BILL ANALYSIS                                                                                                                                                                                                    



                                                                    AB 2738


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          Date of Hearing:  April 6, 2016


                           ASSEMBLY COMMITTEE ON EDUCATION


                              Patrick O'Donnell, Chair


          AB 2738  
          (Olsen) - As Amended March 28, 2016


          SUBJECT:  School bonds:  local school bonds:  investment


          SUMMARY:  Prohibits the proceeds from the issuance of bond funds  
          to be withdrawn by a school district or community college  
          district for investment outside the county treasury.  Specifies  
          that after all project costs related to the issuance of the  
          bonds have been paid, any remaining balance or surplus in the  
          building fund of the school district or community college  
          district shall be applied to debt service.  Clarifies that any  
          reference to "governing board" means the governing board of a  
          school district or a community college district.


          EXISTING LAW:  


          1)Authorizes school districts and community college districts to  
            issue general obligation (GO) bonds upon approval by voters  
            and establishes a process and guidelines for such issuances  
            under the Education Code.  Authorizes any city, county, city  
            and county, school district, community college district, or  
            special district to issue GO bonds, secured by the levy of ad  
            valorem taxes, and establishes a process for such issuances  
            under the Government Code.  (Education Code (EC) Section 15100  
            et seq. and Government Code Section 53506 et seq.) 








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          2)Requires a county to levy and collect taxes, pay bonds, and  
            hold bond proceeds and tax funds issued for bond issued and  
            sold pursuant to the Education Code.  (EC Section 15140(b))


          3)Requires the proceeds of the sale of bonds to be deposited in  
            the county treasury credited to the building fund of the  
            school district or community college district.  Requires the  
            proceeds to be drawn out as other school moneys are drawn out  
            and prohibits the bond proceeds to be applied to any purposes  
            other than those for which the bonds were issued.  (EC Section  
            15146(g))


          FISCAL EFFECT:  None.  This bill is keyed non-fiscal by the  
          Legislative Counsel.  


          COMMENTS:  Background.  School districts and community college  
          districts pay for the construction and rehabilitation of school  
          and community college facilities through a combination of state  
          education bond funds, developer fees, and local bond funds.  GO  
          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 2/3  
          supermajority vote.  In 2000, voters approved Proposition 39,  
          which provided an option for approval of a local education bond  
          based on a 55% vote rather than a 2/3 vote.    


          Once bonds are authorized or approved by voters, districts can  
          issue or sell the bonds.  Under current law, school and  
          community college districts can issue GO bonds under the  
          provisions of the Education Code or under the provisions of the  
          Government Code, which governs bond issuances for any city, city  
          and county, special district, as well as school district or  
          community college district.  There are some notable differences  








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          between the two codes.  The Government Code authorizes the term  
          of bonds to be up to 40 years, whereas the Education Code limits  
          term of bonds to 25 years.  The Government Code authorizes  
          issuers to issue on their own, whereas the Education Code  
          requires school districts to go through county boards of  
          supervisors.  The Government Code authorizes a maximum interest  
          rate of 12% whereas the Education Code limits interest rates to  
          8%.


          What does this bill do?  This bill affects bonds issued pursuant  
          to the Education Code.  Specifically, the bill prohibits a  
          school or community college district to withdraw proceeds of  
          funds issued by a county for purposes of investment outside the  
          county treasury.  The bill also requires any remaining balance  
          of bond funds or surplus in the building fund of the school or  
          community college district, after all project costs related to  
          the issuance of the bond have been paid, to be applied to debt  
          service.  


          This bill is sponsored by the California Association of County  
          Treasurers and Tax Collectors in response to a request by the  
          San Mateo County Community College District located in San Mateo  
          County (County) to withdraw funds deposited in the county  
          treasury on behalf of the community college district for the  
          purpose of investment outside of the county investment pool.   
          The author states that county treasurers have training and  
          experience with investment of large pools of money and allowing  
          districts to invest school bond dollars on the open market would  
          create an enormous amount of risk and leave taxpayers liable for  
          bond debt service if investment losses occur. 


          The San Mateo County Community College District states that it  
          wishes to manage the funds because the District wanted to invest  
          the funds in longer term investments and because the county  
          investment resulted in a loss to the District's funds.  The  
          District states that the project for which bonds were issued  








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          would take a period of five years to complete.  As such, the  
          District requested the now former County Treasurer to allow the  
          District to direct the County's funds towards longer term  
          investments or be allowed to withdraw the funds to invest on  
          their own.  Subsequently, in 2008, the County invested in an  
          investment bank that filed for bankruptcy, causing the County to  
          lose $155 million, of which $25 million belonged to the  
          District.  The County has since recovered some of the $155  
          million, restoring $13 million of the $25 million the District  
          lost.  


