BILL ANALYSIS Ó
AB 2738
Page 1
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to be withdrawn by a school district or community college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