A bill co-authored by state Sen. Ben Hueso aimed at curbing the use of controversial long-term capital appreciation bonds recently cleared the Senate Education Committee, bringing it one step closer to becoming law.
I spent much of last year writing about capital appreciation bonds, loans that saddle future generations with the responsibility for paying off money spent on school improvements today. Our story on the remarkable billion-dollar bond at the Poway Unified School District sparked national scrutiny of these instruments, eventually leading to the introduction of this legislation in January.
Along the way, State Treasurer Bill Lockyer has been outspoken in his opposition to capital appreciation bonds. He told us the officials in Poway who approved the district’s bond deal should be fired and said the Poway school board should be voted out of office.
Here’s a snippet from a post I wrote after talking with Lockyer last October:
Lockyer said there needs to be greater transparency around school bonds and greater constraints on the deals that can be done. He applauded the work of San Diego Treasurer and Tax Collector Dan McAllister and Assemblyman Ben Hueso, who are pushing legislation to significantly tighten the rules on school bonds.
“I think there’s a need for some reforms,” Lockyer said.
“One of the underwriters of one of these deals approached me at the Bond Buyer conference and said, ‘We’ve done some of these deals and I’ve taken a closer look at them, now that it’s become a matter of public debate, and I have the same revulsion that you do. I have the same belief that these are just really indefensible.’”
The bill, AB 182, passed overwhelmingly in the state Assembly and will now go to a second Senate Committee, the Governance and Finance Committee, where it is scheduled to be discussed on July 3.
From there, if it survives, the bill will proceed to the Senate floor for a vote.
The website EdSource.org has an excellent summary of the bill’s progression, and a smart analysis of some amendments made in the Education Committee:
The latest version of AB 182, which reflects changes that (Democratic Assemblywoman Joan) Buchanan negotiated with Senate Education Chair Carol Liu, D-La Canada-Flintridge, contains the following key elements:
• Length of bonds: All CABs for school districts would go through the Ed Code, subject to the 25 year limit and 8 percent maximum interest rate. Districts could continue to use the Government Code to issue standard bonds, but the maximum term for school construction bonds would be 30 years, down from 40. (School groups will likely continue to oppose the shorter terms.)
• Repayment ratio, the combination of total interest and principal payments in proportion to the bond’s face value: No more 9:1 or anything close to it. The maximum would be 4:1. (Some school groups are OK with the ratio, but want it to cover the value of all of the individual bonds authorized in a bond series, averaged together. But Buchanan and Lockyer say there should be no hiding bad decisions behind averages. Poway’s 9:1 CAB would have been permitted, since it was one piece of a big bond issue. Jeffrey Vaca, deputy executive director of the California Association of School Business Officials, said Wednesday that an alliance of school groups will continue to oppose the bill unless the ratio is tied to a 30-year bond market index, giving districts leeway when rates rise.)
• Paying off CABs: All CABs must be callable, allowing districts to pay off the principal early. This provision will raise the cost slightly. (School groups support this provision.)
• Transparency: Buchanan had included disclosure requirements in the bill. The amended version strengthens them. There must be a financial analysis of the CAB, a rationale for it, a comparison with the cost of a standard bond and information about the underwriter. There would be two public presentations, an informational hearing then a vote at a subsequent meeting. (School groups support these conditions.)
You can read the bill in full here.