BILL ANALYSIS Ó AB 2738 Page 1 ASSEMBLY THIRD READING AB 2738 (Olsen) As Amended April 13, 2016 Majority vote ------------------------------------------------------------------ |Committee |Votes|Ayes |Noes | | | | | | | | | | | | | | | | |----------------+-----+----------------------+--------------------| |Education |7-0 |O'Donnell, Olsen, | | | | |Kim, McCarty, | | | | |Santiago, Thurmond, | | | | |Weber | | | | | | | | | | | | ------------------------------------------------------------------ SUMMARY: Prohibits the proceeds from the issuance of bond funds to be withdrawn by a school district or community college district for investment outside the county treasury. 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 AB 2738 Page 2 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.) 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, AB 2738 Page 3 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 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%. This bill affects bonds issued pursuant to the Education Code. Specifically, this 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. 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 (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. AB 2738 Page 4 The 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 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. AB 2738 Page 5 Who should manage the funds? 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 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. 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 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 District states, "SMCCCD knows that the existing law should have permitted us to invest the AB 2738 Page 6 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." Analysis Prepared by: Sophia Kwong / ED. / (916) 319-2087 FN: 0002749