LOS ANGELES -- The California Assembly gave final approval Friday to legislation to regulate and limit school districts’ issuance of capital appreciation bonds.
Assembly Bill 182 heads to Gov. Jerry Brown’s desk for his signature after clearing the Assembly on a 73-0 vote.
It would require the ratio of total debt service to principal for each bond series to not exceed four to one. It would also require bonds with maturities greater than 10 years to be subject to early redemption.
Under existing laws, the bonds are required to bear a rate of interest that does not exceed 8% per year and a maturity not to exceed 25 years.
“AB 182 protects future generations of taxpayers from outrageous debt service burdens that reduce their ability to finance school facilities their own kids need,” State Treasurer Bill Lockyer said in a statement.
“At the same time, the measure preserves the flexibility districts need to build adequate school for their communities’ children,” said Lockyer, who sponsored the bill, which was carried by Assemblymember Joan Buchanan, D-Alamo, and Sen. Ben Hueso, D-San Diego
The bill was introduced after media attention brought to light situations where capital appreciation bonds had been issued with repayments at a 10 to 1 ratio of payments to principal — sometimes as high as a 20 to 1 ratio.
CABs pay a compounded interest rate and principal upon maturity instead of through regular payments over time. They allow school districts a way to finance construction projects and defer debt-service payments in the short-term, avoiding property-tax increases. But the districts incur higher costs in the long run.
“By increasing transparency, AB 182 helps ensure the ball’s not hidden from school board members and taxpayers when underwriters and financial advisors propose the issuance of CABs,” Lockyer said.
The measure would require disclosure of the terms and costs of CABs, how those costs compare to the cost of regular bonds, the repayment ratio, and the reason CABs are recommended. School boards would have to first discuss the issuance of CABs at an informational meeting, and then vote on the issuance at a second public meeting.