LOS ANGELES -- Legislation that would broaden the flexibility for structuring local general obligation bonds in California is before Gov. Pete Wilson.
Senate Bill 872. sponsored by Sen. Quentin L. Kopp, Ind.-San Francisco/San Mateo, is designed to give issuers a broader menu of financing techniques when they sell local GOs, including use of zero coupon bonds and detachable call options.
Market participants believe the flexibility will help produce an overall lower interest cost by letting issuers better tailor the structure to meet investor demand.
Such reasoning prompted the California Debt Advisory Commission to endorse S.B. 872 last spring.
A debt commission staff analysis says the bill establishes an alternative method of sale for local GO bonds. It will permit the use of zero coupon or capital appreciation bonds; allow for slight variations of up to 10% in annual debt service payments; let issuers sell their mandatory tender or redemption rights; and allow local GO bonds to be refunded and to be sold at, above, or below par.
These variations will help meet increased investor demand and interest in investment products and maturities, "thereby reducing the cost of issuance associated with these bonds," the commission summary says.
"Similar flexibility is already allowed for certain types of revenue bonds and refundings issued by local governments," the summary also says.
S.B. 872 was initiated by Laura Wagner-Lockwood, San Francisco's deputy fiscal officer, to help address the lack of flexibility in existing, decades-old state statutes governing such sales.
Market participants have noted that many of the new financing products and features are sometimes difficult to accommodate under the authority and constraints of old laws. S.B. 872 helps modernize a statute that went into effect in 1901 and is considered very restrictive by bond lawyers for modern structuring techniques.
"It's at least a step in the right direction" to give issuers more flexibility in this area, said W. Peck Ferrin, vice president and manager of municipal bond trading at Bank of America.
Existing laws governing local GO sales in California are "astronomically strict" and put issuers in a position where "you've just got to play it plain vanilla," Ferrin said.
But with all the changes sweeping the debt markets, "what worked 25 years ago just doesn't work any more," Ferrin noted.
The powers conferred by S.B. 872 would be "supplemental and additional" to those provided by any other laws, according to the legislation.
The bill applies to bonds secured by the levy of ad valorem taxes and sold by a city, county, city and county, school district, community college district, or special district.
However, the legislation does not change a state constitutional requirement that local GO bond issues receive two-thirds voter approval. Other existing limitations, such as the requirement for a public sale, still apply.
A statewide November ballot issue will ask voters to consider letting school districts sell local GO bonds with simple-majority approval. A similar effort is afoot to extend that provision to other types of local general obligation debt.
A press spokesman for Gov. Wilson could not be reached for comment about the bill.