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Sunday, November 4, 2012

Sacramento To Crackdown On Emery Style School Bonds

Emery School Bond Financing To Be Limited By State Lawmakers

The Emery Unified School District is rushing forward to sell a type of construction bond that the state has determined to be fiscally reckless.  Emery is building a new school campus on San Pablo Avenue but it lacks enough money raising capacity to finance the project in the normal way, or via General Obligation Bonds.  The District is turning instead to a much more expensive type of financing called the Capital Appreciation Bond, or CAB.  
School District officials have been saying they want to raise $20 million via CAB financing but they have recently scaled back the draw to $16 million recently due to constraints from the 'assessed valuation' of Emeryville property owners.  
If lawmakers in Sacramento are successful in their efforts to outlaw the most egregious components of CABs, Emery will have to call back or modify its "Series D"  CAB for the Center of Community Life school construction project.

From the CASBO News Break:

California Association of School Business Officials

Legislation forthcoming on capital appreciation bonds
September 24, 2012By Jeff Vaca, Deputy Executive Director, Governmental Relations
Stating that “this statewide reform is long overdue,” Assembly Member Ben Hueso (D-Chula Vista) announced last week that he will introduce legislation to place significant limits on the use of capital appreciation bonds by school districts and community college districts.
The bill, which is being introduced by Assembly Member Hueso in partnership with Dan McAllister, the San Diego County Treasurer-Tax Collector, will be based on Mr. McAllister’s reform proposal that includes the following elements:
1. Limit the maturity of a bond issued under the Government Code from 40 years to 25 years.
2. Reduce the maximum allowable interest rate from 12 percent to 8 percent.
3. Require one of three government entities – the county board of supervisors, the county superintendent of schools or the governing board of a community college district – to sign off on bond documents for school districts.
4. Establish a prudent debt service coverage ratio not to exceed 4 to 1.  If greater than 4 to 1, a waiver from the county superintendent would be required.
On the day that Assembly Member Hueso made his announcement, Senate President pro Tem Darrell Steinberg (D-Sacramento) released the following statement to the press:
“I’m certainly troubled by reports that some school districts are borrowing large sums of money at high interest rates and pushing their debt service obligations far into the future, disregarding the burden that repayment will impose on future taxpayers.  I will ask the Senate Committee on Governance and Finance to investigate this issue and develop recommendations to curb these practices.  The proposal by San Diego County Treasurer Dan McAllister seems to offer a good start.”
In a letter to Mr. McAllister dated Sept. 19, State Treasurer Bill Lockyer also expressed his support for the legislative proposal, stating in part:
“I commend you on your leadership in addressing serious problems with capital appreciation bonds (CABs) – problems that threaten the best interests of school districts and taxpayers.
Particularly at a time when school districts are struggling with reduced property values and tax revenues, CABs can have an appropriate place in facilities financing programs.  I am very troubled, however, by recent media reports about exorbitant debt service costs and onerous terms imposed by some CABs deals.
Clearly, reforms are needed to toughen taxpayer protections, increase transparency, strengthen oversight of CABs issuance and improve the quality of information provided to decision-makers and the public about CABs.”
It is also possible that an interim legislative hearing on the topic of CABs will be held this fall.  We will keep CASBO members apprised of any new developments on what is likely to be an issue at the forefront of legislative deliberations when the new session convenes in December.

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