LOS ANGELES — A California bill that would add language to school district general obligation bonds to protect investors if the district goes bankrupt is "a good deed for investors," according to a Municipal Market Analytics report.
State Sen. Marty Block, D-San Diego, introduced Senate Bill 222 on Feb. 12. It would amend a section of the education code related to school bonds. The bill was referred to the Senate's governance and finance committee on Feb. 20.
The bill "clarifies that voter-approved general obligation school district bonds benefit from a statutory lien on the levy and collection of the tax revenues without any further action, insulating them from impairment in a Chapter 9 proceeding," according to MMA's March 2 report.
If enacted, the certainty should improve the pricing of the bonds, particularly for weak issuers, according to MMA.
The legislation was introduced at the request of San Diego Unified School District officials who believe adding the language will make it easier for the state's school districts to secure favorable interest rates when issuing bonds, said Maria Lopez, the senator's spokeswoman.
Market participants had generally believed that California school district GOs already enjoyed a statutory lien, but recent bankruptcy cases like Detroit have raised questions about the strength of the pledge, said Matt Fabian, an MMA partner.
Those cases have made "it imperative that states examine statutes to ensure that they are clear in their intent," the MMA report states.
In a Feb. 26 public finance alert, Robert Christmas, a partner with Nixon Peabody, said the legislation is a "welcome development."
"By clarifying that the lien that is created is a 'statutory' lien, SB 222 could reduce bankruptcy risk on K-14 general obligation bonds, and thus potentially improve ratings and interest rates," Christmas said. "Simply put, it removes the extra step between the issuance of GO bonds by a school or community college district and the imposition of a lien on the future ad valorem property taxes that are the source of repayment of the GO bonds."
Municipal bankruptcy cases, and Detroit in particular, have focused attention on the mechanism in various states for the imposition of liens to secure the repayment of GO bonds, Christmas said.
While the range of security for repayment of bonds is generally limited only by the creativity of the issuer and its advisors, Christmas said, the U.S. Bankruptcy Code divides creditor claims into two hard and fast categories: secured and unsecured claims.
"To have validity after the Chapter 9 petition by an issuer, the lien must be a statutory lien, not one simply created by an agreement to create a security interest," Christmas said.
The issue also arose in Orange County's 1995 bankruptcy in which a bankruptcy judge ruled that secured notes were not secured by a statutory lien and that the county had to "decide" to pledge its revenues to secure the notes. On appeal, the district court reversed the decision noting that the "difference between statutory liens and security interests is sometimes obscure," according to the Nixon Peabody report.
The legislation would clarify that the statutory lien arises automatically without further action or authorization by the school or community college district.
If adopted, the legislation would achieve the attended goal of providing assurance to bond investors that the lien on the ad valorem property taxes would be respected in a Chapter 9 proceeding, Christmas said.