California school districts finance much of their school construction with general obligation bonds, the issuance of which requires the approval of 55% of district voters. In recent years, economic conditions have allowed many districts to repay their outstanding general obligation bonds with refunding bonds that produce additional proceeds for the district. These so called “cash-out refundings” have attracted critics who contend that the school districts are circumventing the will of the taxpayers by generating more bond proceeds than were originally approved by voters. California Attorney General Jerry Brown recently issued an opinion supporting the critics and condemning the use of cash-out refundings. In his opinion, the Attorney General notes that bonds used in cash-out refundings create “new indebtedness for purposes of the constitutional debt limit, and therefore require new voter approvals before they may be issued.” Although the opinion is not legally binding, most industry participants expect that school districts will avoid future cash-out refundings in deference to the Attorney General’s position.
Alert February 17, 2009