LOS ANGELES -- A group of California municipal market professionals has endorsed a proposal to require Marks-Roos pool bond proceeds to be spent within 90 days, a drastic departure from current industry practice.
As it now stands, Marks-Roos issuers can wait as long as several years before proceeds are spent -- a delay that sometimes creates blind pools of money that observers said can be abused.
Legislative revision of the state's Marks-Roos Local Bond Pooling Act of 1985 was endorsed last week by a committee of bond industry experts that provides feedback to the California Debt Advisory Commission.
"We voted unanimously to recommend to the California Debt Advisory Commission that the origination period for Marks-Roos financings not exceed 90 days," said Scott C. Sollers, a member of the commission's technical advisory committee, and a partner with San Francisco-based Stone & Youngberg.
The committee -- a volunteer group of high-profile market professionals -- met Dec. 15 in Sacramento and recommended that the proposed bill be introduced early next year as an urgency measure, making its effective date retroactive to Jan. 1, 1995.
An effective date at the start of January would take away the incentive for issuers who might be tempted to structure a Marks-Roos pool under the current, more liberal provisions that allow proceeds to be spent over several years.
Sollers said the Jan. 1 effective date would "prohibit a rush to market" by issuers.
Potentially fast-track legislation might also help to show an industry interest in resuscitating the bonds' now-battered reputation.
Observers said legislation requiring Marks-Roos proceeds to be spent within 90 days conceivably could have prevented the problems that prompted Avenal, Calif., officials on Monday to file a lawsuit in federal court in San Francisco.
In that case, Avenal reinvested Marks-Roos proceeds several years after the city's original 1989 Marks-Roos issuance -- a scenario that the proposed legislation conceivably would prevent from happening in the future. The Avenal court complaint accuses professionals hired by Avenal, and other professionals who oversaw transactions in which Avenal invested, with federal law violations.
As previously reported, the allegations of Marks-Roos-related abuses in Avenal and in other California communities have triggered inquiries by the Securities and Exchange Commission.
More recently, the SEC has focused on the Orange County investment pool debacle. Negative publicity stemming from the twin investigations could create a political environment in which state lawmakers are receptive to tougher restrictions on municipal bonds, some observers believe.
Consequently, the observers believe public finance participants should be proactive and show a willingness to crack down on perceived blemishes in the sometimes-controversial Marks-Roos financing tool.
Sollers said the 90-day "abbreviated origination window would help curb the abuses that are perceived along the Avenal lines, and also prohibit blind pools per se."
But, he added, "If you look at all of the financings to date using Marks-Roos bonds, the vast majority of issuers sold bonds and acquired obligations at closing. The bond investor knew what they were investing in. There was no attempt to sequester funds for future acquisitions."
Underscoring their popularity with issuers and finance professionals alike, more than 400 Marks-Roos issues valued at nearly $12 billion have been issued in California since lawmakers approved the Marks-Roos act nine years ago, according to the Debt Advisory Commission.
The commission, which has been looking at Marks-Roos bonds for several years, issued its long-awaited draft report last week.
"The report has some good recommendations in it," Sollers said. "A lot of them are directed at what can happen throughout an origination period after bonds are sold, and money is escrowed in either an investment contract or otherwise."
"About 90% of the problems that are identified in the Marks-Roos report are handled rather niftily with an abbreviated initiation period," he said. The 90-day limit "will go a long way toward curbing these potential abuses," Sollers added.
The 90-day proposal by the advisory committee was "a far stricter measure" than commission staff developed on its own, said Steve Shea, the commission's director of policy research who wrote the draft report. The popularity of the abbreviated origination period with committee members "I found a little bit surprising," he said.
Shea said much of the controversy surrounding Marks-Roos pools "ties back to blind pools" -- a situation when an issuer sells bonds but does not "have the project identified at the time, and the pool sits idle for long periods. That's what leaves you open to all these problems."
Ironically, the technical advisory committee's proposal to shorten the origination period for Marks-Roos bond pools to 90 days "is much stricter" than the federal hedge bond restrictions adopted into the Internal Revenue Code in 1989, Shea said. The IRS requires agencies to have a reasonable expectation that they will draw down 85% of the proceeds of bonds issued for that purpose within five years.
The proposed shortening of the origination period for Marks-Roos bond pools would "essentially mirror the window on advance refundings, and it would shut down blind pools," Shea said.
A final Marks-Roos report with legislative suggestions will be released at the end of January, Shea said.