Payment Strategies for Settling Claims and Paying Judgements

The difference between the amount of a settlement or judgement and public agency liability coverage most often can't be drawn from reserves without threatening an  agency's long-term financial sustainability. Developing a payment strategy for filing the  gap will be essential. This session will discuss the strengths and weaknesses of different  payment strategies for different agencies including receiverships and emergency  apportionments, tax increases, and bond issuance. Panelists will address the challenging  constitutional, statutory, and procedural hurdles and how they may be overcome to  form a viable payment strategy.

Transcription:
Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the corresponding audio for the authoritative record.

Donald Field (00:08):
It's still morning, so good morning. It's a heavy topic and I appreciate everyone hanging around. I think this is an important discussion. I got involved with AB 218 issues early on, right after the legislation was enacted, and saw the potential for liability. Having spent time early in my career with some judgment obligation bond issues, I knew right away that there could possibly be a need for judgment obligation bonds. So, we're going to talk about different financing options for the AB 218 liabilities. As an introduction to judgment obligation bonds, what they really are is just a way to pay for involuntary liabilities, whether it's tort or some other obligation imposed by law. Judgment obligation bonds have been in the media lately as a result of AB 218, and more and more local government entities are looking to judgment obligation bonds to amortize the liability over time.

(01:35):
The question for local government entities is whether the liability is significant enough to look to a solution to amortize it over time or pay it upfront, keeping in mind the impacts to services and programs. Historically, judgment obligation bonds have been used for a variety of obligations that are unexpected liabilities, but in every case, it's a tool to mitigate the liability and amortize it over time rather than having an impact on budgetary resources in one year. When we looked at the judgment obligation bonds in California over the years, with the help of the CDAC research team that went back to 1992, it was very difficult to find where the judgment obligation bonds were issued because there was no category for judgment obligation bonds when you file your preliminary and final CDAC report. But there's a variety of data that CDAC got available, and there were some surprises on the types of obligations that have been financed with judgment obligation bonds.

(03:00):
A majority of them involved inverse condemnation or other property-related actions, but there were also some surprises with tax refunds and other things that have been financed. One thing that I will say upfront is we're going to be talking about judgments, but the solution for judgment obligation bonds should be equally applicable to settlements. There are some nuances and legal theories on how those work. You'll be hearing this from me over and over during the presentation: it's critical if you're considering a financing option to get your litigation team and your finance team together, especially bond counsel, because really the litigation strategy is going to inform how your judgment obligation bond program is going to work, both in the validation action that we'll be discussing today and the structure of the financing program.

(04:09):
So why JOBs? As I said, the policy decision is to look at the impacts to programs and services of a large liability. In California, when you're hit with a judgment, local government is obligated to pay it upon conclusion of that litigation. Mike Fine mentioned earlier there are some provisions to let the judgment be amortized over time, but unless you meet those hardship provisions, the obligation is to pay it immediately. When you're faced with these obligations, you must consider the impacts to the local budget and the programs and services, and whether that is going to be managed by amortizing it over time.

(05:11):
The discretion is in the governing board of the local entity. The courts recognize that the decision in these matters, especially budgetary matters, are at the discretion of the governing body. There are other options to consider. When you're looking at judgment obligation bonds, it's not the only way to amortize the liability over time. There is the option to enter into a settlement agreement and have the settlement payments payable over a term of years. As I earlier mentioned, there are also the provisions in the government code that allow local government entities to spread the judgment over a 10-year period if you meet the hardship provisions. So the question for the local government entity to discuss with its finance team is: what option is better? In other words, are the financing terms that you can negotiate to settle a liability over a term of years and pay it to the plaintiffs over that term going to be better than if you were to agree to a lump sum payment and finance it over a term of years?

(06:34):
Also, with the government provisions relating to the amortization of a judgment, that comes with statutory interest. It also may have impacts on your credit profile because you basically have to go into court and declare that you are unable to pay the judgment. These implications need to be considered in connection with coming up with your plan on whether a judgment obligation bond is best for the local government.

