It's Calif. Gas-Tax COPs Under Scrutiny, Lockyer Says

SAN FRANCISCO — The California State Treasurer's Office Thursday clarified statements Treasurer Bill Lockyer made this week that appeared to call into question the legality of a commonly used bond structure.

The structure Lockyer intended to call into question is some certificates of participation secured by gas tax distributions, a spokesman said.

Lockyer caused a stir in his keynote address Wednesday to a California Debt and Investment Advisory Commission's event at The Bond Buyer California Public Finance Conference by saying legal questions surround COPs backed by lease revenues, a structure under which more than $30 billion of debt has been issued in California since 2002, according to Thomson Reuters.

Lockyer's COP remarks had conference attendees baffled and buzzing.

Asked to clarify the treasurer's comments, spokesman Tom Dresslar Thursday said Lockyer's concerns are specific to COPs  issued by local governments backed by their share of state gas tax distributions, a much smaller subset of transactions.

Market participants asked about outstanding gas tax COPs said to their knowledge they believe they all received judicial validation before issuance.

Lockyer cited a COPs transaction done by the city of Indio, Calif. That city in 2008 issued $7.5 million of gas tax COPs for road construction projects as part of a California Statewide Communities Development Authority $13.7 million deal for the cities of Coalinga and Indio.

Oxnard is believed to be the first local government in the state to securitize future gas tax payments when it sold $27.7 million of the debt in 2007.

California collects a tax on gasoline and then some of the proceeds are distributed to local governments for transportation purposes based on pre-set formulas. Historically, cities used the state gas tax distributions to fund street projects on a pay-as-you-go basis.

The legal structure of the Oxnard transaction involved the city selling the streets in question to a joint-powers agency, and purchasing them back through an installment purchase agreement, which was securitized through the certificates of participation.

De La Rosa underwrote the deal and did subsequent sales using the same model.

Lockyer's speech criticism of COPs came after he strongly criticized school-district capital appreciation bond structures that have high ratios of total debt service payments to principal and said he will push for legislation that would curb such CABs.

"He sent his message yesterday," Dresslar said Thursday. "We don't want to see California public finance becoming Wall Street West."

Dresslar said the treasurer is concerned that there is too much "creativity" in public finance right now, and the questions about the legality of certain COPs fall into the same pattern of exotic financing deals that include capital appreciation bonds that have 10-, 15- or 30-to-1 pay

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