
for debt issuance?
b) Would it be more appropriate and effective
to simply "undo" the provisions of AB 3188
(Hernandez, 2009) and reinstate the maximum
annual debt limit of 10%?
c) Should local governments also be bound by
restrictions on Capital Appreciation Bonds
(CABs)?
d) What competitive disadvantage is created
across local entities if not all are bound by the
same rules/conditions?
1) Effect of the bill on school districts ? School
districts have noted a number of potentially negative
impacts as a result of the bill's provisions. The bill
limits the financing tools available to school
districts to meet their facility needs. Absent any
change to the maximum tax rates, some districts may be
unable to generate the revenue necessary to complete
construction projects authorized by local voters.
Other districts report that limiting the term of all
bonds to 25 years could mean that districts that do
not currently plan to issue CABs would be compelled to
in order to generate the funds necessary within the
more limited time frames. Limiting the debt service
ratio of each bond issuance undermines the ability of
districts to manage the overall portfolio of bond
issuances under a bond authorization to maximize the
benefits and in some cases, minimize the overall costs
for debt to finance their facility construction
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program. Finally, since these provisions apply
exclusively to school districts, districts have raised
concerns that limiting the terms of CIBs and CABs for
them alone will disadvantage school districts when
compared to other municipal bond issuers in the
competitive markets, making their costs for completing
public school construction projects greater than that
for constructing other publicly financed facilities.
Notwithstanding these concerns, if it is the desire of
the committee to implement restriction on the issuance
of CABs by school districts staff recommends the bill
be amended per staff comments #7, 8, and 9.
2) If we must?.. ? Notwithstanding the concerns outlined
in staff comment #6, if it is the desire of the
committee to implement restrictions on the issuance of
CABs by school districts, staff recommends the bill be
amended to:
a) Extend the term of maturity of a CAB to 30
years.
b) Apply the 4:1 debt service ratio to the
overall bond authorization rather than each
issuance of a bond series.
3) Strengthen local transparency and disclosure . This
bill requires that a school district that chooses to
issue a Capital Appreciation Bond (CAB) must meet
specified disclosure requirements at a public meeting
of the board. These provisions would appear to support
the autonomy of a local governing board elected to
make the best decisions for the local community it
serves. At the same time, ensuring transparency and
disclosure regarding the information being provided to
the board offers a means of ensuring accountability to
its local voters for the board's decisions and
actions.
Staff recommends that these provisions be strengthened
to:
a) Require that the resolution required by the
bill's provisions be considered first as an
informational item and then as an action item at
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a subsequent public meeting of the board.
b) Require that the resolution additionally
include disclosure of the financing term and time
of maturity, repayment ratio, and the district's
assumed change in assessed value of local
property.
4) Broader reach than necessary ? According to the
author, the changes to the Government Code provisions
are intended to align the term of a bond issuance with
the life cycle of the structure. The author contends
that, since the State School Facility 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.
Staff notes however, for a variety of reasons, many
school districts opt not to access modernization funds
at 25 years, and a number of school districts utilize
their buildings for instructional purposes well beyond
the time-frames established under the SFP. In
addition, state bond funds have been exhausted, and
even if a district wishes to modernize or construct,
the state's ability to provide funds to modernize
facilities every 25 years is, and will continue to be,
limited.
School districts were granted the ability to use
Government Code provisions to issue general obligation
bonds by SB 872 (Kopp, Chapter 841, Statutes of 1993).
Based upon the analysis of the bill at that time, the
intent of adding school districts to the Government
Code was to establish a single set of issuance
procedures for local agencies to follow when issuing
general obligation. bonds, thereby streamlining
existing aw which contained a variety of different
processes for local agencies.
In addition, while concerns have been raised regarding
the high cost of CABs relative to Current Interest
Bonds, it does not appear that issues have been raised
regarding the issuance of Current Interest Bonds
either under Education Code or Government Code
provisions. Aside from putting school districts at a
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disadvantage in the municipal markets compared to
other local government entities, these provisions seem
unnecessarily punitive.
Staff recommends that the deletion of school districts
from the Government Code provisions be restored. Staff
further recommends that the bill be amended to clarify
that the limitations imposed on the issuance of
Capital Appreciation Bonds in the Education Code
cannot be overridden by the authorities established
for school districts in the Government Code.
SUPPORT
Bill Lockyer, Treasurer, State of California
California Association of County Treasurers and Tax
Collectors
California League of Bond Oversight Committees
CalTax
Howard Jarvis Taxpayers Association
Treasurer-Tax Collector, County of San Diego
OPPOSITION
Association of California School Administrators
Beverly Hills Unified School District
California Association of School Business Officials
California Association of Suburban School Districts
California Financial Services
California School Boards Association
Coalition for Adequate School Housing
Community College League of California
Fresno Unified School District
Oceanside Unified School District
Office of the Riverside County Superintendent of Schools
San Diego Unified School District
Small School Districts' Association
Superintendent, Tustin Unified School District