San Mateo County Grand Jury • 2007-2008

Issue | Background | Findings | Conclusions | Recommendations | Responses | Attachments Cash Out Refunding: Important

Published: October 04, 2007 68 pages

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⚠️ Este contenido ha sido traducido automáticamente. El texto original en inglés es la versión oficial. La traducción puede contener errores.

Note: Missing finding numbers detected: F5, F6, F7, F8, F9, F10, F11, F12, F13, F14, F15, F16, F17, F18, F19, F20, F21, F22, F23, F24, F25, F26, F27, F28, F29, F30, F31, F32, F33, F34, F35, F36, F37, F38, F39, F40, F41, F42, F43, F44, F45, F46, F47, F48, F49, F50, F51, F52, F53, F54, F55, F56, F57, F58, F59, F60, F61, F62, F63, F64, F65, F66, F67, F68, F69, F70, F71, F72, F73, F74, F75, F76, F77, F78, F79, F80, F81, F82, F83, F84, F85, F86, F87, F88, F89, F90, F91, F92, F93, F94, F95, F96, F97, F98, F99, F100, F101, F102, F103, F104, F105, F106, F107, F108, F109, F110, F111, F112, F113, F114, F115, F116, F117, F118, F119, F120, F121, F122, F123, F124, F125, F126, F127, F128, F129, F130, F131, F132, F133, F134, F135, F136, F137, F138, F139, F140, F141, F142, F143, F144, F145, F146, F147, F148, F149, F150, F151, F152, F153, F154, F155, F156, F157, F158, F159, F160, F161, F162, F163, F164, F165, F166, F167, F168, F169, F170, F171, F172, F173, F174, F175, F176, F177, F178, F179, F180, 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Findings and Recommendations 5 findings

This District would agree with the Grand Jury’s recommendation that if it were to consider this method of financing, the District would have to become much more familiar with the complexities of cash out refunding , other types of follow-up bond transactions, pertinent Government Code and relevant IRS information pertaining to tax exemption.

Related Recommendations (1)

Districts should better acquaint themselves with the complexities of: a) cash out refunding transactions; b) other types of follow-on bond transactions; c) sections 53550- 53569 of the California Government Code; d) relevant sections of the Internal Revenue Code pertaining to tax-exemption, e.g.- Section 103 SSFUSD Response: Agrees with recommendation Recommendation had been implemented at the time of the cash out refunding transaction. At the time of the adoption of the bond issuance resolution in December 2005, the SSFUSD Board and administration reviewed the issues related to cash-out refundings. Moving forward, representatives from SSFUSD will attend a FCMAT-sponsored workshop hosted by the San Mateo County Office on October 30, 2008, on Debt Management. Lori Ranieri with Governmental Financial Strategies, is an expert in this field and will cover many of the topics noted in the Grand Jury report. 1

If this District were to consider refinancing our bond, we would want this process to be a transparent as possible. Any process would have to be approved by the Trustees at a public meeting so the process would be a public process with appropriate notice. This District has limited knowledge about the process associated with cash out refunding. As such, it is unclear what procedural steps would be appropriate.

Related Recommendations (1)

Consider taking procedural steps that are usually taken for an original bond issuance, if the district knowingly engages in a cash out refunding. This process would include public notice and approval by the voters. SSFUSD Response: Agrees with recommendation The recommendation for public notice had been implemented at the time of the cash out refunding transaction. The governing board discussed and approved the refinancing at a regularly held and properly noticed public board meeting. The recommendation to seek voter approval requires further analysis. The District will confer with bond counsel before any future cash-out refinancing as the District is not aware of a mechanism under current law to obtain voter approval for a refinancing.

This District totally agrees that if there is any question about the legality of a refunding transaction that it would rely heavily on the opinion of Bond Counsel and any other appropriate source to help determine the appropriateness of the action.

