New California Law Imposes Additional Disclosure Requirements for Local Government Bonds

by Orrick, Herrington & Sutcliffe LLP

Orrick, Herrington & Sutcliffe LLP

Local government issuers of bonds and any conduit borrowers of the proceeds of such bonds need to be aware of California Senate Bill 450 (Hertzberg), signed into law by the Governor on October 9, 2017.  The new law requires the governing body (the “Governing Board”) of a local public body[1] (a “Local Issuer”) to obtain and disclose, prior to authorization of the issuance of bonds with a term of greater than 13 months, good faith estimates of the following information in a meeting open to the public:

  1. True interest cost of the bonds: the rate necessary to discount the amounts payable on the respective principal and interest payment dates to the purchase price received for the new issue of bonds.

  2. Finance charge of the bonds: the sum of all fees and charges paid to third parties.

  3. Amount of proceeds received by the public body for sale of the bonds: the proceeds of the bonds net of the fees and changes paid to third parties and any reserves or capitalized interest paid or funded with proceeds of the bonds.

  4. Total payment amount: the sum total of all debt service payments on the bonds calculated to the final maturity of the bonds plus the fees and changes paid to third parties not paid with the proceeds of the bonds.

SB 450 requires that the good faith estimates be obtained from an underwriter, financial advisor or private lender.  This means that Local Issuers will want to make sure that this information is part of the staff report or agenda item when seeking authorization from the Governing Board for the issuance of bonds.  For new money general obligation bonds, school districts are already obligated to disclose estimates of costs of issuance so, for school districts, items 1, 3, and 4 above are the new items to be disclosed. 

If the proceeds of the bonds are being loaned to any nongovernmental conduit borrower, SB 450 requires that the good faith estimates be obtained by the Local Issuer from the conduit borrower after (1) the good faith estimates are presented to the conduit borrower by an underwriter, financial advisor or private lender engaged by the conduit borrower and (2) such good faith estimates are presented to the borrower’s governing board or the official(s) or committee with authority to obligate the conduit borrower in connection with the financing. This means that the good faith estimates will need to be presented to the conduit borrower and the borrower’s governing board, official(s) or committee prior to Governing Board approval.

SB 450 makes clear that these requirements only apply to Local Issuers and not any state agency, department, bureau or commission of any kind.  Moreover, SB 450 confirms that any failure to comply with its requirements does not impact the validity of the bonds or the authorization of the bonds by the Local Issuer.  Lastly, this legislation is not effective until January 1, 2018.  Local Issuers that are considering authorizing the issuance of bonds in the last part of this year, but not issuing such bonds until 2018, should consider the impact of SB 450 as the financing schedule is developed.


[1] Includes a county, city, city and county, public district, public authority, public corporation, nonprofit corporation or other statutorily constituted public entity which is authorized to issue bonds.

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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