In his latest warning to the companies that put together hundreds of controversial school bond deals in California, state Treasurer Bill Lockyer is putting firms on notice that they should figure out how to restructure the debt or face significant consequences.

As first reported in the Bond Buyer, a trade publication covering the municipal bond market, Lockyer is putting particular pressure on the underwriters of hundreds of deals involving capital appreciation bonds. The controversial financial instruments have become a political hot potato since Voice of San Diego published a story about a bond in Poway schools where taxpayers will pay back almost $1 billion on a loan of $126 million.

“Lockyer has said before that these deals are outrageous, and if the companies aren’t willing to restructure them, there are going to be repercussions,” said Lockyer spokesman Tom Dresslar.

Dresslar did not provide details on what those repercussions would be. He said the state is still studying the deals to ascertain how to proceed, and Lockyer is not just looking at underwriters but also at the financial advisers and law firms that helped put the deals together.

Lori Raineri, president of Government Financial Strategies, who is working with several California county offices of education to alleviate the problems caused by expensive school district bond deals, said unwrapping the deals would be impossible in most cases.

Raineri said she has found that most of California’s school district capital appreciation bonds are “non-callable,” which means the loans can’t be refinanced. That’s the case in Poway.

“The bonds are likely in the hands of hundreds of investors or more,” Raineri said. “An underwriter is supposed to represent investors’ best interests. They can hardly go to those investors and ask them to give up their bonds at less than fair market value, which is the only way there would be any savings for the school district.”

Raineri said any such request by the underwriter would likely be a violation of their fiduciary duty to the investor.

“It’s not reasonable to think non-callable bonds will be restructured,” Raineri said.

Dresslar said it’s not up to the Treasurer’s Office to figure out how the deals should be renegotiated.

“Investment bankers are very imaginative and creative,” Dresslar said. “It’s not our job to tell these guys how to fix their deals.”

It’s unclear what, if anything, Lockyer could do to punish the companies that helped make deals that push billions of dollars of debt onto future generations of Californians. The treasurer previously told Voice of San Diego that he would freeze companies that worked on these deals out of the state’s bond-selling process, but Dresslar didn’t elaborate on how that might work.

Scott Sollers, a managing director of public finance with the underwriter Stone & Youngberg in San Francisco, which underwrote Poway’s 2011 bond deal among many others, said his company is communicating with the Treasurer’s Office. Sellers said his firm wants to work with the treasurer to craft legislation on capital appreciation bonds.

He would not comment on whether Stone & Youngberg is working to try and renegotiate the 2011 Poway bond sale that kicked off the furor over capital appreciation bonds.

Will Carless is an investigative reporter at Voice of San Diego currently focused on local education. You can reach him at or 619.550.5670.

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Disclosure: Voice of San Diego members and supporters may be mentioned or have a stake in the stories we cover. For a complete list of our contributors, click here.

Will Carless was formerly the head of investigations at Voice of San Diego.

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