LOS ANGELES -- California legislators have agreed to eliminate a state commission that oversees certain local debt sales, saving the agency has outlived its usefulness because of improved scrutiny in the municipal bond market.
S.B. 767, which now goes to Gov. Pete Wilson, eliminates the Districts Securities Division of the state Treasurer's Office. It also disbands the Districts Securities Advisory Commission, which reviews the work of the division's staff.
California created the division 60 years ago in response to widespread defaults by irrigation and water districts. The division has supervised fiscal proposals of certain types of these districts, with the primary purpose of reviewing project feasibility to ensure the issuance of sound securities. Districts subject to the division's oversight pay a fee as part of the certification process.
Kathleen Brown, the state treasurer, asked for a review of the division's mission as part of an overall examination of ways to improve the efficiency of the treasurer's office. Ms. Brown assumed the post in January.
She recalled yesterday that she was concerned about the division's role after she made a drop-in visit to its San Francisco office "and found a skeleton staff and an antiquated operation."
The commissioners whom she appointed to the agency were charged with reviewing the division's operation. They concluded it was unneeded.
State officials noted that, among other factors, improvements in the municipal bond market rendered the division's review of local bonds obsolete.
"Private rating companies and intense legal reviews now reassure investors that they're buying quality local bonds," state Sen. Marian Bergeson, R-Newport Beach, said in a statement. "This is a case where the private market protects consumers better than any public agency can."
Sen. Bergeson is chairman of the Senate Committee on Local Government, which is a joint author of S.B. 767. The bill also makes other minor changes to statutes affecting localities.
Peter Detwiler, a consultant to the Senate committee, said "we can't think of any reason" Gov. Wilson will not sign the bill.
Elimination of the securities division is supported by various groups, including the California Public Securities Association and the Association of California Water Agencies, Mr. Detwiler noted.
Given the changes since the commission was created, Ms. Brown said, it has "outlived its usefulness."
She noted, for example, that securities laws are more sophisticated now, and that deals receive much more scrutiny from bond counsel and other market participants. "I'm obviously mindful of abuses in the public finance arena," Ms. Brown said. She added that the division had not seen a need to "disapprove an application in many, many years."
Many of the division's functions also had been reduced by legislation in recent years, Ms. Brown noted.
The decision in California seems to fly in the face of recent reasoning concerning local bond issuance. Treasurers and their staffs from 12 states met in Nashville in May to discuss ways of overseeing and managing rising issuance of state and local bonds. A rash of defaults in Colorado special district bonds helped spark discussion in that state and others over the role that state government can or should play in monitoring local debt sales.
California officials noted that the division targeted for disbanding does not oversee the type of land-related district deals that encountered problems in Colorado.
California's local Mello-Roos bonds, which are secured by a special tax, have received market scrutiny in recent months, but problems similar to those of Colorado have not emerged, partly because California's real estate market proved more resilient despite a slump.
Ms. Brown said her office is trying to take "a much more aggressive role in the Mello-Roos arena" by publishing guidelines and providing information to local issuers about the debt mechanism.
But Mello-Roos bonds are "not analogous" to the type of securities that encountered problems in California, Ms. Brown said.
Mr. Detwiler seconded the notion that California is "not getting rid of a watchdog" by eliminating the Districts Securities Division. Improvements in the private bond market" obviated the necessity [for the division] to be around," he said.
State officials noted that it is often difficult to eliminate layers of government once they become entrenched.
Ms. Brown said it has become an "unprecedented event in government at any level" to agree on eliminating a function. In this instance, however, state officials felt assured that the cutback will not "create more problems."