(1)Existing law requires a school district to notify the county superintendent of schools and the county auditor when the governing board of the school district approves proceeding with the issuance of certificates of participation or revenue bonds or entering into specified agreements for financing school construction pursuant to the California School Finance Authority Act. The superintendent of the school district is required to provide specified information to the county auditor, the county superintendent of schools, the governing board, and the public regarding that debt.

Existing law requires the county superintendent of schools or superintendent of a school district for which the county board serves as governing board to notify the Superintendent of Public Instruction when the county board of education approves proceeding with the issuance of certificates of participation or revenue bonds or to entering into an agreement for financing pursuant to the California School Finance Authority Act. The county superintendent of schools or the superintendent of a school district for which the county board serves as the governing board is required to provide specified information to the Superintendent of Public Instruction, the governing board, and the public.

This bill would delete the language specifying that the scope of these provisions is limited to revenue bonds, and instead refer to bonds generally. The bill would also require that, no later than 30 days before the approval by the governing board of the school district to proceed with the issuance of bonds, the school district notify the county superintendent of schools and the county auditor. The bill would delete the language limiting the requirement of this notice to instruments that do not require approval of the voters of the school district or county.

To the extent that this bill would expand the requirements for the provision of notices by specified county officials, the bill would impose a state-mandated local program.

(2)The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that, if the Commission on State Mandates determines that the bill contains costs mandated by the state, reimbursement for those costs shall be made pursuant to these statutory provisions.

Date of Hearing: April 8, 2015

ASSEMBLY COMMITTEE ON EDUCATION

Patrick O'Donnell, Chair

ABPCA Bill Id:AB 912

Author:(Wilk) – As Introduced Ver:February 26, 2015

SUBJECT: Local educational agencies: school bonds: notices

SUMMARY: Expands the requirement for reporting issuances of non-voter-approved debt to include voter-approved debt. Specifically, this bill:

1. Requires a governing board of a school district to do the following:

   1. Notify the county superintendent of schools and the county auditor upon approval of the issuance of all bonds, not just revenue bonds, by the governing board.

   2. Notify the county superintendent of schools and the county auditor, no later than 30 days before the approval by a governing board of a school district to issue all bonds.

2. Requires the superintendent of the school district to provide the repayment schedules for that debt obligation, evidence of the ability of the school district to repay that obligation, and the issuance costs, to the county auditor, the county superintendent, the governing board, both before an issuance and upon approval by the governing board of an issuance.

3. Requires a county superintendent of schools to do the following:

   1. Notify the Superintendent of Public Instruction (SPI) upon approval of the issuance of all bonds, not just revenue bonds, by the county board of education.

   2. Notify the SPI, no later than 30 days before the approval by the county board of education to issue all debt instruments that are secured by real property.

4. Requires the county superintendent of schools or the superintendent of a school district for which the county board serves as the governing board to provide information necessary to assess the anticipated effect of the debt obligation, the repayment schedules, the evidence of the ability of the county office of education or school district to repay that obligation, and issuance costs to the SPI, both before an issuance and upon approval of an issuance.

EXISTING LAW:

1. Requires that upon approval by the governing board of a school district or a county office of education to proceed with the issuance of revenue bonds or entering an agreement for school facility financing through the California School Finance Authority, the school district shall provide notification to the county superintendent and county auditor. A county superintendent and district superintendent for which the county board serves as the governing board shall provide notification to the SPI.

2. Requires the superintendent of the school district to provide to the county superintendent of schools, the county auditor, the governing board and the public, the repayment schedules for that debt obligation and evidence of the ability of the school district to repay that obligation. Requires the county superintendent or the district superintendent for whom the county board serves as the governing board to provide to the SPI, the governing board and public, the repayment schedules for that debt obligation and evidence of the ability of the county office of education or school district to repay that obligation.

3. Provides that within 15 days of the receipt of the information, the county superintendent and the county auditor may comment publicly to the governing board of the school district regarding the capability of the school district to repay that debt obligation, and the SPI may comment publicly to the county board of education regarding the capability of the county board of education or school district to repay that debt obligation.

4. Provides that no later than 30 days before a governing board of a school district or a county office of education approves the issuance of certificates of participation (COPs) and other non-voter-approved debt instrument secured by real property, the superintendent of the school district shall notify the county superintendent of schools and the county auditor, and the county superintendent of schools shall notify the SPI.

5. Requires the superintendent of the school district to provide to the county superintendent of schools, the county auditor, the governing board and the public, information necessary to assess the anticipated effect of the debt issuance, including the issuance costs, the repayment schedules for that debt obligation, and evidence of the ability of the school district or county office of education to repay that obligation.

6. Provides that within 15 days of the receipt of the information, the county superintendent of schools and the county auditor may comment publicly to the governing board of the school district, and the SPI may comment publicly to the county board of education regarding the capability of the school district to repay that debt obligation.

FISCAL EFFECT: The Legislative Counsel has keyed this bill as a state-mandated local program.

COMMENTS: Existing law requires the superintendent of a school district to notify the county superintendent of schools, and the county superintendent of schools to notify the SPI, at least 30 days prior to approving a COP or other debt instruments that are secured by real property and do not require the approval of voters. This provision was enacted by AB 2197 (Mullin), Chapter, 128, Statutes of 2008, following reports of districts' over-reliance of COPs that could put school districts' or county offices of educations' general funds at risk.

