SAN FRANCISCO - Dozens of "cash-out refunding bonds" issued by California school districts were unconstitutional and illegal, according to an opinion published yesterday by Attorney General Jerry Brown.
Brown said that the bonds remain legal obligations of the school districts - which protects investors - because none of the deals were challenged during the 60-day validation period designated under state law. But he added that the districts may face lawsuits from taxpayers demanding to be compensated by school districts that over-taxed them.
"Absent specific approval from the district's electors, a school district may not issue refunding general obligation bonds at a price or an interest rate that will generate proceeds in excess of the amount needed to retire the designated outstanding bonds," Brown said in an opinion prepared by supervising deputy attorney general Constance L. LeLouis and deputy attorney general Daniel G. Stone.
The opinion does not have the force of law that a court ruling would have, but it is likely to both stop the practice and spur lawsuits against school districts, according to some bond lawyers in the state.
"This is a really big deal," said one bond lawyer, who declined to be identified because he was not authorized to speak to the press on behalf of his firm. "There are scores of these deals outstanding."
The deals in question are refinancings for California school districts that sold bonds at a premium by offering higher than market interest ratesto refund GOs that were originally issued when interest rates were higher.
By offering higher than market coupons that were still lower than the rates on their outstanding debts, districts raised enough money to both pay off the original debt and garner extra proceeds without exceeding the par amount approved by voters.
Brown said the practice violates the state constitution's requirement of a popular vote for any new GOs. He said the deals are illegal even if they finance projects that were approved by voters under the original issue or if the deals were funneled through a joint-powers authority that issued the new, higher amount of debt.
Essentially, the opinion says that the amount of proceeds from a bond deal is what the voters have approved, not the par amount.
"The analogy is simple and straightforward: when a homeowner refinances a mortgage both to refinance the existing debt and to take out additional equity (cash) to make home improvements, the homeowner is plainly incurring additional debt beyond that required merely to refinance the existing debt," the opinion said.
While Brown said the bonds themselves remain legal because they were not challenged within 60 days - the timeframe in which the legal validity of California deals must be challenged after a bond is issued - the school districts may still face litigation over the deals.
"Apart from the invalidation of the bond sale, other remedies may be available pursuant to a taxpayer's suit ... or actions by the attorney general," he concluded.