LOS ANGELES — California Gov. Jerry Brown signed a bill Wednesday to regulate and limit school districts' issuance of capital appreciation bonds.
Assembly Bill 182, introduced by Assemblymember Joan Buchanan, D-Alamo, and Sen. Ben Hueso, D-San Diego, establishes parameters for the issuance of local education bonds that compound interest.
It requires the ratio of total debt service to principal for each bond series to not exceed four to one, limits maturities to 25 years, and requires deals to permit early repayment on CABs with maturities longer than 10 years.
"AB 182 corrects a fundamental unfairness," said State Treasurer Bill Lockyer, who has supported the legislation. "It ensures school districts no longer can heap outrageous debt burdens on the backs of future generations of taxpayers, force them to pay for aging facilities their children won't fully enjoy and at the same time reduce those taxpayers' ability to finance the schools their kids need."
The bill also requires governing boards to be provided additional information regarding the issuance of CABs and for current interest bonds that are issued for a period over 30 years. Such information includes disclosure of the terms and costs of CABs, how they compares to other bond deals, the debt service ratio, and the reason why CABs are recommended.
Boards will have to first discuss the issuance of CABs at an informational meeting, then vote on the issuance at a second meeting.
"The reforms are reasonable and balanced, and they won't harm districts' ability to meet their school construction needs," Lockyer said. "By increasing transparency, AB 182 also helps ensure school board members and taxpayers get all the pertinent facts when underwriters and financial advisors pitch CABs."
AB 182 was introduced after media attention brought to light situations where capital appreciation bonds had been issued with repayment schedules that have greater than a 10-to-1 ratio of interest payments to principal — sometimes as high as a 20-to-1 ratio.
CABs pay a compounded interest rate and principal upon maturity, instead of through regular payments over time. They allow school districts to finance construction projects and defer debt-service payments in the short-term, avoiding property tax increases. But the districts incur higher costs in the long run.