Related Recommendations (1)

If a district is in doubt about the propriety of a proposed refunding transaction, it should consult with its bond counsel and the Treasurer’s office before engaging in the transaction. SSFUSD Response: Agrees with recommendation Recommendation had been implemented at the time of the cash out refunding transaction. Prior to its cash out refunding of January 2006, the South San Francisco Unified School District consulted the renowned San Francisco law firm, Orrick, which, in turn, had numerous conversations/ correspondences with the County Treasurer’s office on the District’s behalf at the time. In the future, the District will consult with bond counsel and the Treasurer’s office if it is in doubt about the propriety of a proposed refunding transaction in the future.

This District agrees that any financing or refinancing of bonds should be a public process providing the public with pertinent information. Sincerely, Marilyn Loushin-Miller Superintendent, Hillsborough City School District PORTOLA VALLEY SCHOOL DISTRICT 4575 Alpine Road • Portola Valley, CA 94028 Phone: (650) 851-1777 • Fax: (650) 851-3700 • www.pvsd.net PVSD Anne E. Campbell, Superintendent Board of Trustees Tim Hanretty, Asst. Superintendent Donald Collat Steven Humphreys Judith Ann Mendelsohn Ray Villareal William Youstra August 18, 2008 Hon. Joseph C. Scott Judge of the Superior Court Hall of Justice 400 County Center; 2nd Floor Redwood City, CA 94063-1655 Dear Judge Scott, The Portola Valley School District Governing Board has received the Grand Jury’s

Related Recommendations (1)

Inform the constituency in the district of the proposed refunding, if the district is contemplating a cash out refunding. The information to the public should, at a minimum, disclose: a) the amount to be originally borrowed; b) the amount that will be used to refund the original bond issue; c) the premium amount that the district will keep; d) the new amount that the taxpayers will be obligated to pay; e) possible effect on property owner assessments necessary to pay the bond; and, f) status of Attorney General decision regarding legality of refunding bonds. SSFUSD Response: Agrees with recommendation Recommendation had been implemented at the time of the cash out refunding transaction. The District informed its constituency of the impact of the cash-out refunding at its December 5, 2005 Board meeting and will inform its constituency of any future cash-out refunding 2 July 22, 2208 Hon. Joseph C. Scott Judge of the Superior Court Hall of Justice 400 County Center, 2nd Floor Redwood City, CA 94063-1655 Dear Judge Scott The Hillsborough City School District Board of Trustees has asked me to respond to the Grand Jury’s report regarding Cash Out Refunding. This school district has not done any cash out refunding of its bond. The district does not anticipate the need to do any cash out refunding at this time. It appears that there is no finding about this district and it is not possible to agree or to disagree with findings made about other districts. 1. This District would agree with the Grand Jury’s recommendation that if it were to consider this method of financing, the District would have to become much more familiar with the complexities of cash out refunding , other types of follow-up bond transactions, pertinent Government Code and relevant IRS information pertaining to tax exemption. 2. If this District were to consider refinancing our bond, we would want this process to be a transparent as possible. Any process would have to be approved by the Trustees at a public meeting so the process would be a public process with appropriate notice. This District has limited knowledge about the process associated with cash out refunding. As such, it is unclear what procedural steps would be appropriate. 3. This District totally agrees that if there is any question about the legality of a refunding transaction that it would rely heavily on the opinion of Bond Counsel and any other appropriate source to help determine the appropriateness of the action. 4. This District agrees that any financing or refinancing of bonds should be a public process providing the public with pertinent information. Sincerely, Marilyn Loushin-Miller Superintendent, Hillsborough City School District PORTOLA VALLEY SCHOOL DISTRICT 4575 Alpine Road • Portola Valley, CA 94028 Phone: (650) 851-1777 • Fax: (650) 851-3700 • www.pvsd.net PVSD Anne E. Campbell, Superintendent Board of Trustees Tim Hanretty, Asst. Superintendent Donald Collat Steven Humphreys Judith Ann Mendelsohn Ray Villareal William Youstra August 18, 2008 Hon. Joseph C. Scott Judge of the Superior Court Hall of Justice 400 County Center; 2nd Floor Redwood City, CA 94063-1655 Dear Judge Scott, The Portola Valley School District Governing Board has received the Grand Jury’s recommendations regarding cash-out refunding and has reviewed them with interest. The Portola Valley School District has not engaged in any such cash-out endeavor and is not one of the districts noted in the Grand Jury Report. However, at some point in the future should the Portola Valley School District consider engaging in a cash-out refunding transaction, it would carefully consider the recommendations of the Grand Jury before moving forward. The Portola Valley School District Governing Board thoroughly agrees that it has an obligation to keep its constituency well-informed regarding the details of any proposed cash-out refunding. Thank you for the opportunity to respond regarding this important issue. Very truly yours, Ray Villareal Board President RV:ac Ormondale School Corte Madera School 200 Shawnee Pass 4575 Alpine Road Portola Valley, CA 94028 Portola Valley, CA 94028

