SAN DIEGO -- Lease issuance in California is surging to new highs this year, but many issuers are getting close to the limit that their budgets will permit, California officials and dealers said late last week.
Certificate of participation issues by the state's 7,000 local governments jumped 60%, to $3.35 billion in the first three quarters of this year from about $2 billion during the same period last year, said Steve Juarez, executive secretary of the California Debt Advisory Commission, during the Association for Governmental Leasing and Finance conference held here on Thursday and Friday.
Nevertheless, he and other state and local officials cautioned that lease issuance in the state that gave birth to the nation's big-time leasing industry may be topping out, with many issuers hemmed in by severe budgetary constraints and others in danger of overextending themselves in the leasing market.
"We are concerned about public agencies dealing in too high levels" of lease debt, said Hal Geiogue, California's assistant state treasurer, who addressed the leasing group on behalf of Treasurer Kathleen Brown, who was unable to speak due to illness.
The state's school districts in particular have become "heavy users" of certificates in the decade since the Proposition 13 property tax limits were passed and issuing bonds became more difficult for municipalities, he said.
The Richmond, Calif., Unified School District's issuance of certificates to finance operating expenses -- and its subsequent bankruptcy and default on those certificates this year -- was only the most blatant example of this overextension, he said.
"We're concerned about the expansion of that" incident to other school districts and localities, he said. "We want to make sure the lease financings are managed and are not just a quick fix for the fact that voters turned down" a bond referendum, he said.
"As the needs keep piling up and voters turn down GO bonds, there is inevitable pressure for more lease financings," he said. But lease issues, too, need to be "defensible" to the electorate even though they do not require outright voter approval.
The state has been more conservative than localities in its issuance of lease revenue bonds, keeping the "scope" of such issuances "fairly limited" to prison and school issues, he said.
But Mr. Juarez pointed out that the state needs only a simple majority to win approval for general obligation bonds in elections, while municipalities must obtain a two-thirds approval from voters, a much stiffer requirement that forces them to rely more on lease issues, which do not have to be approved by the voters. He said state lawmakers are considering helping municipalities by reducing the margin of approval necessary for local bond issuance to 60%.
Two California financial advisers, Carl Kadie of Kadie-Jensen, Johnson & Bodnar Municipal Financing Consultants Inc., and Robert Kelling of Kelling, Northcross & Nobriga Inc., of San Francisco, said California municipalities are reaching practical limits on their lease issuance because they simply do not have enough room in their operating budgets to support more issues.
"All my clients are leased up," said Mr. Kadie, adding that he now is advising them to try to pass general obligation bonds or tax-backed instruments to finance major capital projects.
"COP leasing matured in the 1980s, when cities and school districts had a choice" to issue certificates or bonds, Mr. Kelling said. "They don't have a choice anymore. Their general funds are so depleted that they can't support lease financings for large projects. They have to go to the voters and issue GO bonds."
David Brodsley, a Los Angeles finance specialist, said municipalities are getting into a "gridlock" as voters reject bond issues and drive them into leasing, but budgetary pressures put constraints on their leasing capacity. The "growth mode" that characterized California leasing in the last decade is coming to an end, he said.
"It was like getting your first credit card. You just used it and didn't question whether you should," he said.
The leasing splurge is ending not just because of the recession, but because municipal governments are facing "structural" budget problems that stem from a long-term shortfall of revenues over outlays that will prevent them from accumulating significantly more debt, he said.
Mr. Juarez said he is concerned that some municipalities may ignore good financial practices and go ahead and overextend themselves, ending up in the same situation as the Richmond school district. This is possible, he said, since the market has been willing to accept unrated and uninsured offerings from such issuers.
Mr. Kadie and Mr. Kelling said the bond market has gotten better at "disciplining" issuers who are reckless and contemplate default, and will not support that type of financing anymore.
Despite the financial difficulties troubling many issuers, none of the officials said they foresee an increase in lease defaults in the state. "A confluence of events -- including natual disasters or catastrophes -- might cause defaults," Mr. Brodsley said, "but it wouldn't come from hard budgetary times."
Mr. Kelling conceded that "COPs are at risk" during the budgetary strain "because they are dependent for payment on general fund revenue." But he said, nevertheless, "I don't think the increased use of COPs will lead to more defaults."
