SAN FRANCISCO – California lawmakers have introduced legislation that would curb the use of long-maturity, non-callable capital appreciation bonds by school and community college districts.
Assembly members Joan Buchanan, D-Alamo, and Ben Hueso, D-San Diego, proposed
The lawmakers’ proposal comes after a flurry of bad publicity in California and a push for change by politicians over the use of what some see as very expensive CABs issued by school districts.
“We will continue to work with lawmakers and interested parties to craft the best bill possible,” said Tom Dresslar, a spokesman for Treasurer Bill Lockyer, who is a sponsor of the bill. “We believe the bill will strengthen protections for taxpayers and increase transparency so that school boards and the public know what they are getting into before CABs are issued.”
The proposed bill would change exiting education and government statutes to reduce the maximum interest rates for school and community college districts to 8% from 12%, require their ratios of total debt service to principal for each series of bonds not to exceed 4-to-1 , and would require any bond maturing after 10 years to allow for a mandatory tender or redemption before maturity.
The legislation also would require the district boards to adopt a detailed analysis explaining the reasons for issuing the capital appreciation bonds as part of adopting a resolution prior to the sale.
The California Public Securities Association, a lobbying organization, has yet to take a position on the proposed bill, according to its Chairman James Cervantes, a managing director in San Francisco at Stone & Youngberg, a division of Stifel Nicolaus.
Buchanan and Hueso did not return calls to comment.
Hueso, working with San Diego Treasurer and Tax Collector Dan McAllister, said in September he would put forward a similar measure.
CABs became a hot-button subject after the publication Voice of San Diego detailed how the Poway Unified School District in San Diego County sold $105 million CABs that require nearly $1 billion in debt service at their 40-year maturity, without an option to call the bond.
Many members of the public finance industry see CABs as a valuable tool that have been used to help schools pay for construction that they otherwise couldn’t afford.
CABs pay a compounded interest rate and principal upon maturity instead of through regular payments over time.
Some school districts turned to CABs as a way to finance construction projects despite sluggish property-tax revenues amid legal limits on their debt burden. The bonds allowed them to defer debt-service payments in the short term, avoiding near-term property-tax rate increases, but incurring higher costs in the long run.
CABs can present an opportunity for misuse if school districts are uneducated about the risks, said Howard Cure, an analyst with Evercore Wealth Management in New York.
“The fear is if you are totally reliant on it with these big bullet maturities at the end, then it is risky,” Cure said. “School districts need to have a level of financial sophistication to realize how this instrument would fit into their overall debt profile.”
