BILL ANALYSIS                                                                                                                                                                                                    



          SENATE COMMITTEE ON EDUCATION
                              Senator Carol Liu, Chair
                                2015 - 2016  Regular 

          Bill No:             AB 2738             
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          |Author:    |Olsen                                                |
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          |Version:   |April 13, 2016                             Hearing   |
          |           |Date:     June 8, 2016                               |
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          |Urgency:   |No                     |Fiscal:     |No              |
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          |Consultant:|Kathleen Chavira                                     |
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          Subject:  School bonds:  local school bonds:  investment


            SUMMARY
          
          This bill prohibits a school or community college district from  
          withdrawing proceeds from the sale of bonds for investment  
          outside the county treasury. 

            BACKGROUND
          
          Existing law 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.  Existing law also  
          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  15100, et seq. and Government Code  53506, et  
          seq.)

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

          Existing law requires the proceeds of the sale of bonds to be  
          deposited in the county treasury and to be credited to the  
          building fund of the school district or community college  







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          district.  Existing law requires these proceeds be drawn out as  
          other school moneys are drawn out and prohibits the withdrawn  
          bond proceeds from being applied to any purposes other than  
          those for which the bonds were issued.  (EC  15146(g))

          Existing law specifies the types of securities that are eligible  
          for the investment of surplus state funds and contains specific  
          provisions and requirements regarding how and where public money  
          may be invested.  (Government Code  16340,  16429.1, 
           53601,  53601.6,  53601.8,  53635,  53635.2,  53635.8,   
          53638, and  53684)  
            
          ANALYSIS
          
          This bill:

          1)   Prohibits a school or community college district from  
               withdrawing proceeds from the sale of bonds for purposes of  
               investment outside the county treasury.

          2)   Makes several technical and clarifying amendments.

          STAFF COMMENTS
          
          1)   Source of the bill.  According to the author, county  
               treasurers are tasked with managing county resources  
               because of their extensive knowledge and expertise in  
               issuing bonds and investing large sums of taxpayer dollars.  
                This bill, sponsored by the California Association of  
               County Treasurers and Tax Collectors, responds to a  
               conflict in San Mateo between the County and a local  
               community college district regarding the withdrawal of  
               funds for the purpose of investment outside the county  
               investment pool.  

               In November 2014, voters approved $338 million in  
               facilities bonds for the San Mateo Community College  
               District (SMCCD).  In June 2015, the SMCCD Board declared  
               $109 million in bond proceeds surplus for the purpose of  
               authorizing withdrawal from, and investment outside of, the  
               county investment pool. Reportedly, the intent was to allow  
               the district to generate greater earnings than that  
               realized through the county treasurer. 









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               The author is concerned that allowing school districts to  
               invest bond dollars creates greater risk and potentially  
               compromises funds necessary for school maintenance and  
               upgrades, as well as voter support of future school bonds.  
               In addition, the author is concerned that funds intended  
               for classroom construction could be diverted to pay  
               investment fees to private parties at greater cost than  
               would be incurred by the use of a public agency.

          2)   Does current law need clarification?  Current law (EC   
               41015) authorizes districts that have any surplus moneys  
               not required for the immediate necessities of the district  
               to invest all or part of the funds in any investments  
               authorized under specified Government Code provisions.   
               However, statute also requires that proceeds from the sale  
               of bond funds be deposited in the county treasury and  
               prohibits the withdrawal of these funds for purposes other  
               than those for which the bonds were issued. This bill is  
               prompted by a disagreement in the interpretation and  
               application of current law. 

               The sponsors of the bill report that withdrawal of funds  
               for outside investment has only been proposed twice so far  
               (in two northern California counties), but are concerned  
               about the potential incentive for private financial  
               industry providers to encourage districts to expand this  
               practice.  School and community college representatives  
               report that districts in other parts of the state have  
               withdrawn funds for this purpose with no conflicts with the  
               county treasury. 

               Staff notes that, while the range of risk associated with  
               an investment portfolio would depend upon the choices made  
               by the investing entity, all local agencies are bound by  
               the same state and federal requirements regarding the  
               investment of public funds.  
           
          3)   Underlying policy questions?  While the impetus of this  
               bill emanates from a district's desire to pursue a more  
               aggressive investment strategy than that of the county  
               treasurer, districts also cite examples of counties whose  
               investment strategy may be riskier than an elected school  
               or community college board would prefer.  Both county  
               treasurers and districts are authorized to invest public  








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               funds, and depending upon the district/county, it is likely  
               that each would have varying levels of expertise available  
               to them for this purpose.  The provisions of this bill are  
               specific to the investment of proceeds from the sale of  
               voter authorized bonds outside the county treasury. The  
               committee may wish to consider:

                  a)        Should proceeds from the sale of bonds be  
                    treated differently than other funds that a school  
                    district might receive and invest? Is the sale of  
                    bonds for purposes of investment by a school district  
                    an appropriate use of bond funds?  

                  b)        How many school districts have the expertise  
                    to invest bond proceeds independent of a county  
                    treasurer?  Are the existing bond accountability and  
                    audit processes sufficient to ensure oversight of  
                    district investment practices? 
                
                  c)        Are there examples of county treasuries that  
                    have made poor investment decisions and jeopardized  
                    district funds?  How widespread are these examples?

                  d)        Do country treasuries offer adequate  
                    mechanisms for districts to oversee investment policy  
                    and ensure that districts' investment needs are being  
                    met?
                
            SUPPORT
          
          California Association of County Treasurers and Tax Collectors
          Howard Jarvis Taxpayers Association
          San Mateo County Board of Supervisors

            OPPOSITION
           
           California Association of School Business Officials
          Coalition for Adequate School Housing
          Community College Facility Coalition
          San Mateo County Community College District

                                      -- END --
          









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