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In all cases, the refunding was applied to bonds that were originally authorized by the voters to fund construction, renovation and/or repair of school facilities. Table 1 summarizes the seven cash out refundings in the County during the past decade. Column A is the amount authorized by the voters. The original bonds can usually be repurchased (paid off) for an amount (Column B) that is less than the original principal, because the bonds are usually issued in many series, some of which have matured by the time of refunding. Columns C and D show the gross amount received from sale and the cost of issuing the refunding bonds. Column E shows the amount deposited to the school district’s building fund. The County Treasurer is required to deposit any net gain from refunding into the fund for which the original bonds were approved. Column F shows the additional obligation placed upon the taxpayers by the refunding; i.e., the difference between what is still owed on the original principal at the time of refunding and the gross proceeds of the refunding. The final column (G) shows the fraction of the added obligation that went to the building fund; i.e., the net gain to the district. In the worst cases, the enablers of refunding (underwriters, bond counsels, bond insurers) took almost half of the additional obligation. Table 1: Cash Out Refundings – 2005-20072 Dollars in Thousands ($ 000) Original Bond Refunding Bond A: B: C: D: E: F: G: Original Re- Gross Issue To Bldg. Added Usable School District Principal purchase Proceeds Costs fund obligation fraction Belmont-Redwood Shores 12,000 11,620 12,294 283 391 674 58% Jefferson Union High 5,500 5,163 5,584 200 220 421 52% Las Lomitas Elementary 24,000 22,012 24,619 355 2,253 2,607 86% Ravenswood City 16,000 14,520 15,561 469 572 1,041 55% San Mateo-Foster City 79,000 76,752 83,445 937 5,755 6,693 86% So. San Francisco Unified 40,000 39,062 42,617 563 2,992 3,555 84% Woodside Elementary 9,500 9,517 10,089 220 352 572 61% Total 186,000 178,645 194,208 3,028 12,536 15,563 81% Notes to Columns in Table 1: B: Bonds are issued in many series, some with very short maturities that have matured by the time of refunding. D: Issue Costs include fees charged by the underwriter, bond counsel, bond insurer, etc. E: Net gain to school district, i. e., the additional amount available for construction and renovation. E = C – B – D F: The additional taxpayer obligation incurred by refunding. F = (D + E) = (C – B) G: The percentage of the added tax obligation that is deposited to the district’s building fund. G =100*E / F 2 Source: See Appendix 2. The first data row in Table 1 shows the key components of the refunding transaction undertaken by the Belmont-Redwood Shores School District. The original bond issue (Series A, 1997) was approved by the voters for $12 million. By 2005, the time of refunding, the outstanding principal (payoff amount) owed on the original bonds was $11.62 million. The new refunding bonds were sold for $12.294 million. The total cost of issuing the refunding bonds (including bond insurance, underwriting and other fees) was $283,000. The proceeds of the refunding bonds were used to pay off the original bonds and the issuance costs, leaving a net gain of $391,000 to be deposited into the District’s building fund (12,294,000 – 11,620,000 – 283,000 = 391,000). In 2005 at the time of refunding, if the original bonds were allowed to mature as scheduled, the taxpayers’ remaining obligation would have been $11.62 million (the outstanding principal). Instead, the refunding bonds established a new principal amount of $12.294 million, thereby increasing the taxpayers’ obligation by $674,000. Only 58% of the additional obligation was available to the District (100 X 391,000 / 674,000).3 The Grand Jury found that Sections 53550 – 53569 of the California Government Code was used as authority for school districts to enter into these transactions. (See Appendix 1) While cash out refunding has generated income for underwriters and additional revenue for school districts, the legality of this type of transaction is in question. The California Attorney General’s office was asked to provide an opinion on whether or not the Government Code allows cash out refunding, but has yet to do so. One County school district was given a Preliminary Adverse Determination by the Internal Revenue Service (IRS) pursuant to Section 103 of the Internal Revenue Code, stating that “the interest on the Bonds is not excludable from gross income.” Essentially, this is a preliminary ruling that the interest on a particular type of refunding bond is not tax-exempt. (See Appendix 1) Unlike the original bond issues, cash out refunding transactions have not been approved through a public process. Taxpayers may have been unaware of the transactions, even though their tax obligation increased. Some school districts that engaged in cash out refunding seemed unaware of its true nature and its potential consequences, although these same school districts understood that such refunding would increase funds available for their projects. Other school districts appear to have knowingly engaged in cash out refunding transactions while understanding their questionable legality, if not their potential consequences. Conclusions Cash out refunding has generally escaped public notice, probably because it can be done without voter approval or raising tax rates. Such refunding obligates taxpayers to pay off larger debts than stated in the original bond measures. The principle of full disclosure suggests that taxpayers should be informed of such increases in their obligations. Cash 3 Amounts have been rounded. 4 out refundings are, effectively, new bond issues that do not go before the voters like any original bond issues. Furthermore, the legality under California law of cash out refunding is doubtful, according to County officials and other financial experts, and the tax-exempt status of some types of refunding bonds is being questioned by the IRS. Pursuant to Section 103 of the Internal Revenue Code, interest on some types of cash out refunding bonds might be considered gross income and, thus, taxable. One County school district has received a Notice of Preliminary Adverse Determination based on Section 103, which means that the tax- exempt status of its refunding bonds may be in jeopardy. The Grand Jury hopes this report will make county agencies aware of the potential consequences of engaging in cash out refunding transactions, and will encourage them to be more cautious in the future. The Grand Jury does not intend to suggest in this report that agencies that are able to issue general obligation bonds should not do so when needed.