(07:13):
There are also some other considerations. Some entities may have the ability to seek state assistance and emergency loans. Mike's going to touch on that a little bit later. You should also consider whether other revenue sources are available for these liabilities. In some cases, the local government may want to consider bankruptcy protection. We think that bankruptcy protection is going to be a rare situation, but we think the local government entity should know all of its options in deciding whether a bond should be considered. It's important to get your team that really knows the various options and can discuss them, because to have an informed decision on whether to negotiate a settlement over a term of years or issue bonds, you're going to have to look at a number of financial situations.

(08:17):
As far as JOB basics, as mentioned earlier, this is a general fund obligation. It couldn't be a full faith taxing obligation without a vote of the people because, for debt-limited entities subject to the California debt limit, you would have to do a vote of the jurisdiction to get approval for any additional taxes. So these are generally structured to be general fund obligations within an exception to the constitutional debt limit called "obligation imposed by law." The obligations of the underlying liability essentially become the bond obligation. These are unconditional obligations when the bonds are issued and they're not subject to set-aside, so they take on the character of the underlying judgment.

(09:24):
As I mentioned before, these bonds are an exception to the constitutional debt limit. As most of you know, there are entities in California—cities, counties, school districts—that are subject to the constitutional debt limit that prohibits them from entering into debt obligations beyond the current year's revenues. The courts have made a few exceptions to that. Most of you are familiar with some of them. For instance, the leasing exception as well as an enterprise revenue exception to the debt limit. This exception is similar to those; it's called the "obligations imposed by law." Basically, the courts have said that the constitutional debt limit was entered into our constitution to prevent local governmental entities from voluntarily entering into debt obligations, essentially for short-term political gain, and obligating the local entity for long-term debt. Here, for obligations imposed by law or tort obligations, the court says that the constitutional debt limit is not applicable.

(10:52):
So the constitutional debt limit is not applicable, but we still need some authority to issue the bonds. And the authority for issuing the bonds is the Local Agency Refunding Law. Now, there are a couple of aspects of the Local Agency Refunding Law that need to be paid attention to. One is that it provides that the local agency could essentially refund indebtedness. So the theory for the judgment obligation bonds is you have this judgment or settlement, and that is your indebtedness that is refunded. The courts have also said that when you issue the bonds, those bonds take on the character of the judgment. So it's not new indebtedness; it's just a change in the form of the indebtedness. When the underlying judgment is an exception to the constitutional debt limit, the bonds that refinance it are also under that same exception.

(11:57):
Now, we're talking about exceptions to the constitutional debt limit. Some of those exceptions, like the leasing exception, have gone up to the California Supreme Court a number of times, and that exception is well understood in the public finance market and with the bond lawyers that give opinions on the bonds. For judgment obligation bonds, as you heard earlier, there's only been about 35 of them since 1992. The exception is not well established in the courts, and so all of the ones that have been issued by debt-limit entities have gone through a validation action. What the validation action does is a court gives a judgment that the bonds and the bond documents they're issued under are valid. That takes time, and we'll go over a little bit of the timing issues in a minute. But the key thing with the validation action to understand is that you're validating bond documents.

(13:12):
So, when you are approaching your bond program, there are a number of things that you need to consider and establish upfront so that you have flexibility later on. For instance, if you are validating your bond documents, whether you want to issue variable rate bonds, fixed rate bonds, or maybe you have a need to issue capital appreciation bonds so that you can have a couple of years where you don't have to pay any debt service. All of those decisions need to be considered upfront because they're going to be in your bond documents when you file the validation action.

(13:57):
You want to build in all of the flexibility that you think you need into those bond documents and your refunding program when you do your validation action. That will include whether you want to be able to issue refunding bonds for savings later on. Here's a sample uncontested validation timeline. By the way, this presentation closely follows the information that's in the booklet, so don't feel the need to take too many notes. A couple of things that I note on this: validation actions have priority over all other civil matters in the courts. So, you should be able to get into the court quickly and get your matters on the calendar quickly. But this calendar is always subject to the court's discretion on when they're available. Even though the worst case here is 110 days, we've seen it almost double that in some courts where the courts just are not responsive.

(15:18):
You really need to anticipate delays and feel out what your county court system is going to do as far as timing.

