BILL ANALYSIS Ó
AB 2738
Page 1
ASSEMBLY THIRD READING
AB
2738 (Olsen)
As Amended April 13, 2016
Majority vote
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|Committee |Votes|Ayes |Noes |
| | | | |
| | | | |
| | | | |
|----------------+-----+----------------------+--------------------|
|Education |7-0 |O'Donnell, Olsen, | |
| | |Kim, McCarty, | |
| | |Santiago, Thurmond, | |
| | |Weber | |
| | | | |
| | | | |
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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to be withdrawn by a school district or community college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
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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,
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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.
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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.
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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
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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