BILL ANALYSIS                                                                                                                                                                                                    



                                                                  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  


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