New Law Restricts Ability of School Districts to Issue Capital Appreciation Bonds

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KMTG continues our series of updates on new legislation signed by Governor Brown.  All laws became effective January 1, 2014, unless otherwise stated.

Capital Appreciation Bonds and Current Interest Bonds-- AB 182       

The Governor approved AB 182, which addresses the sale of bonds by school districts and community college districts.  AB 182 mandates that the ratio of total debt service to principal for each bond series shall not exceed four to one.

Under current law, a governing board of any school district or community college district may submit to its electors the question of whether bonds should be issued and sold to raise money for specified purposes.  Currently, bonds must by law bear a rate of interest that does not exceed 8% per annum.  The law currently requires the number of years the bonds are to run may not exceed 25 years.

AB 182 adds section 15140.5. to the Education Code and provides that for the purposes of AB 182, the term “bonds” is defined as “bonds, notes, warrants, or other evidence of indebtedness payable, both principal and interest, from the proceeds of ad valorem property taxes that may be levied without limitation as to rate or amount upon property subject to taxation by the governing board of the school district or community college district.”

AB 182 also adds section 15144.1 to the Education Code and provides that “[t]he ratio of total debt service to principal for each bond series shall not exceed four to one.”  Also added to the Education Code by AB 182, is section 15144.2, which applies to a bond that allows for the compounding of interest, including, but not limited to, a capital appreciation bond.  Any such bonds that mature “more than 10 years after its date of issuance shall be subject to redemption before its fixed maturity date, with or without a premium, at any time, or from time to time, at the option of the issuer, beginning no later than the 10th anniversary of the date the bond that allows for the compounding of interest was issued.” 

According to newly added Education Code section 15144.3, a school district or community college district that had a note issued before December 31, 2013, pursuant to Section 15150, may seek from the State Board of Education or the Chancellor of the California Community Colleges a one-time waiver from one or more of the specified requirements if two specified conditions are met.  First, the proceeds of the issuance that is the subject of the waiver must be used only for the purpose of paying the note.  Second, the district must provide to the State Board of Education an analysis from an unaffiliated financial adviser that shows the overall costs of the proposed bond, how the issuance is the most cost-effective method, and the reasons why the school district or community college district is unable to meet the specified requirements.  

AB 182 amends section 15146 of the Education Code to provide, Where a “sale includes bonds that allow for the compounding of interest, including, but not limited to, capital appreciation bonds” there must be a “disclosure of the financing term and time of maturity, repayment ratio, and the estimated change in the assessed value of taxable property within the school district or community college district over the term of the bonds.”  In such a sale, the resolution must “be publicly noticed on at least two consecutive meeting agendas, first as an information item and second as an action item.”  Also, the agenda item must identify that bonds that allow for the compounding of interest are proposed.  The governing board must be presented with specific information designated by the statute including an analysis that details the total overall cost, a comparison of that cost to the overall cost of current interest bonds, the reason that the bonds are being recommended, and a copy of the disclosure made by the underwriter. 

AB 182 also adds 53508.6 to the Education Code to provide that a school district or community college district may “issue bonds that do not allow for the compounding of interest and that have a maturity greater than 30 years, but not greater than 40 years,” provided that the district (1) “complies with the requirements of subdivisions (b) and (c) of Section 15146 of the Education Code,” and (2) makes a finding that the useful life of the facility financed with the bonds equals or exceeds the maturity date of those bonds.

Topics:  Bonds, School Districts

Published In: Education Updates, Finance & Banking Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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