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Lockyer Challenges California School's CAB Advisors

SAN FRANCISCO — California Treasurer Bill Lockyer put underwriters, advisors and bond counsel on notice Wednesday that if they are not willing to renegotiate some of what he called the more egregious capital-appreciation bonds issued by the state’s school districts, his office may cut them off.

“I wish the firms that underwrote those bonds would renegotiate those deals,” Lockyer said. “I have the list, I know the underwriters, financial advisors and bond counsel who did them, and they are going to face constraints with my office when the state issues bonds.”

Lockyer paused then looked out to audience members and said, “You get to make the choice.”

Lockyer was keynote speaker at the California Debt and Investment Advisory Commission’s event preceding The Bond Buyer’s California Public Finance Conference here. Lockyer as treasurer chairs CDIAC.

He began by reviewing some of the CAB deals in the state that have come under fire after the Voice of San Diego news site reported that CABs issued by the Poway Unified School District, located in San Diego County, will mushroom from the $105 million in principal the district received to about $1 billion in debt-service payments at maturity. The bonds have a 40-year maturity and do not have a call option.

CABs pay compound interest rate and principal upon maturity instead of reduced payments over time.

The Poway deal isn’t even the worst, according to Lockyer.

First, the treasurer suggested that restrictions on the issuance of these bonds will likely be something the state Legislature will take up this year. Then he dropped the bomb on public finance professionals associated with deals that involved CAB debt with debt service to principal ratios as high as 35 to 1.

Lockyer also called into question some lease-backed certificates of participation issued by cities and local governments.

Financial professionals are “getting way too creative in finding ways to load debt on people,” Lockyer said, because the returns are potentially substantial.

“It is time to go back to vanilla issuances — and go back to the voters before issuing bonds,” he said.

Reform legislation is needed, according to the treasurer.

“These are such egregious deals that reforms are needed,” Lockyer said. “I would like to catch the right balance between local revenue needs and local outlay and taxpayers’ interests and future debt service.”

Some restrictions he envisions would be limiting maturities to not more than 25 years and making sure all deals are callable.

Lockyer also addressed the recent bankruptcies of three California cities.

He said he would like the state government to have more tools to help cities in distress, such as an early warning system, and for the state government to have more say in whether locals can declare Chapter 9.

Forget about bailouts, however. The state shouldn’t pick up the tab for cities’ bad choices, Lockyer said.

David Brodsley, managing director of KNN Public Finance, just responded to a question from the audience about Lockyer’s statement about financial advisors pushing CAB debt on the school districts.
"I've long been not a fan of escalating debt service," he said. "On general principle, I think the idea of pushing back obligations to future generations is bad karma. I think it is a better idea to overload now than to let the future carry the bag."
On the other hand, Brodsley said he had colleagues at his firm who are obsessive about the district's tax rate and do backload.
He cautioned against lumping all CABs in with the egregious issues like the 30-to-1 example Lockyer made reference to in his comments.

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