CHICAGO -- Michigan lawmakers this week passed legislation banning the issuance of capital appreciation bonds by school districts around the state.
The bill is now on its way to, be considered by Gov. John Engler, who favors the ban.
Lawmakers amended the ban Tuesday onto a school bill that the Senate subsequently passed Tueday night and the House passed yesterday.
According to Peter Jaskosin, an aide to state Sen. Joanne Emmons, R-Big Rapids, the amendment's sponsor, the bill won the necessary three-fourths vote of the legislature for passage under Michigan's new school funding system.
The bill also includes an amendment that would require the boards of school districts to obtain disclosure from prospective bond attorneys as to whether they are also representing an underwriter or any other party involved in the districts' debt issues.
If such representation exists, a majority vote of the school board would be required to approve a contract with a bond attorney. The amendment also calls for bond counsel to submit monthly itemized billings to a school district for services and any payments made to third parties in connection with the bond counsel's work for the district.
Nick Khouri, Michigan's chief deputy treasurer, said yesterday that while Engler supports the prohibition on school districts' use of capital appreciation bonds, he will review the entire bill when it gets to his desk.
The amendment would' prohibit school districts from issuing the zero coupon bonds starting May 1, 1995.
The time lag will allow districts to complete bond issues that are in the works and will also allow lawmakers to study the use of capital appreciation bonds more closely.
Jakoski said Emmons intends to use the time to hold hearings on the matter and propose changes to the state's municipal finance act. He added that in the end some "prudent form" of capital appreciation issuance may be returned to school districts.
That is the hope of public finance executives at A.G. Edwards & Sons and Kemper Securities Inc., two firms that underwrite much of the school debt in Michigan.
"We hope we are able to hold discussions before May 1 in order to work out some uses" of capital appreciation bonds, said Richard Allen, a managing director at Kemper. "They continue to be a valuable financing tool."
Don Elliott, a vice president and manager at A.G. Edwards, said that capital appreciation bonds should not be outlawed, but that their "improper use" should be addressed.
"I think we've got some work ahead of us to educate the legislature to have them reconsider this," Elliott said.
He said the amendment's swift passage was due to its attachment to a bill that school districts "desperately need." The bill, which is intended to correct legislation passed last year in connection with Michigan's new school funding system, would allow schools to use bond proceeds to buy computers and pay for partial remodeling of their facilities.
Another amendment to the bill would prohibit school districts from refinancing their outstanding debt unless they can achieve present-value savings. Elliott said he had no objections to that amendment.
While a similar measure to ban the use of capital appreciation bonds failed to pass the legislature last year, Jaskoski said this latest attempt was helped by the Pontiac School District's recent victory in a lawsuit involving capital appreciation bonds.
Last month, an Oakland County Circuit Court jury found Miller, Canfield, Paddock and Stone, the district's bond counsel, liable on three counts of legal malpractice, including conflict of interest, and awarded Pontiac School District damages of $22 million to $28 million.
The suit involved the district's 1991 issuance of $54.6 million of bonds, including about $35 million of capital appreciation bonds. The attorney for the Pontiac district has said the inclusion of noncallable capital appreciation bonds in the 1991 issue will cost the district $104 million in debt service over 25 years. Dennis Pollard, the attorney, also said the school board looked to experts like Miller Canfield to fully explain the implication of issuing that type of debt.
Even before the Pontiac case, critics of the bonds charged that districts and their underwriters use the practice to sidestep unpopular tax increases by telling voters they can push debt service payments into the future and not see their property taxes increase. However, if assessed valuation growth is not enough to meet those future debt service payments, taxes would have to be increased because the debt carries a general obligation pledge by the districts, according to critics.
In addition, critics contended that interest costs on the bonds can be three to four times higher than on a normal bond issue because debt service payments are deferred for several years.
Khouri has said some districts have abused the use of capital appreciation bonds by backloading debt service and putting an undue burden on future taxpayers.
The amendment dealing with bond counsel disclosure grew out of the Pontiac case, according to an aide to state Sen. Debbie Stabenow, D-Lansing, the amendment's sponsor. Pontiac successfully argued that Miller Canfield failed to disclose it was working with Kemper, the senior manager for the bond issue, at the same time the law firm was serving as bond counsel to the district.
"We're not saying a law firm can't represent a school district and a bond firm, but that people should be aware of it," Stabenow's aide said.