New Law Imposes Significant Restrictions on Bond Issuance

October 2013

Beginning January 1, 2014, school districts in California face stricter limitations on their ability to finance new facilities projects under the requirements of Assembly Bill 182 (“AB 182”), signed by Governor Brown on October 2.  While the new law primarily affects capital appreciation bonds (“CABs”), it also contains provisions applicable to current interest bonds.

(Unlike current interest bonds, in which interest is paid periodically during the term of the bond, CABs require payment of principal and interest in one lump sum on the maturity date,)

The following are the highlights of AB 182:

·       The ratio of total debt service to principal for each bond series cannot exceed 4 to 1.

·       School districts and community college districts that intend to issue CABs now must comply with the provisions of the Education Code that limit interest to a rate of 8 percent per annum and limit terms to a maximum of 25 years.

·       A CAB that matures more than 10 years after its date of issuance may be redeemed by its issuer, with or without a premium, at any time beginning not later than the 10th anniversary of its issuance date.

·       Under new disclosure requirements, for any proposed sale of a CAB, the governing board is required to include all of the following information in its resolution as an agenda item at a public meeting: financing terms, time of maturity, repayment ratio, and the estimated change in the assessed value of taxable property within the school district or community college district over the term of the bonds.  The resolution must be publicly noticed on at least two consecutive meeting agendas, first as an information item and second as an action item.

·       When a CAB is being proposed, the agenda item must state as such and the governing board must be presented with all of the following: (1) An analysis containing the total overall cost of the bonds that allow for the compounding of interest; (2) A comparison to the overall cost of current interest bonds; (3) The reason bonds that allow for the compounding of interest are being recommended; (4) A copy of the disclosure made by the underwriter in compliance with Rule G-17 adopted by the federal Municipal Securities Rulemaking Board.

·       Under new Government Code section 53508.6, which was added by AB 182, a school district or community college district may issue bonds that do not allow for the compounding of interest and that have a maturity greater than 30 years, but not greater than 40 years, if the district or community college district does both of the following: (a) complies with the disclosure and approval requirements of subdivisions (b) and (c) of Education Code section 15146; and (b) makes a finding that the useful life of the facility financed with the bonds equals or exceeds the maturity date of those bonds.

Understanding the impact of a CAB is of critical importance for any school district, as CABs and other school bonds are receiving greater political and media scrutiny, particularly following the passage of AB 182.  Whether your district is considering issuing a CAB or a current interest bond, it is important to be aware of AB 182 and its new requirements.

If you have any questions regarding this matter, please call one of our six offices.

F3 NewsFlash prepared by Kathleen J. McKee and John W. Norlin.
Kathy is a partner in the F3 San Diego office.
John is Special Counsel in the F3 San Diego office.

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