(15:33):
Possible disadvantages of judgment obligation bonds: I mentioned earlier that the refunding law allows local agencies to refund indebtedness, and that creates a couple of timing issues. One, the judgment that you're wanting to finance has to be in place. If you've already paid it, there's no indebtedness to refund. And number two, you don't have any indebtedness if the judgment isn't in place yet. So you have to wait until it actually exists to do the refunding. You can't issue the bonds and then wait for the judgments to come in. That creates timing issues that need to be coordinated between your finance team and your litigation team. As I mentioned before, it's essential for close coordination between the litigation team and the finance team.

(16:38):
Bargaining position: judgment obligation bonds have been in the news lately, and you can expect that the plaintiffs' lawyers know that they exist. Local government entities should understand judgment obligation bonds—what they do—and that they are really a tool to finance the judgment, not a pool of money that is going to increase the judgment amount. There's going to be some pushback between those two. Understanding what judgment obligation bonds do is important because the plaintiffs' lawyers are likely to look at them as an extra pot of money to increase the demands on the settlements.

(17:41):
Tax-exempt bonds are generally issued for capital financing. There are exceptions for working capital, which financing a tort judgment would be considered, but for an extraordinary working capital financing—meaning a long-term tax-exempt financing of working capital—there are a lot of hoops to jump through in the tax rules, including annual testing after you issue. So even though the tax-exempt issue may save on interest costs, some issuers may think that the administrative aspects are not worth the tax-exempt interest. That should be discussed upfront just to see what the different costs of a tax-exempt versus a taxable financing would be.

(18:50):
I mentioned earlier that on the validation actions, you really need to look at your whole program upfront when considering the issuance of judgment obligation bonds, because the documents are being validated. You're stuck with the options and flexibility that you include in those bond documents during the validation action. I go into more detail in the booklet, but the possible structures—whether you want variable rate, index rate, capital appreciation bonds, or other financial terms—should all be discussed upfront. I will say that most of the judgment obligation bonds that have been issued have been very simple fixed-rate bonds, so likely that is where most local governments will end up, but these are things that should be discussed in your particular financial plan so that you do not lose out on flexibility once the validation action is commenced.

(20:05):
How and to whom will the judgment obligation bonds be sold? There are two basic methods of sale: competitive and negotiated. Karma's going to jump in here in a minute. The best choice depends on the type of bonds you're selling, whether they're so-called "story bonds" or not, and the importance of what the local governmental entity places on the two different types of sale. But also importantly for judgment obligation bonds, if a local government is looking at them, you really need to start looking immediately at your debt issuance policies. It's been a few years since this became a requirement for all local governments to have, but most debt management policies do not include judgment obligation bonds. In every judgment obligation bond that I've worked on, we've had to go and amend the policies to allow for the issuance of judgment obligation bonds.

(21:19):
I'll turn it over to Karma.

Karma Pemba (21:30):
Thanks, Don. Good morning, everybody. Over the next few slides, we'll talk about method of sale and then also investor interest in JOBs and the type of investors that you might see. I'll start by saying this is not going to be a commercial for a banker to suggest you have to do a negotiated sale, but I'll start with the negotiated sale. The trend has been over the years to have more negotiated sales. I saw a stat that said in 1975, 34% of the sales were negotiated, and in 2009, it was about 85%. I think the stat is probably similar currently.

(22:19):
In addition to some of the benefits of a negotiated sale, traditionally, depending on the ratings of an issuer—if it has weaker ratings, if the structure is very unique, or if they're not a regular issuer—those might be reasons to sell on a negotiated basis. For a JOB, I think there are a couple of things that are interesting. One is flexibility and timing; a negotiated sale can navigate market turmoil or provide a better marketing period to find the right point in time to sell your bonds. I do say competitive sales recently have shown more flexibility, but typically the negotiated sale would have more benefit in that aspect. The bankers are involved throughout the process. Somebody like myself would work with the issuer and your municipal advisor on the rating strategy as well as structure all the way through pricing and closing.

(23:21):
That leads me to probably the most important part of a negotiated sale for a JOB: the extensive marketing period. When you issue bonds on a negotiated sale for a JOB, the underwriting firm would have several days to several weeks to market your bonds. At our firm, we put sales memos together for the sales force so they understand the information that they can give to the investor community. In addition, typically you'll have one-on-one calls with investors and just generally a big buildup in terms of the marketing period. That's one of the benefits of a negotiated sale for a JOB.

