LOS ANGELES -- Legislation to clean up alleged problems with Marks-Roos bonds could be forthcoming from the California Debt Advisory Commission, a commission staff member said yesterday.
Legal changes in the structure of the bon.ds might be recommended in a Marks-Roos report expected to be released late this fall by the commission, said Steve Juarez, executive director of the debt advisory commission.
"There is no guarantee we will come up with any recommendations, but it is a possibility that legislation that may affect how Marks-Roos deals are done may come out of this," Juarez said.
The Marks-Roos Local Bond Pooling Act of 1985 was subjected to corrective legislation once before. A bill introduced by state Sen. Dan McCorquodale, D-Modesto, became law in January 1991.
Through February of this year, 339 Marks-Roos bond issues totaling $8.8 billion have been sold, according to the debt commission.
Juarez and Steve Shea, the commission's policy research manager, in an advisory group of public finance professionals to discuss what topics should be investigated in the Marks-Roos study.
A Marks-Roos study "is somewhat after the fact," said Scott Sollers, a partner and manager of public finance of San Francisco-based Stone & Youngberg.
Sollers sits on the debt commission's technical advisory committee, and he attended Tuesday's meeting.
McCorquodale's bill "addressed some potential abuses, and the vast majority of the industry welcomed that legislation," Sollers said.
But "I do have a little concern the study is going to produce the two or three glaring examples of abuse and focus on those," Sollers said.
He said he hopes the study would not "overlook the hundreds of transactions that have been done efficiently" under the Marks-Roos act.
At the meeting, technical advisory committee members reached a consensus "to move forward with the study with the understanding that whatever we come up with does not undercut the flexibility in the Marks-Roos bond act," Juarez said.
"There was general agreement that if there are abuses, root out those abuses, but do not throw out positive aspects that are inherent in the law," he said. "We don't want to do a full-scale attack on MarksRoos to the extent that it might be totally eliminated" by legislation.
Juarez said commission members gave their staff approval to begin a Marks-Roos study in December 1991, but research was placed on hold until now because of other staff commitments.
The Marks-Roos act was conceived to provide financial flexibility to local governments by allowing them to form joint powers authorities that then create bond pools. The expectation was that Marks-Roos legislation would primarily benefit smaller jurisdictions where financing costs of stand-alone deals pose a significant burden.
Increasingly, Marks-Roos bond pooling has been used by single cities. For example, a city will band together with its city-controlled redevelopment agency to form a public financing authority.
"Even though such public financing authorities technically constitute joint powers authorities, they are under the direct control of the city council and may execute financings for both city projects and redevelopment agency projects," a debt commission background memo said.
"From the time that local agencies began forming public financing authorities and setting up MarksRoos bond pools in the late 1980s, this method of financing has been controversial," the memo said.
Initially, much of the MarksRoos criticism centered on the arbitrage earned by public financing authorities on the spread between the interest rates paid on MarksRoos bonds and the interest rates charged on the underlying obligations purchased with Marks-Roos bond proceeds, the memo said.
"The interest rate differential pocketed by these public financing authorities was nothing more than a surreptitious tax increase," according to critics of the approach, the memo said.
The bill by McCorquodale attempted to curb some of these arbitrage profits. It restricted the interest that could be charged on underlying obligations to that of the bond pool.
But the legislation contained exceptions for interest-rate differentials: one for obligations acquired for refinancings, and the other for those acquired when there has been an increase in interest rates.
One focus of the debt advisory commission will be to look at interest rates charged on obligations purchased by Marks-Roos bond pools to see if they are in compliance with yield restrictions, Juarez said.
Staff members have not "reached any conclusion about that," Juarez said. "We're just looking into whether most of the financings have been in compliance since January 1991," when the McCorquodale bill took effect.
The commission's memo said "events over the past three years may have made this study of Marks-Roos bond pooling more timely than ever."
"The drop-off in real estate development activity, coupled with the decline in interest rates over the past few years, would appear to have adversely affected many Marks-Roos bond pools," the memo said. "Yet very little is known about the fiscal integrity of these pools... For the most part, the performance of pool investments is not monitored."
The commission memo also noted a recent story in The Bond Buyer that highlighted a Marks-' Roos controversy in Lincoln, Calif. In that city, a developer objected to the fact that virtually all savings generated by a refunding of assessment district bonds were kept by the Lincoln public financing authority.