Recently, a great deal of media attention has been paid to school districts' issuance of capital appreciation bonds ("CABs") which can offer greater flexibility in repayment terms than traditional bonds, including delay of payments in exchange for higher interest rates on the back end. CABs with onerous terms and extraordinarily high payback amounts have generated legislative efforts to limit the issuance of this type of bond, including a bill by Assembly Member Ben Hueso (D-San Diego) expected in January 2013.
Approximately 200 school districts throughout the state have issued various types of CABs and some of them have burdensome terms. It is important to note that each CAB varies depending on the negotiated terms and each affects a school district and taxpayers differently. Some CABs contain prudent repayment terms that do not generate excessive interest costs. Some CABs form one component of a larger district financing package that, taken as a whole, offers moderate terms.
If your district is considering issuing a CAB or even if it has already issued a CAB, it is important for the district to educate itself about the unique characteristics of the CAB by asking the following questions:
· What is the CAB’s payback period? How long will it take for the total bond (principal and interest) to be paid off?
· What is the CAB’s total allowable debt ratio (money borrowed vs. money repaid)?
· Are there any options for early payback of the CAB? Are there any penalties for early payback?
· What is the CAB’s interest rate?
· Can the CAB be refinanced?
· Does the CAB have a "balloon" payment at the end?
· Is the CAB part of a larger financing package?
· Will the CAB be used to finance projects that serve the district in the long-term?
Compiling and analyzing the above information will assist districts that already have a CAB to determine what, if any, action they can take to ameliorate the effect of the CAB. For those districts contemplating the issuance of a CAB, the above information should be used to make the decision.
In the future, if your district is exploring the use of any type of bond financing, we recommend the following:
· Ensure that bond counsel and the district's general or business counsel work closely to make the unique repayment terms of the bond both understood by and acceptable to the district's governing board;
· Understand that bond counsel and the district's general or business counsel play different roles and serve the district in different ways and require that both types of counsel explain their role to you;
· Seek a financial consultant who will negotiate the best terms on behalf of the district and who can answer district questions about the value of one type of bond compared to others;
· Create a "summary sheet" for the governing board that outlines significant terms of the bond, e.g., total amount financed, term, annual capital and interest payments; total capital and interest paid at the end of the term; and early repayment penalties, if any;
· Provide the public an opportunity to understand and be heard on the terms of the bond;
· Require a written legal opinion from bond counsel establishing that the bond's issuance complies with all laws, including the Education Code;
· Ensure that the bond can be paid off early with few or no penalties; and
· Work with district's general or business counsel and a communications consultant to inform and educate the community about the district's decision and effect of the bond.
Understanding the impact of a Capital Appreciation Bond is of critical importance for any school district, as CABs and other school bonds are likely to receive greater political and media scrutiny in 2013.
If you have any questions regarding this matter, please call one of our six offices.
F3 NewsFlash prepared by Paul Thompson and Jim Traber.
Paul is a partner in the F3 Sacramento office.
Jim is an associate in the F3 Sacramento office.
This F3 NewsFlash is a summary only and not legal advice. We recommend that you consult with legal counsel to determine how this legal development may apply to your specific facts and circumstances. Information on a free NewsFlash subscription can be found at www.fagenfriedman.com.
As part of the E-ducation™ Professional Development Series hosted by ACSA and F3, we offer webinars on various topics. You can find the information on the ACSA website at www.acsa.org/e-ducation.
Keep up to the minute on the latest updates, NewsFlashes, and legal news by following F3 on Twitter:@F3Law.