(24:12):
In terms of a competitive sale, and Don mentioned this with your state statute or debt policy, depending on how it's written, you might be forced to do a competitive sale or a negotiated sale based on the structure. We've worked with an issuer where their debt policy says all new money bonds need to be competitive and they can negotiate on a refunding. You as an issuer and your advisor, depending on your policies and procedures, may have to modify it if you want to do a competitive or negotiated sale if it's not allowed in your policy. Some of the benefits of a competitive sale include the transparency of getting all the bids in at the same time. As an issuer, it might be a very important aspect of your policies where you get all the bids at the same time and take the lowest bid.

(25:06):
It's pretty clear that you took the lowest. Obviously, on a negotiated sale, you've got comparables and your advisors looking at your pricing, but on a competitive sale, you can basically say, "Here are the three bids and we've taken the lowest." That might be very important for an issuer to be able to say that. A challenge on a competitive sale, at least for a JOB, is going to be that extensive marketing period. With a competitive sale, the underwriters will put in their bids on that date and time. They'll obviously talk to some investors, but there aren't the days and weeks of an extensive marketing period, and so your bid is going to have a little bit of market risk in there. That's something to consider.

(25:53):
The third one we'll call direct purchase. This is where a placement agent will reach out to several banks and negotiate directly with them on this financing. The advantage for an issuer is that information is contained and confidential. You don't have a JOB Official Statement in the market and a lot of the information out there. This is more of a one-on-one negotiation with the bank, but part of that is it's going to be more limited. Your advisor will be able to run a hypothetical public sale and they can compare potential bids that come in from a bank directly to see if the direct purchase is worth the effort, whether for confidentiality or if the pricing is just better or worse.

(26:50):
The other thing with the direct purchase that's unique is because the bank is buying this directly, they might have size or tenure constraints. So depending on your JOB, if it's very large or if you need to stretch it out longer or shorter, if it doesn't fit in the wheelhouse of the bank, there's going to be structuring issues where you might be forced to sell in a competitive or negotiated sale. Those are the three main forms of structures that you'll see. In terms of market expectation and investor outreach, the table in front of you shows what I would call the typical buyer base for a plain vanilla tax-exempt financing. Taxable financing won't differ too much. On the far left, you've got individual retail, and they participate throughout the yield curve.

(27:46):
SMAs (Separately Managed Accounts), who have become big buyers of bonds in the past few years, typically are in years 1 through 15 and then maybe longer down the curve. You've got bond funds pretty much throughout the curve, as well as insurance companies. Relative value arbitrage funds are typically found on the longer end of the curve, but they are a lot more flexible; they'll participate where they think there's value. Bank portfolios typically stay lower down the curve. What we've noticed for our sales on JOBs is that SMA participation is a lot more muted. It could be several things, whether it's market conditions or they find something more attractive, but it also could be just discerning use of proceeds. At least the sales that we've seen, you've found more bond funds, insurance, and relative value investors come into play. On a recent transaction of ours, we had a strong breadth of 30-something investors, but it was very muted on the SMA side, especially when our bonds were shorter.

(28:57):
That's definitely something for you to consider as you look at a potential JOB; if typically you've got bonds that are zero through 15 and you're anticipating a lot of SMAs to come in, you might not see that. You need investors to come in from other sectors.

(29:17):
On pricing difference, again, there's too many variables, so I didn't want to make this an exact pricing conversation. What I wanted to leave with you is more about what a rating would be and the subsequent increases in rates based on different vehicles. If you have a standard GO bond that's rated AA2, you should get your JOBs rated one notch lower at AA3, and then your COP (Certificate of Participation) lease revenue is typically two notches lower, so A1 in this case. The real difference between the JOB rating and the COP rating—and I'm sure Helen went through this earlier—is the obligatory nature of the JOBs. With COP lease revenue bonds, you've got abatement risk and appropriation risk. Whereas in a judgment, as Don mentioned earlier, this is the obligation of the district. The ratings are actually a little bit stronger than a COP.

(30:28):
Just throwing out some numbers: from a AA2 GO, your JOB might be about 10 basis points more expensive. A COP might be 10 to 15 basis points more expensive than that.

