Volume I, No. 11

January 29, 2009

Attorney General Issues Opinion on Use of Proceeds from Refunding Obligation Bonds

By Patti Herrera -- pherrera@m-w-h.com

State Attorney General Jerry Brown issued an opinion on January 9, 2009 stating that proceeds from refunding general obligation bonds (G.O. bonds) must be used to retire the debt on the outstanding bonds issued in accordance with what the voters approved.  The opinion takes issue with the legality of the practice by school districts and community colleges of refinancing voter-approved bonds at a lower interest rate and utilizing generated proceeds to complete unfinished projects approved by the voters or to finance other infrastructure projects.  The practice is commonly known as “cash out refinancing.”  The Attorney General has opined that refunding G.O. bonds that generate additional proceeds, beyond what is necessary to retire voter-approved debt, violates the Constitution by creating new bonded indebtedness without voter approval.

In summary, the opinion states that:

1. School districts must seek further voter approval to issue refunding G.O. bonds at a price or interest rate that will increase revenue beyond what is necessary to retire the debt on the outstanding bonds;
2. School districts cannot use proceeds from a refunding G.O. bond to supplement funding for unfinished projects, even if they were approved by the voters, or other infrastructure projects without first seeking voter approval to do so;
3. School districts cannot set or maintain ad valorem property taxes at rates higher than what is necessary to retire the debt;
4. School districts cannot, without specific voter approval, sell refunding G.O. bonds to joint powers authorities who in turn agree to issue revenue bonds and use the proceeds from those bonds to buy the district’s refunding G.O. bonds and fund additional capital outlay projects.

The opinion further discusses the legal ramifications of using refunding G.O. bonds for purposes beyond retiring the voter-approved debt.  The Attorney General states that the validity of refunding G.O. bonds can be challenged, but that an entity seeking to do so must file the challenge within 60 days of authorization.  Thus, it is likely the statute of limitations for such action has expired in most cases.

It is important to note that the Attorney General’s opinion is not binding.  However, school districts and community colleges are advised to consult with their legal counsel before proceeding with a cash-out refinancing of their bonds.