BILL ANALYSIS Ó
AB 182
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CONCURRENCE IN SENATE AMENDMENTS
AB 182 (Buchanan and Hueso)
As Amended August 29, 2013
Majority vote
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|ASSEMBLY: |75-0 |(April 8, 2013) |SENATE: |36-0 |(September 3, |
| | | | | |2013) |
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Original Committee Reference: ED.
SUMMARY : Establishes parameters for the issuance of local
education bonds that allow for the compounding of interest,
including, but not limited to, capital appreciation bonds
(CABs). Specifically, this bill :
1)Defines, in the Education Code, "bonds" as bonds, notes,
warrants, or other evidence of indebtedness payable, both
principal and interest, from the proceeds of ad valorem
property taxes that may be levied without limitation as to
rate or amount upon property subject to taxation by the
governing board of the school district or community college
district. This definition is the same definition found in the
Government Code.
2)Specifies that the ratio of total debt service to principal
for each bond series shall not exceed four to one.
3)Specifies that a bond that allows for the compounding of
interest, including, but not limited to, CABs, maturing more
than 10 years after its date of issuance shall be subject to
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.
4)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
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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
most cost-effective method, and the reasons why the school
district or community college district is unable to meet
the requirements of this bill.
5)Provides that if the sale of bonds includes bonds that allow
for the compounding of interest, including, but not limited
to, CABs, the agenda of the governing board meeting approving
the sale shall identify that CABs are proposed. Requires the
resolution to be publicly noticed on at least two consecutive
meeting agendas, first as an information item and second as an
action item. Requires the governing board to be presented
with the following information:
a) Disclosure of the financing term and time of maturity,
repayment ratio, and the estimated change in the assessed
value of taxable property within the school district or
community college district over the term of the bonds.
b) An analysis containing the total overall cost of the
bonds that allow for the compounding of interest.
c) A comparison to the overall cost of current interest
bonds (CIBs).
d) The reason bonds that allow for the compounding of
interest are being recommended.
e) A copy of the disclosure made by the underwriter as
required by Rule G-17 adopted by the federal Municipal
Securities Rulemaking Board.
6)Requires bonds that allow for the compounding of interest,
such as CABs, issued under the provisions specified in the
Government Code to comply with the parameters for such bonds
established in the Education Code, including, but not limited
to, the provisions limiting the term of such bonds to 25
years, a maximum interest rate of 8%, a limit of the debt
service to principal ratio of four to one, the requirement
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that such bonds that have a term longer than 10 years be
subject to redemption, and required disclosures in the
governing board agenda and to the governing board.
7)Requires districts that choose to issue bonds that have a term
greater than 30 years to comply with the provisions requiring
disclosure to the governing board and make a finding that the
useful life of the facility will equal or exceed the maturity
date of the bonds that have a maturity between 30 and 40
years.
The Senate amendments :
1)Reinstate the authority for school districts and community
college districts to issue bonds under the provisions
specified in the Government Code.
2)Require school districts and community college districts
issuing CABs under the Government Code to meet the parameters
established under the Education Code.
3)Require school districts and community college districts
issuing CIBs with a maturity greater than 30 years to comply
with the disclosures required of CABs and make a finding that
the lifespan of the facility funded by the bond will exceed
the term of the bond.
4)Require a governing board to schedule two local governing
board meetings regarding the sale of CABs, one for
informational purposes, and the other to take action.
5)Add additional information required to be provided to the
governing board, including disclosure of the financing term
and time of maturity, repayment ratio, and the estimated
change in the assessed value of taxable property within the
school district or community college district over the term of
the bonds.
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. General Obligation
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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 two-thirds
supermajority vote. In 2000, voters approved Proposition 39,
which allows passage of a local education bond based on a 55%
vote rather than a two-thirds 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 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 under provisions specified
under the Education Code or the Government Code. 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 : 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).
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 under Proposition 39, 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 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,
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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.
Purpose of the bill : According to the authors, this bill was
introduced due to concerns about 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 at higher interest rates, 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. For example, the
total debt service to principal ratio of Poway Unified School
District's 2011 CAB that has been highlighted by the media is
9.3 to 1. Taxpayers 20 to 40 years from now will pay almost $1
billion for borrowing $105 million.
What the bill does : According to the authors, this bill was
introduced to impose parameters on bond issuances. It does not
prohibit CABs, although it is likely that there will be a
reduction in the use of CABs. The bill has the following
components:
1)Limits the term of CABs and any other type of bond that allows
for the compounding of interest to 25 years.
2)Limits the ratio of total debt service to principal for each
bond series to four to one under the Education Code.
3)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.
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Financial advisors estimate an increase between the ranges of
10 to 30 basis points (.1% to .3%), but allowing a district to
refinance will have longer-term financial benefits.
4)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)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.
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."
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.
Analysis Prepared by : Sophia Kwong Kim / ED. / (916) 319-2087
FN: 0002029
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