(30:43):
One of the things I think Don will get to later is that some issuers can actually issue their JOBs through a COP or a lease structure as well. That's something to take into consideration. Do you do a COP that might be more expensive than a JOB, but maybe you save more on publicity in the sense of use of proceeds? It's not a JOB out there; it's more of a COP that's being marketed. But again, the takeaway here is the JOB ratings are very strong, stronger than lease revenue bonds. From our experience, with a strong extensive marketing period, you are seeing strong pricing. You're not paying a very high penalty because of a JOB. Handing it back to you.

Donald Field (31:40):
Thank you. As I mentioned before, tax-exempt bonds generally finance capital costs. There are limited situations where you could do a tax-exempt financing for working capital. Short-term working capital—most people are familiar with tax and revenue anticipation notes—comes with extra tests regarding cash deficits. Extraordinary long-term working capital financings have additional tests that you have to comply with. Not only are they additional tests, but they are ongoing after you issue. There's an annual test to see whether there are available amounts as defined in the Internal Revenue Code each year that the bonds are outstanding, and to the extent that you do have available amounts, there are some mitigation requirements. So whether to issue tax-exempt bonds is a discussion that should be had with tax lawyers. There is a possibility to ask for a private letter ruling from the IRS to avoid the ongoing tests, but that in itself is a process.

(33:03):
It's just another item to consider when you're issuing judgment obligation bonds.

(33:13):
As Karma mentioned, there are alternatives to judgment obligation bonds. One is a lease financing. The lease financing exception to the constitutional debt limit is much more well known and vetted in the courts. So there's no need for a validation action, but some entities won't be able to do lease financings. For instance, school districts are not allowed to finance anything other than capital costs in a lease financing. Some cities may have restrictions in their city charters on how lease financings may be used. If you are looking at a lease financing, a disadvantage is that local government entities have a limited number of assets. In this case, you have another exception to the constitutional debt limit by doing a judgment obligation bond, which does not require you to encumber an asset. If you have capital financing needs in the future, it may be a disadvantage to use lease financing and encumber one of those assets if there are few to utilize for capital financing.

(34:51):
Just as an example of the challenges that AB 218 can present: early on after AB 218 was enacted, it became clear that some issuers were going to have dozens, hundreds, and even thousands of these claims. I was asked early on to come up with a program, and there were some parameters. Traditionally, with judgment obligation bonds, a local government entity would be faced with, for instance, an inverse condemnation action where there was a large judgment. The process would be pretty straightforward: have this one judgment, do a validation action, and issue bonds for that liability. But here, where you're having maybe dozens or hundreds of cases, the timing of those are all coming in at different times. You have the timing issues under the refunding law—you need to issue bonds to refund it when the judgment is in existence and not do a reimbursement financing or prefund.

(36:19):
There are a lot of timing issues that come into play. The question is: how do you deal with those timing issues? We came up with a program where there was a three-step process.

(36:36):
One: do what I'll refer to as a consolidated validation action, where we go into the court and ask the court to validate our financing techniques to finance a type of liability. We defined what the scope of the litigation cases was going to be and what the potential financing would be. In this case, obviously AB 218, but we were clear to make sure that we allowed the financing to cover cases that may not have needed the AB 218 provisions because not only did AB 218 bring out a lot of cases that needed the extension or revival provisions, but it also made the topic more well known. So there are cases that are not within the provisions of AB 218. We carefully defined the types of cases this would involve and went into court indicating that we would finance those particular types of cases and only those cases.

(37:54):
So the scope of the judgments was defined, but then also we came up with the idea of having an interim financing as well as a long-term financing. The interim financing mechanism was meant to deal with the timing issues of the refunding law. One of the big concerns when you have multiple cases—dozens or hundreds—is that you don't want to negotiate each case with financing terms and timing issues while the validation action is going on. You want to be able to prevent the litigation from interfering with the financing discussion in the hopes that you would have better terms on settling. The interim financing mechanism, whether it's a credit agreement or a revolving credit agreement, essentially acts as a letter of credit. As the litigation progresses, you're able to draw down on the letter of credit and pay for the judgment. That deals with the timing issues, but it also preserves in the interim financing the debt obligation that then later could be refinanced into long-term debt.

