Local governments and school districts, with voter approval, sell bonds to finance new buildings and other capital projects. If interest rates decline after the bonds are sold, governments often sell new “refunding” bonds to retire the original bonds–like refinancing a home mortgage. But suppose governments, when refunding, take “cash out” of the transaction by issuing more new debt than is needed to pay off the old debt? Does that practice, which is widespread in California, violate the requirement of voter approval for bonds? In an important legal opinion, the Attorney General yesterday answered “YES.”
The AG’s opinion is a victory for a taxpayer group, Citizens for School Bond Accountability, led by Jill Escher, a nonpractising lawyer in San Jose. She charged that the San Jose Unified School District misled voters by refinancing bonds and taking out $20 million in additional cash instead of returning the difference to the voters in lower tax rates. Only through multiple public record requests was Escher and her group able to find out about the $20 million of “cash out” funding.-PS
You can read Jill Escher’s press release on her blog.
For a PDF of the AG’s 22-page opinion, click here.
Here is a news story on the AG Opinion from Friday’s San Francisco Recorder:
By Zusha Elinson
January 16, 2009
SAN FRANCISCO — Jerry Brown has dealt a knockout blow to a controversial — and profitable — niche for public finance lawyers.
“Cash-out” refunding bonds, used by school districts to squeeze extra cash from existing bonds for projects without voter approval, are unconstitutional, the state attorney general’s office declared last week in a long-anticipated legal opinion . The AG’s office said schools must go to the voters if they want to use the complex refinancing scheme.
Opinions from the attorney general aren’t legally binding, but bond lawyers say it spells the end of the niche practice because school boards won’t want to fly in the face of the state’s top lawyer.
“As a political gesture, it’s the death knell of cash-out refundings,” said Lisalee Anne Wells, a Fulbright & Jaworski public finance partner in Los Angeles. “Legally, there may still be whatever loopholes there were before.”
The practice caused a stir in the normally placid world of public finance lawyers. In San Jose, a taxpayer group called Citizens for School Bond Accountability harshly criticized a 2007 cash-out refunding deal in the San Jose Unified School District. Led by Jill Escher, a non-practicing lawyer, the group charged that the district, with the help of bond lawyer David Casnocha, pulled the wool over voters’ eyes by refinancing bonds and taking out $20 million in cash instead of paying it back to the voters in lower tax rates.
In the world of bond lawyers, there was also a rift over the practice. Casnocha, a partner at Stradling Yocca Carlson & Rauth and leading figure in the field, used a structure that lawyers at other firms deemed to be in violation of California law. The public finance lawyers at Orrick, Herrington & Sutcliffe, for instance, wouldn’t use Casnocha’s structure and came up with a different way to get the same result using a joint powers authority to buy and sell the refinanced bonds.
But the 22-page opinion from Jerry Brown’s office concluded that both methods are unconstitutional because “absent voter approval, the constitution’s debt limit permits only those refunding bonds that are limited to refinancing existing debt,” not pulling out cash for projects.
Roger Davis, the head of Orrick’s public finance department, took issue with the attorney general’s scrutiny of the JPA structure used by Orrick.
“I think that the JPA version should be less vulnerable to challenge, based on the attorney general’s reasoning,” Davis said. “That part of the attorney general’s opinion is relatively flimsy in terms of the analysis.”
Even with the disagreement, Davis said, Orrick lawyers won’t be doing many cash-out refunding deals.
“I would guess that advising clients going forward to proceed in the face of an AG’s opinion to the contrary would be potentially placing them in an uncomfortable position,” Davis said. “We’re certainly not going to be pushing it.”
Casnocha, who had publicly stated that he’d put the brakes on such deals while the attorney general was looking into the matter, didn’t return a call seeking comment Thursday.
Fulbright’s Wells said that her firm had made no final decision about whether it would continue to advise on such deals but said she didn’t expect to see many anyway. Wells said that it would be difficult to challenge past cash-out deals since the statute of limitation to challenge bonds runs out after six months.
Escher was very pleased with the opinion. “I feel like it’s a vindication of what we’ve been saying for so long,” she said.
Copyright Recorder 2009