A COP is a form of lease purchasing using properties (e.g., facilities and equipment) as collateral to borrow funds for physical capital needs. COPs do not require voter approval and are commonly used by local governmental entities to secure immediate resources. An independent party, sometimes another public entity or a nonprofit organization, known as a lessor, executes the lease agreement. The borrower, also known as the lessee, purchases the property from the lessor and makes annual payments for the principal and interests, which are tax exempt. When the debt is retired, the lessee receives ownership of the property. A trustee, usually a bank or trust company, holds title to the property and sells the COPs to investors. If the lessee defaults on the payments, the property used for collateral will be sold to reimburse investors. Interest rates and issuance (administrative) costs for COPs can be higher than those for general obligation (GO) bonds.

According to school facilities financial consultants, a COP is one of the easiest sources of funding because it does not require approval by voters. A school district that issues a COP generally anticipates repaying the COP through projected new revenues, such as developer fees, redevelopment agency funds, state bond funds, or the general fund. If the non-general-fund sources of revenue do not materialize, a district's general fund may be put at risk.

Current law also requires a superintendent of a school district to notify the county superintendent of schools and the county superintendent of schools to notify the SPI upon approval of an issuance of a revenue bond. Similarly, revenue bonds are secured by an anticipated revenue stream and are occasionally used by school districts.

Is this bill necessary? This bill removes the reference to "revenue" bonds and "non-voter-approved" debt so that the notification provisions would apply to all debt instruments, including GO bonds. Current law requires the notification for revenue bonds and COPs because they do not require voter approval and they could impact a district's general fund. In these cases, it is a good idea for a county office of education or the SPI to review the proposed debt and be able to comment on whether a school district or county office of education is able to make repayments without jeopardizing a school district or county office of education's general fund. Voter approved debt, such as GO bonds, Mello Roos, and School Facilities Improvement Districts, are secured by property taxes and require voter approval. A bond proposition informs voters of the maximum amount of bonds that can be issued while statute caps the maximum rate that can be assessed for bonds approved by a 55% vote (Proposition 39). Moreover, governing boards are required to approve the bond issuance at a public meeting. Any objection can be made at the public meeting.

Current law authorizes the county superintendent of schools or the SPI to comment on the proposed debt regarding the capability of the school district or county office of education to repay that debt obligation. This bill extends this requirement to GO bonds. It is not necessary because GO bond debt payments are secured by property taxes that are approved by voters. We know districts will be able to pay GO bond debt.

Will this bill have the effect intended by the author and sponsor? If enacted, this bill will require notification both before and after a bond issuance is approved by a governing board. Districts are required to provide the same information about the bond, including evidence that the school district is able to pay the debt, both before and after a bond issuance is approved.

The sponsor, the Howard Jarvis Taxpayers Association, states that notification will allow the county superintendent of schools, the county auditor and the SPI to identify any potential issues prior to a bond approval. County offices of education have expertise in district general fund budgeting; however, county offices of education do not seek passage or issue GO bonds and likely do not have the expertise to evaluate a GO bond issuance. Most school districts issue bonds through the provisions of the Education Code, which are issued by the County. County auditors will already have the information about the proposed bond issuance.

Supporters also state that notification can avert questionable issuances, such as capital appreciation bonds (CABs), which is a costly tool used to get funding now but delay payments for a long period of time, or use bond proceeds to repay non-voter approved debt. Districts that issued CABs became the subject of media attention a couple of years ago. Staff notes that county auditors were aware of CABs, but ultimately, CABs had to be addressed by the Legislature, which enacted AB 182 (Buchanan), Chapter 477, Statutes of 2013. This bill would not have prevented CABs.

Under Education Code Section 15150, districts are authorized to issue bond anticipation notes (BANs). BANs are non-voter approved short-term borrowing that are paid back when GO bonds are sold. Districts issuing GO bonds to repay this type of non-voter approved debt are not doing something they are not legally allowed to do. It is not clear why this is a problem or how this bill would address it.

Unintended consequence? GO bond issuance is driven by the market. A rate is not secured until the bond goes to market. Any delay can potentially prevent a school district from getting a low rate. This is particularly true for refunding (refinancing) of bonds because rates can change quickly. Similar to refinancing of home mortgages, the purpose of a refinance is to get a better rate.

Arguments in support. The Howard Jarvis Taxpayers Association, the sponsor of the bill, states, "This increase in transparency would benefit several interests. Local school boards and the general public receive the benefit of the time disclosure of all debt, not just what in non-voter approved."

Arguments in opposition. The California Association of School Business Officials states, "We agree that it is appropriate for local education agencies to report the issuance of non-voter approved debt to the County Auditor and County Superintendent of Schools. However, when a school district issues voter-approved general obligation bond debt, the final documents are submitted to the district's governing board for approval – at an open meeting – through adoption of a resolution authorizing the debt. It is not clear how AB 912 would enhance transparency to a process that is already open to the public and interested stakeholders."

REGISTERED SUPPORT / OPPOSITION:

Support

Howard Jarvis Taxpayers Association (sponsor)

California League of Bond Oversight Committees

California Taxpayers Association

Opposition

California Association of School Business Officials

Coalition for Adequate School Housing

Los Angeles Unified School District

Small School Districts' Association

Analysis Prepared by: Sophia Kwong Kim / ED. / (916) 319-2087