Lawmakers Back Bill To Restructure Richmond's Debt
Attempting to avert panic in California's municipal-bond market, state lawmakers have passed a bill to prevent the bankrupt Richmond school district from following through on its threat to renege on its debts under a popular public-financing scheme.
The measure, approved by the legislature last month, restructures the troubled Bay Area district's debt and helps it gain a fresh start with a new name.
But the central provision of the bill is a plan to refinance nearly $10 million in lease-finance bonds issued by the district.
Such bonds have become an important fund-raising tool for California districts stymied by Proposition 13, the state's 1978 tax-limitation measure.
Under a lease-finance arrangement, a public agency agrees to contract with a specially created private financing group. The group, made up of individual investors, takes out a long-term lease on property and pays the entire rent up-front. The group then subleases the property back to the agency for annual rent payments, which over the duration of the lease will equal the original rent plus interest.
Because the funds are listed as rent rather than debt, they are not subject to voter approval like traditional bond measures, which under Proposition 13 must win two-thirds approval.
Officials estimate that lease-financing generates more than $5 billion a year across the state. The total is expected to increase as the state's austere budget sends public agencies searching for financial alternatives.
Financial Shock Waves
While most agencies have used lease-finance bonds to fund building projects, Richmond in 1988 decided to use them to patch up budget deficits for that year and 1989, as well as to fund a $1.8 million classroom computer program, officials said.
Under the arrangement, an entity called the Richmond Unified School District Financing Corporation paid $9.8 million to the district for a 10-year lease on eight district buildings. The corporation then agreed to lease the buildings back to the district for 10 annual payments of $1.4 million.
After Richmond declared bankruptcy, however, state officials ruled that the funds had been unconstitutional because they were used to shore up a budget deficit.
Richmond officials then decided not to repay the funds, which had been secured from investors through "certificates of participation.'' Such certificates are much like municipal bonds but have fewer legal strings attached and slightly higher interest rates.
The Richmond threat to stop paying investors sent shock waves through the state's financial circles, officials said. Along with grand-jury investigations that have blasted other COP arrangements, the move posed a substantial danger to the funding mechanism statewide.
Lawmakers said their solution would allow the Richmond district to refinance the COP's and would require repayment.
In addition, the bill would restructure another $28.5 million loan by turning over 16 district properties to a state and local authority that would settle the debt, a legislative aide explained.
Finally, the bill would also help Richmond officials get out from under another costly stigma, the district's name.
The bill renames the district the West Contra Costa Unified School