- Attorney General Says Refunding General Obligation Bonds Are Only For Refunding
- February 4, 2009
- Law Firm: Best Best & Krieger LLP - Riverside Office
On January 9, 2009, the California Attorney General issued an opinion (the “Opinion”) which concludes that without voter approval the California constitution only permits school districts, community colleges and county offices of education to use proceeds of refunding general obligation bonds to pay principal and interest on outstanding bonds, challenging a popular practice often referred to as “cash out refunding.”
The Opinion reaches the following conclusions:
- Unless voter approval is obtained, proceeds from a refunding general obligation bond may only be used to redeem outstanding general obligation bonds;
- Refunding general obligation bonds, including those issued by a joint powers authority, may not be used to generate new money to finance the acquisition and construction of new facilities or completion of voter approved facilities without additional voter approval; and
- School districts, community colleges and county offices of education may not set or maintain ad valorem property taxes at a higher level to refinance outstanding debt.
The Opinion seeks to curtail the practice of structuring refunding general obligation bond issues so as to produce funds from a premium which will be used to finance facilities. Obtaining such excess funds would require voter approval.
However, the Opinion does acknowledge that an action to invalidate such bonds must be brought within 60 days of when the bonds were authorized to be issued and after such date the “agency’s action will become immune from attack whether it is legally valid or not.”
While the Opinion is not binding, it is one of the first attempts to articulate objections to such bond issues and any school district considering such a financing in the future should take this into consideration if contemplating such a transaction.