          It is unclear whether the District's intention to make  
          longer-term investments would violate federal arbitrage  
          regulations, which limit tax-exempt bonds from excessive  
          earnings.  This is to discourage issuers from issuing bonds long  
          before funds are required and to discourage issuers from issuing  
          more bonds than necessary.          


          Does current law allow school or community college district to  
          invest funds?  Current law requires counties to levy and collect  
          taxes, pay bonds, and hold bond proceeds and tax funds for bonds  
          issued and sold pursuant to the Education Code.  Current law  
          also requires the proceeds of the sale of bonds to be deposited  
          in the county treasury credited to the building fund of the  
          school district or community college district.  The statute does  
          not explicitly authorize nor does it prohibit the funds to be  
          withdrawn by a school or community college district for  
          investment separately.  However, because the statute requires a  
          county to hold bond proceeds and directs the proceeds to be  
          deposited in the county treasury, it can be argued that the  
          Legislature intended for the funds to be managed by counties.  


          Who should have control?  Both supporters and opponents make the  
          argument that they should have control over the funds in the  
          event the other party (County Treasurer or school or community  
          college district) sustains a loss.  Losses are possible  








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          regardless of whether the County Treasurer or school or  
          community college districts manage the funds.  Opponents argue  
          that they should have the authority to make longer term  
          investments because a project may take a number of years for  
          completion.  Even if districts managed their own funds, they are  
          subject to the same investment parameters specified in the  
          Government Code (Section 53600 et seq.).  Opposition may wish to  
          consider seeking a change in the Government Code to allow county  
          treasurers to make longer term investments without violating  
          federal arbitrage regulations for funds that may not be needed  
          immediately.  


          Use of bond proceeds.  This bill requires that after all project  
          costs related to the issuance of the bonds have been paid, any  
          remaining balance or surplus in the building fund of the school  
          district or community college district shall be applied to debt  
          service.  Staff recommends striking this provision.  Current law  
          requires the proceeds to be drawn out as other school moneys are  
          drawn out and prohibits the bond proceeds to be applied to any  
          purposes other than those for which the bonds were issued.   
          Moreover, Proposition 39 of 2000 specifies that the proceeds  
          from the sale of the bonds shall only be used for the following  
          purposes and not for any other purposes: construction,  
          reconstruction, rehabilitation or replacement of school  
          facilities, including the furnishing and equipping of school  
          facilities.  Adding this provision may pose a conflict with  
          existing law and Proposition 39.  


          Arguments in support.  The California Association of County  
          Treasurers and Tax Collectors states, "County Treasurers have  
          historically served as the treasurer for public agencies located  
          inside county boundaries and this includes school and community  
          college districts.  Districts enjoy the benefit of a secure  
          repository and handling of their funds, including the proceeds  
          from any voter-approved bonds.  County treasurers must abide by  
          a strict set of statutory requirements that govern their  
          investment strategy, with the overarching goal being to protect  








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          principal, with liquidity and yield being secondary and tertiary  
          priorities.  Given the size of many voter-approved bond proceeds  
          - in the hundreds of millions of dollars - a professional  
          investment manager is needed.  However, the immense demands put  
          on school districts to deliver high quality education should not  
          compete with the needs to manage such vast sums.  Thus,  
          logically, the professional public treasury staff in the County  
          have historically handled these funds."


          Arguments in opposition. The San Mateo County Community College  
          District (SMCCCD) states, "SMCCCD knows that the existing law  
          should have permitted us to invest the funds in a more secure  
          and longer term investment and might have allowed SMCCCD to  
          avoid these losses.  We do not believe that restricting schools  
          and colleges from withdrawing bond funds to invest according to  
          the cash flow needs of their project is a good idea."     


          REGISTERED SUPPORT / OPPOSITION:




          Support


          California Association of County Treasurers and Tax Collectors  
          (sponsor)


          Howard Jarvis Taxpayers Association




          Opposition










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          California Association of School Business Officials


          Coalition for Adequate School Housing


          Community College Facility Coalition


          San Mateo County Community College District




          Analysis Prepared by:Sophia Kwong Kim / ED. / (916) 319-2087