BILL ANALYSIS Ó
SB 222
Page 1
SENATE THIRD READING
SB
222 (Block)
As Amended May 19, 2015
Majority vote
SENATE VOTE: 38-0
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|Committee |Votes|Ayes | |
| | | | |
| | | | |
| | | | |
|----------------+-----+----------------------+--------------------|
|Local |9-0 |Maienschein, | |
|Government | |Gonzalez, Alejo, | |
| | |Chiu, Cooley, Gordon, | |
| | |Holden, Linder, | |
| | |Waldron | |
| | | | |
| | | | |
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SUMMARY: Enacts a statutory lien to secure general obligation
(GO) bonds issued or sold by a city, county, city and county,
school district, community college district, authority, or
special district. Specifically, this bill:
1)Requires all GO bonds issued and sold by or on behalf of a
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local agency to be secured by a statutory lien on all revenues
received, pursuant to the levy and collection of the tax.
2)Requires the lien to automatically arise without any further
action or authorization by the local agency or its governing
board
3)Requires the lien to be valid and binding from the time the
bonds are executed and delivered.
4)Requires the revenue received, pursuant to the levy and
collection of the tax, to be immediately subject to the lien
and requires the lien to immediately attach to the revenues
and be effective, binding, and enforceable against the local
agency, its successors, transfers, and creditors, irrespective
of whether those parties have notice of the lien and without
the need for any physical delivery, recordation, filing or
further act.
5)Specifies that this section is not intended to supplement or
limit a local agency's power to issue GO bonds conferred by
any other law.
6)Defines local agency to mean any city, county, city and
county, school district, community college district,
authority, or special district.
7)Defines GO bonds to mean bonds, warrants, notes, or other
evidence of indebtedness of a local agency payable from the
proceeds of ad valorem taxes that may be lived, pursuant to
the California Constitution Article XIII A ,Section
1(b)(2)(3).
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FISCAL EFFECT: None
COMMENTS:
1)General Obligation Bonds. The Legislature has granted cities,
counties, school districts and several types of special
districts the authority to issue GO bonds. These GO bonds
issued by local agencies are secured by the legal obligation
to levy an ad valorem property tax on taxable property in an
amount sufficient to pay the debt service. The rate of the
annual ad valorem taxes levied by the local agency to repay GO
bonds is determined by the relationship between the assessed
valuation of taxable property in the local agency and the
amount of debt service due on the GO bonds in any year.
Two-thirds of voters must approve the issuance of a GO bond,
and in doing so, approve the levy of an ad valorem tax to pay
the bond. Proposition 39 (2000) enables school districts to
issue GO bonds upon a 55% voter approval, subject to specified
conditions. 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.
2)Bankruptcy. Recent bankruptcy cases across the country
(Jefferson County, Alabama and City of Detroit, Michigan) have
raised new questions about the security and treatment of GO
bonds after the filing of Chapter 9 (municipal bankruptcy).
It is difficult to conclude the treatment of GO bonds in all
Chapter 9 cases due to the differences in state law. However,
California is listed as one of the five states that have GO
bonds backed by a statutory lien, pursuant to the requirements
under state law which require local agencies to secure GO
bonds with a broad pledge of voter approved ad valorem tax
revenues. A statutory lien is one type of lien recognized by
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the Bankruptcy Code that arises by statute, and does not
require any consent between parties (security interests) or
judicial action (judicial lien). In Bankruptcy Court, GO
bonds backed by statutory liens are secured claims meaning
they cannot be altered.
In past bankruptcy cases in California (San Jose Unified in
1983, Orange County in 1994, and Sierra Kings Health Care
District in 2009), GO bond debt was preserved and the local
agencies continued to make payments to bondholders. While
there have been more recent cases of bankruptcy in California
among cities and special districts, financially struggling
school districts take a different path. As a result of court
decisions (Butt v. State of California, 1992) placing the
ultimate responsibility for ensuring the equitable provision
of public education to all students, including those in
financially failing school districts, and the resulting early
experiences with districts on the verge of insolvency, the
state developed a process for providing financial oversight to
school districts, and for providing financial assistance and
financial recovery to school districts in financial trouble
[AB 1200 (Eastin), Chapter 1213, Statutes of 1991]. As a
result, the AB 1200 process has been sufficient to pull nine
school districts out of immediate financial trouble and return
them to a more stable fiscal condition.
3)Bill Summary. This bill enacts a statutory lien to secure GO
bonds issued by a city, county, city and county, special
district, authority, school district, and community college
district. This bill requires the statutory lien arise
automatically without the need for any action or authorization
by the local agency or its governing body. Under this bill,
the lien will be valid and binding from the time the bonds are
executed and delivered. Additionally, this bill requires that
the lien must immediately attach to the GO bond revenues and
be effective, binding, and enforceable against the local
agency, its successors, purchasers of those revenues,
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creditors, and all other asserting rights therein,
irrespective of whether those parties have notice of the lien
and without the need for any physical delivery, recordation,
filing, or further act. School districts have the authority
to issue GO bonds under both the Government Code and the
Education Code, therefore, the author and sponsor want to
amend both codes to emphasize the statutory lien for school
districts.
This bill is sponsored by San Diego Unified School District.
4)Author's Statement. According to the author, "[This bill]
clarifies that GO bonds issued and sold by school districts,
community college districts, and local governments are secured
by a statutory lien on the taxes collected for their payment.
Current practice among bond rating agencies is to analyze the
fiscal strength of the issuing district or region when giving
the bonds a rating because they are concerned that if the
district or local government were to declare bankruptcy, the
taxes levied for payment of their general obligation bonds
could be diverted by the bankruptcy court reducing or
suspending payments to the bondholders. In the case of school
districts with less financial stability, it can result in a
lower rating on the bond issuance which results in taxpayers
paying more for improvements to their schools than their
counterparts in districts with more financial stability, even
though the risk is the same.
"[This bill] clarifies that the statutory liens protect GO
bonds thus eliminating the risk of non-repayment. In the
event credit ratings were improved, it could result in savings
to a school district, community college district, or local
government."
5)Policy Consideration. Supporters of this bill contend that
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current practice among bond rating agencies is to analyze the
financial strength of the issuing local agency as opposed to
the actual security for repayment of the GO bond debt, the
property tax base. Proponents argue that this causes school
districts with less financial stability to get a lower rating
on bond issuance causing some districts to pay more for school
improvements than other districts with greater financial
stability. While equity is a good public policy goal, the
Legislature may wish to consider if this bill will achieve
that equity and if bond rating agencies will still analyze the
overall financial strength of a local agency despite the
pledged security of a statutory lien on the revenue that will
be used to repay the bond debt.
6)Arguments in Support. Supporters argue that this bill
clarifies existing law to secure GO bonds by way of a
statutory lien on the taxes collected for their repayment. By
clarifying in statute that these are statutory liens, it would
reduce bankruptcy risks on GO bonds and local agencies would
potentially benefit from higher credit ratings, improved
interest rates, and savings to their bond costs.
7)Arguments in Opposition. None on file.
Analysis Prepared by:
Misa Lennox / L. GOV. / (916) 319-3958 FN:
0000979
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