Alert May 14, 2009

Lease-Leaseback Financing Under Scrutiny

On February 27, 2009, Assemblywoman Audra Strickland introduced Assembly Bill No. 1192 ("AB 1192") in an effort to stop California cities from utilizing the lease-leaseback structure to finance public infrastructure. In a typical lease-leaseback financing, a city leases or sells an asset to a joint powers authority ("JPA") formed by the city, and then re-leases or repurchases the asset from the JPA under a long-term lease or installment purchase agreement. The JPA then pledges the resulting lease or installment payments to pay debt service on certificates of participation, which are sold to investors to generate the funds to pay for the required infrastructure. AB 1192 would prohibit cities from leasing or selling any existing public improvement to a public or private entity, and then re-leasing or repurchasing that improvement. According to a fact sheet released by Assemblywoman Strickland’s office, she believes that the lease-leaseback financing structure should constitute an indebtedness that requires two-thirds voter approval under the California Constitution, despite a series of California Supreme Court cases that have definitively ruled otherwise. (See, for example, the 1998 case Rider v. City of San Diego.) California cities have used lease-leaseback vehicles to finance vital infrastructure, including schools, courts, administrative buildings, utilities, airport facilities, light rail, correctional facilities, and asbestos removal. If adopted, especially during the current credit dislocations, AB 1192 could severely hamstring a city’s ability to meet its infrastructure obligations.