California Assembly Would Curb Capital-Appreciation Bonds

California’s Assembly passed limits on long-term bonds that have saddled school districts with debt of as much as 10 times the principal after financing new classrooms in years of slumping property values.

The lower house of the state legislature approved a bill that would limit the duration of capital-appreciation bonds to 25 years, prohibit debt payments of more than four times the principal and mandate the option of early repayment on deals that mature in more than 10 years. The vote yesterday was 73-0.

State Treasurer Bill Lockyer called for curbs on the bonds after news reports last year showed that the Poway Unified School District in San Diego County would pay $1 billion in interest on $105 million in bonds maturing over 22 to 40 years.

“This bill would protect taxpayers from terrible bond deals while maintaining school districts’ ability to provide their parents and children needed facilities,” Lockyer said yesterday in a statement about the measure, Assembly Bill 182. “Today’s vote reflects widespread agreement that AB 182 offers a reasoned, balanced approach to addressing this important issue.”

The proposal now goes to the state Senate, which like the Assembly is controlled by Democrats.

California school districts sold $19.7 billion of in capital-appreciation bonds from 2000 through September 2012, according to data provided by Tom Dresslar, a Lockyer spokesman. The zero-coupon notes carry higher yields than coupon bonds, to compensate investors for the longer holding period before they receive any income.

Popular Mechanism

Boards overseeing local schools increasingly turned to the long-term financing mechanism after the 2007 subprime-mortgage market meltdown and the housing-market collapse that followed cut into property-tax revenue used to build and modernize classrooms and other space, an analysis of the measure shows.

The current bill would hinder districts’ ability to finance construction, said Jeff Vaca, deputy executive director of the California Association of School Business Officials.

The group, representing more than three-quarters of California’s approximately 1,000 school districts, opposes the limits proposed in the measure.

“It’s our view that this bill would make it more difficult for school districts to pursue their capital-improvement programs, if not impossible,” Vaca said.

To contact the reporter on this story: James Nash in Los Angeles at jnash24@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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