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WHAT A STATUTORY LIEN MEANS FOR CALIFORNIA SCHOOL AND COMMUNITY COLLEGE DISTRICT GENERAL OBLIGATION BONDS CALIFORNIA SENATE BILL 222.

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Presentation on theme: "WHAT A STATUTORY LIEN MEANS FOR CALIFORNIA SCHOOL AND COMMUNITY COLLEGE DISTRICT GENERAL OBLIGATION BONDS CALIFORNIA SENATE BILL 222."— Presentation transcript:

1 WHAT A STATUTORY LIEN MEANS FOR CALIFORNIA SCHOOL AND COMMUNITY COLLEGE DISTRICT GENERAL OBLIGATION BONDS CALIFORNIA SENATE BILL 222

2 EUGENE CLARK-HERRERA MARY COLLINS DON FIELD JOHN PALMER PRESENTERS 2

3 The California Constitution requires schools and community colleges to obtain voter approval for general obligation bonds. Bonds are paid by a dedicated ad valorem tax on property in the District (the “bond taxes”). The County collects bond taxes and may only use them to pay the District’s bonds. The District’s general fund is not the source of payment for the District’s bonds and should not be part of the credit analysis. GO BONDS: A QUICK OVERVIEW 3

4 Bankruptcy courts have wide latitude to fashion (what they see as) equitable solutions. Rating agencies worry a bankruptcy court would permit bond taxes to be used for purposes other than paying the bonds. State law should do as much as it can to clarify treatment of bond taxes in a District bankruptcy. RATING AGENCIES WORRY ABOUT BANKRUPTCY 4

5 Because of the uncertainty about how the bond taxes would be treated in a school district bankruptcy, rating agencies continue to evaluate the health of a District’s general fund. For Districts with strong tax bases and general fund issues, this can substantially lower the District’s bond rating and thus increase the cost of borrowing. For large Districts, this can cost local taxpayers hundreds of millions of dollars of unnecessary interest expense over the life of a bond program. UNCERTAINTY HAS A COST 5

6 One way of assessing the impact of the general fund on a District’s credit is by comparing the District’s rating against another issuer with the same tax base: in such cases, rating differences are due to general fund health. We have seen instances where rates paid by Districts with distressed general funds exceed rates paid by issuers with coterminous tax bases (but healthier general funds) by over 1.0% per year. A 1% difference in rate on a $100M deal is $1M/yr: the same taxpayer is paying 1% more to borrow for the District than another issuer with the same tax base. AN ILLUSTRATION OF THE COST 6

7 SB 222 creates a statutory lien on bond taxes. A statutory lien is a lien in favor of bondholders that is created by statute and arises without any further action by the issuer. It reinforces the existing state law and constitutional provisions that bond taxes may only be used for payment of principal and interest on the bonds and for no other purpose. Eliminating the District’s general fund from the credit analysis on its general obligation bonds would make school finance less expensive for taxpayers. SB 222: STATUTORY LIEN REDUCES UNCERTAINTY 7

8 Bill introduced February 12, 2015 by Senator Marty Block (D – San Diego). Referred to the Committee on Governance and Finance. Set for hearing on April 8 th. Not referred to the Education Committee. CURRENT STATUS OF THE BILL 8

9 The full text of the bill is available here.here Write your state senator and assemblyman or assemblywoman: we will have a form letter you can use available on our website. Please contact us with follow-up questions or comments. Eugene Clark-Herrera: (415) Mary Collins (415) Don Field (949) John Palmer (415) HOW TO GET INVOLVED 9

10 THANK YOU! 10


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