More than a year after California school bonds first hit the headlines in a big way, state lawmakers have passed legislation tackling some of the industry’s most serious problems.
Assembly Bill 182, which passed the state Senate last week, will now go to Gov. Jerry Brown’s desk. He’s expected to sign it.
The bill outlaws some of the wackier trends that made the Poway Unified School District a poster child for irresponsible bond financing. School districts will no longer be allowed to borrow money at a price of $10 for $1, and school boards will be forbidden from borrowing money today and pushing off payments too far into the future.
But the bill is a far cry from the comprehensive reform some fiscal hawks wanted. The California League of Bond Oversight Committees, a group that keeps an eye on municipal bond financing, plans to send the governor a letter pointing out several weaknesses in the law.
We’ve taken a close look at the bill and broken down what it means for California school districts and taxpayers.
The impacts of the bill come in two clear categories: changes and caveats.
The Changes
The bill reins in irresponsible borrowing by making four big changes.
It forbids school districts from borrowing money over more than 25 years.
The point of this reform is simple: It stops districts shunting debt payments far into the future. That means things like school buildings and facilities will be paid for over their useful life, instead of long after they’ve started to crumble.
(Though the same won’t be true for bond purchases like iPads.)
It limits the payback ratio on school and community college bonds to 4-to-1.
There have been some really crazy deals made around the state. Districts have saddled taxpayers with loans with payback ratios of $10, $15 and even $20 for every dollar borrowed.
AB 182 puts an end to all that.
It requires school districts to actually tell the public what they’re doing.
Let’s face it, the reason districts like Poway got away with their wild deals is because nobody’s been paying much attention to school bonds. The new legislation tries to combat this by requiring districts to lay out what they plan to do and how much taxpayers will have to pay, in explicit detail aired during public meetings.
It forces districts to include escape clauses in their deals.
One of the most controversial elements of Poway’s deal was that the district has no chance to renegotiate. AB 182 will ensure that all future bond deals (of more than 10 years) are re-financeable.
The Caveats
There are two big ones.
Districts can still make deals just like Poway’s for the next six months.
While lawmakers almost universally agree that allowing districts to borrow money at really high interest rates, over really long periods of time, is a bad thing, districts will be allowed to continue doing this until Dec. 31, 2013.
Why?
Basically a bunch of school districts around California have taken out loans called “bond anticipation notes.” These are just what they sound like: short-term loans that districts plan to pay off once they’ve sold their bonds.
But many of those same districts can’t sell bonds right now unless they do the sort of deal Poway did, and don’t start paying back the loans for decades.
Districts in this situation will be allowed to make the case that they should get a one-time waiver from the new rules.
Between the law passing and the end of the year, they will have to provide the state Board of Education with an analysis from a financial adviser showing why they really, really need to make a deal that’s outside the new parameters.
A 4-to-1 ratio is still a lot, and experts worry it will become the new norm.
In light of deals like Poway’s, a 4-to-1 payback ratio doesn’t seem that bad.
But bond experts like Michale Day, president and co-founder of the California League of Bond Oversight Committees, caution that by enshrining a ratio into law, legislators could have created a new normal for bond deals that is much higher than it should be.
School districts should be able to get 25-year loans at a 2-to-1 ratio, just like homeowners, Day said. But the legislation might have the inadvertent effect of encouraging districts to take the first loan they find at a 4-to-1 payback, without shopping around.
“We’re worried that what is being intended as a maximum ratio will end up being the default floor,” Day said. “That’s what tends to happen.”
Day said his group supports the work done by the legislators who pushed the bill (state Sens. Joan Buchanan, a Bay Area Democrat, and Democrat Ben Hueso from San Diego.)
But Day said he’s worried the complicated new law might also contain other loopholes he and fellow hawks haven’t even figured out yet.
He said the group is currently drafting a letter to the governor and plans to send it this week.
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