(39:31):
It also allows the local entity to not enter the public markets as often because they could draw down on the credit agreement until the amount outstanding gets to a place where it makes more sense to enter the market.

(39:52):
That's the long-term takeout mechanism. When it is appropriate, depending on the program, there could be a couple of long-term bond takeouts of the interim financing mechanism. The timing of that could depend on the size, how much has been drawn down on the credit agreement, and when it is appropriate to enter into the market, depending on the issuer's financial disclosure availability and other timing issues. It allowed this issuer to be able to manage the litigation side without interference from the financings and preserve the judgments through the interim financing mechanism to enter the market with long-term financings periodically. This is just a visual of that, but this program is just an example. The real point I want to make on setting a judgment obligation bond program is it's going to be dependent on your litigation strategy.

(41:14):
Some issuers may want to have a settlement process where there's going to be a number of payments over time. They may or may not finance those with judgment obligation bonds, but that structure they may believe gives them the most cost-effective approach. Getting with your finance team early on in the process and making sure they understand the litigation strategy allows the finance team to inform the issuer and the litigators what the options are for a bond program and how they fit into the litigation strategy. It really needs to be a coordinated effort.

(42:08):
A summary of that: again, the refunding law and the timing issues we've mentioned, litigation strategy, the validation action, and making sure that you include enough flexibility in your documents to accommodate your needs—whether that is a period of time where you don't pay interest with capital appreciation bonds or some other structure. It's been touched on a couple of times, but there are a lot of disclosure issues related to this topic. There are a couple of GASB rules that require issuers to disclose in financial statements known liabilities that reasonably can be determined. There are also disclosure issues when you're going to the markets with a public offering or anytime you're speaking to the market. So the litigation that's going on needs to be discussed and vetted with not only your auditors but your disclosure counsel to make sure it's properly disclosed.

(43:39):
Recently in some bond financings, there has been a desire to put in disclosure even where the issuer doesn't have AB 218 claims, or maybe they've had a couple of claims that have been covered by insurance, just to deal with the headline traffic in the media right now and give some assurances that the topic is being thought about. Disclosure issues should be discussed not only in a financing but in any ongoing disclosure to the market.

Mike Fine (44:30):
So you thought I was just sitting up here to balance out the hair color, right? I want to touch very briefly on the issue of state receivership for school districts—traditional school districts. Charters are not included, and community colleges and county offices, as I indicated earlier, are also not included. Just to say a couple of things: first, that is a statutory provision that's intended to be the last resort. It mirrors in principle Chapter 9 of US bankruptcy proceedings, in principle only. There are some mechanical differences, but it's meant to be a last resort and meant to turn to the legislature for assistance after you've exhausted all of your other options. That's why I make this comment at the very end—everything Don and everybody else have talked about with respect to potential financing of these claims needs to be explored first.

(45:37):
You don't go to the legislature and say, "We want to come to you because you're going to be easier to deal with. There's no marketing, there's no this, there's no that." The reality is there are lots of public hearings about it to go down that process. Keep in mind that it is, for those entities with exposures, the last resort. It naturally also raises the question: why wouldn't Sacramento care? Why wouldn't the legislature care about funding some of these claims for school districts and colleges if they're ultimately going to have to loan them money? The loan process or the receivership process is an advanced apportionment. It's really not even a loan; it's an advanced apportionment on what the state's going to owe that school district or college over time. Under statute today it's 20 years, although we just did one of these at the end of June for 30 years.

(46:40):
There is no budget impact; there's no appropriation. It's a cash transaction and the state has two choices to fund that. If the state has ample cash resources—the treasurer has done a great job sitting on $100 billion or something of cash—they can choose to make a general fund advanced apportionment and charge basically 2% more than what the treasurer is earning for costs. The transaction we just did for one school district at the end of June is over 6% for up to 30 years. Obviously, the marketplace can do better than that. The second way to do this is actually a lease-leaseback arrangement through the I-Bank, the state's infrastructure and economic development bank. We've done both over the last 30 years. We have a mix of those, and that is going to be more reflective of some of the market rates and market conditions that have been discussed today.