No recommendations for this finding

Conclusions 2

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Cash out refunding has generally escaped public notice, probably because it can be done without voter approval or raising tax rates. Such refunding obligates taxpayers to pay off larger debts than stated in the original bond measures. The principle of full disclosure suggests that taxpayers should be informed of such increases in their obligations. Cash 3 Amounts have been rounded. 4 out refundings are, effectively, new bond issues that do not go before the voters like any original bond issues. Furthermore, the legality under California law of cash out refunding is doubtful, according to County officials and other financial experts, and the tax-exempt status of some types of refunding bonds is being questioned by the IRS. Pursuant to Section 103 of the Internal Revenue Code, interest on some types of cash out refunding bonds might be considered gross income and, thus, taxable. One County school district has received a Notice of Preliminary Adverse Determination based on Section 103, which means that the tax- exempt status of its refunding bonds may be in jeopardy. The Grand Jury hopes this report will make county agencies aware of the potential consequences of engaging in cash out refunding transactions, and will encourage them to be more cautious in the future. The Grand Jury does not intend to suggest in this report that agencies that are able to issue general obligation bonds should not do so when needed.
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Grand Jury: “… The Grand Jury hopes this report will make county agencies aware of the potential consequences of engaging in cash out refunding transactions, and will encourage them to Page 2 – Cabrillo response to Cash Out Refunding be more cautious in the future. The Grand Jury does not intend to suggest in this report that agencies that are able to issue general obligation bonds should not do so when needed.” Cabrillo Unified School District response to conclusion: While this conclusion is not applicable to the Cabrillo Unified School District at this point in time, the District does appreciate learning more about the potential issues associated with cash out refunding and will establish a cautionary stance in approaching such transactions in the future.

No Responses Found 2

Government entities assigned to respond to this report. No response documents have been linked in our database.

Pacifica School District School District

San Mateo-Foster City Elementary School District School District