BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |SB 222 |Hearing |4/8/15 |
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|Author: |Block |Tax Levy: |No |
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|Version: |2/12/15 |Fiscal: |No |
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|Consultant|Weinberger |
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STATUTORY LIEN FOR SCHOOL GENERAL OBLIGATION BONDS
Specifies that general obligation bonds issued and sold by a
school district or community college district are secured by a
statutory lien.
Background and Existing Law
School districts can finance improvements with district-wide
voter-approved general obligation (GO) bonds (Education Code
15100, et seq.). School districts can also finance improvements
with voter-approved GO bonds issued by "school facilities
improvement districts" that are less than district-wide
(Education Code 15300, et seq., added by AB 3747, Quackenbush,
1994 and recodified by SB 161, Greene, 1997).
Like all GO bonds issued by California local governments, school
districts' GO bonds are secured by a district's pledge to levy
ad valorem property taxes in an unlimited amount as necessary to
pay debt service on the bonds. Because GO bonds are backed by
such a broad and reliable security pledge, they typically obtain
the highest bond ratings and widest investor acceptance, which
results in the lowest borrowing costs among various types of
long-term bonds.
It has generally been assumed that the broad pledge of ad
valorem tax revenues to back GO bonds pursuant to state law
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establishes a "statutory lien," which federal bankruptcy law
would treat as a secured claim that would not be subject to
modification if an issuer files for bankruptcy. Recent
high-profile cases of municipal insolvency, like the City of
Detroit's bankruptcy filing, have caused some municipal finance
practitioners to raise questions about the security of GO bonds
in municipal bankruptcy proceedings.
School district officials worry that uncertainty about whether a
statutory lien secures a school district's GO bonds may cause
ratings agencies to give those bonds a lower rating than they
would receive without that uncertainty. A lower rating
increases the borrowing costs that are borne by the district's
taxpayers. School district officials want legislators to
eliminate potential uncertainty by amending state law to
explicitly declare that a statutory lien secures school
districts' GO bonds.
Proposed Law
Senate Bill 222 declares that bonds issued and sold pursuant to
the statutes that govern school and community college districts'
general obligation bonds are secured by a statutory lien on all
revenues received pursuant to the levy and collection of the tax
levied by the district upon the property in the district for the
interest and redemption of all outstanding bonds of the
district.
SB 222 requires that:
The lien must automatically attach without further
action or authorization by the governing board of the
school district or community college district.
The lien is valid and binding from the time the bonds
are executed and delivered.
The revenues received pursuant to the levy and
collection of the tax are immediately subject to the lien
The lien must automatically attach to the revenues and
be effective, binding, and enforceable against the school
district or community college district, its successors,
transferees, and creditors, and all others asserting rights
SB 222 (Block) 2/12/15 Page 3
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therein, irrespective of whether those parties have notice
of the lien and without the need for any physical delivery,
recordation, filing, or further act.
State Revenue Impact
No estimate.
Comments
1. Purpose of the bill . Bond rating agencies perceive that some
school districts' distressed financial conditions could pose a
threat to those districts' GO bond payments. As a result,
districts in financial difficulty receive lower GO bond ratings
than do districts in more stable financial condition. Fiscally
distressed school districts are often among those districts that
most need the kinds of facilities renovation or rehabilitation
that can be financed through GO debt. Lower bond ratings
increase those districts' borrowing costs, creating an
additional obstacle to financing their facilities projects. By
enacting language that unambiguously attaches statutory liens to
school districts' GO bonds, SB 222 will improve some districts'
bond ratings. Higher ratings will reduce the bonds' interest
rates, allowing district taxpayers to finance more school
facility improvements at lower costs.
2. Unintended consequences . One rule of legal interpretation is
that if a law mentions some things, by implication it excludes
other things (expressio unius est exclusio alterius). By
explicitly applying a statutory lien only to school districts'
GO bonds, SB 222 may imply that a statutory lien does not apply
to GO bonds issued by a city, county, or special district. That
implication could have negative consequences for non-school GO
bond ratings. To avoid raising unintended questions about
whether a statutory lien applies only to some local government
GO bonds and not others, the Committee may wish to consider
amending SB 222 to apply the bill's provisions to all general
obligation bonds issued by California local governments.
3. Uncertain benefits . The benefits of enacting explicit
statutory lien language for local government GO bonds may not be
widespread. A commentary on statutory liens issued by the
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ratings agency Standard & Poor's (S&P) on March 24, 2015
suggests that statutory lien provisions, like those in SB 222,
may only have a positive effect on ratings of bonds issued by a
relatively small universe of fiscally distressed issuers. The
commentary notes that a bankruptcy filing could call the
timeliness of GO bond payments into question regardless of
whether a statutory lien guarantees bondholders' claims on
pledged tax revenues. As a result, because the timeliness of
payments is a critical component of GO bond ratings, regardless
of an issuer's ability to pay, SB 222 may not change the vast
majority of ratings. S&P's commentary proposes that possible
ratings benefits may be warranted if some fiscally distressed
issuers are less likely to default on bond payments because they
understand that they ultimately will be responsible for those
payments regardless of any subsequent bankruptcy filing.
Support and
Opposition (4/2/15)
Support : California Association of School Business Officials;
Coalition for Adequate School Housing; Lemon Grove School
District; Riverside County school district superintendents;
Riverside County Superintendent of Schools; San Diego Unified
School District.
Opposition : Unknown.
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