(47:47):
Keep that in mind. Again, it's a last resort. There's no appropriation issue for the state here, thus they don't feel a burden to pay the bill. Again, that is limited to just those two groups: traditional school districts and community colleges, which the courts back in the '90s determined to be providing essential services.

Donald Field (48:19):
The thing I would say after working on these for the last probably four years now: every issuer considering judgment obligation bonds has a situation that is a little bit different. Some have had just one or two judgments, but they're very small and the budget can't take it. The process has been very straightforward with the validation action and fixed-rate bonds sold to a bank. Others where there's been dozens or hundreds of claims become more complex, and every litigation strategy has been a little bit different, so the nuances work their way through the documents. I can't emphasize enough the need to coordinate and understand what your litigation strategy is so that a bond program can be developed around it if it's needed. There are just so many nuances that need to be flushed out, and it really leads with the litigation strategy.

(49:44):
Hopefully, the presentation and the booklet give you some thoughts to think about and ask questions if you're facing this situation. Thank you. And thank you, Karma and Mike.

Karma Pemba (50:05):
We have some time for some questions. Any questions for our panelists?

Audience Member 1 (50:15):
Thank you, and thank you for the presentation. Don, do you think there'll be a time that there will be enough case law or whatever it takes not to require validation for POBs, JOBs, and the like?

Donald Field (50:29):
Sorry, I'm having a hard time... Were you asking whether there'd be a time when we didn't have to do validation?

Audience Member 1 (50:34):
Validation.

Donald Field (50:35):
Validation?

Audience Member 1 (50:36):
Yes.

Donald Field (50:38):
Well, if it got flushed out more in the courts—if a validation action was challenged and then the issuer decided to litigate it up to the Supreme Court and we got a Supreme Court decision that was strong enough on the issues, then yes.

Audience Member 1 (51:00):
Doesn't sound likely, though.

Donald Field (51:01):
Right. There have been challenges of these. The case law, I think, is pretty strong to win if there were a challenge, but the issuers don't want to spend the number of months and years to get up to the Supreme Court on these issues.

Audience Member 1 (51:21):
Understood. Thanks.

Donald Field (51:22):
Probably not anytime soon. Any other questions? Great. I think we have one. Yep.

Audience Member 2 (51:38):
Thank you for the presentation. Don, you mentioned having set up a program, and it sounded like you had either worked with an issuer or were maybe in the process of working with an issuer. If it's been completed, was it a public offering? Would you be able to disclose the name, and would we be able to find an OS on EMMA to learn more about the program and how it all works?

Mike Fine (52:15):
The plan you outlined sounds like it was with an issuer. Is there an OS that they could look to?

Donald Field (52:24):
As was mentioned at the beginning of the session today, the trouble with these AB 218 issues and the issuers that are facing them is we've taken them in and have their confidences. I wouldn't want to name any issuer in the presentation today, but the examples are from a cumulative experience of the different programs that I have and don't represent any single issuer.

Audience Member 3 (53:15):
Okay. Thank you, Don. Thank you for this handy book. In your Appendix A, it shows some of the judgment obligation bond and similar debt issuance data, and there are big principal amounts for tax refunds as the nature of the underlying obligation. Do you know what those cases are about in general?

Mike Fine (53:40):
Within the history of the JOBs, one of the categories is tax refunds. Do you know anything more about that?

Donald Field (53:49):
Yes. The tax refund cases are a very interesting scenario because even though it involved a very different topic than AB 218, at the time that cities were faced with these, it was very similar in that there were a lot of claimants coming in at the same time. What those involved were unconstitutional business taxes levied by cities that were challenged, and then the business owners within the jurisdiction filed claims. All of these claims came in and then they issued judgment obligation bonds to basically fund the refunding of the taxes. If you look in the judgment obligation booklet, some of them are on the table; there's a list of all of the judgment obligation bonds since 1992 in one of the appendices. You'll be able to see the different types of underlying obligations that judgment obligation bonds have financed in California.

(55:02):
I apologize for my errors. I recently started swimming again and I have a really bad case of swimmer's ear, so it's echoing in my head.

Karma Pemba (55:16):
Any more questions? All right. Well, thank you very much, Karma, Don, and Mike again. Appreciate your presentation.