California's Brown Steers $9 Billion School Bond Into Slow Lane

(Bloomberg) -- A potential deluge of bond sales for California schools may be more like a trickle.

Although state voters in November approved borrowing $9 billion for school construction, the sales may span more than a decade, according to the nonpartisan Legislative Analyst's Office. Democratic Governor Jerry Brown, who opposed the debt measure, wants to tighten requirements on eligibility and oversight that kindergartens through high schools must adhere to before bonds are sold for their projects.

To prevent delays, advocates are lobbying legislators to limit the changes to be included in the budget due June 15, said Dennis Meyers, assistant executive director of governmental relations for California School Boards Association. About $600 million of general obligations authorized by the voters would be sold in the fiscal year starting in July, according to Brown's finance department. Supporters of the debt issue want the funds raised at a faster pace.

"The worst-case scenario is that the bond funds would be stalled indefinitely," said Meyers, who argues that it would hurt the creation of construction jobs. "Our goal is to let legislators know the importance of getting these funds out the door under current law and to act quickly."

A subdued approach to the debt sales may help support prices of bonds issued by California, the biggest issuer in the $3.8 trillion municipal market. The state's securities have gained as the booming economy erased once massive budget shortfalls, allowing Brown to pay down debt built up during previous downturns. California's 10-year securities yield about 2.16 percent, or just 0.2 percentage point over benchmark debt, a third of the premium investors demanded four years ago.

The state has seen its credit rating rise to the highest in more than a decade, in part because of the decision to pay down debt and sock away more into its reserves. California's outstanding general-obligation and lease-revenue debt has declined to $84 billion in May from about $86 billion in June 2016, according to the treasurer's office.

Even with rates low, investors have clamored for bonds from issuers in California as the amount of maturing securities outstrips new debt. About $1.3 billion in California bonds are expected to be sold within 30 days, down from about $4.5 billion in the middle of last month, according to data compiled by Bloomberg.

The governor's approach to the school bond sale would prevent a surge in the supply of debt. The regulations would ensure proceeds are being spent appropriately, considering a state audit last year that showed that previous bond funds were used on ineligible items such as golf carts, said H.D. Palmer, a spokesman for Brown's finance department.

"We will be able to put in place a process that provides further guarantees to the taxpayers who approved this multi-billion dollar bond authorization that these dollars are in fact being spent in the manner in which they were told would be spent,” Palmer said.

Californians embraced the first statewide education bond in a decade despite Brown's objection that it will benefit richer school districts with stronger tax bases. Under the program, school districts raise local dollars and apply for matching state dollars for projects. Low-income communities can also request grants.

Of the $9 billion, $2 billion is dedicated to community colleges and the rest for K-to-12 schools. A delay in bond funds could see a court challenge from those who seek expeditious action since the voters indicated they want the bonds sold, according to the Legislative Analyst's Office. It encouraged lawmakers to adopt a plan with a quicker pace.

Some of the provisions the administration is proposing are "changing the rules mid-stream" and could set precedent by allowing any funds that the state may seek to claw back from school districts to come from aid for operating costs, said Meyers, the school board association lobbyist.

The measures are clarifications of existing regulations, Palmer said. The passage of the bond didn't "reverse the administration's concerns and focus on adopting additional reforms."

To contact the reporter on this story: Romy Varghese in San Francisco at rvarghese8@bloomberg.net.

To contact the editors responsible for this story: Christopher Maloney at cmaloney16@bloomberg.net, William Selway, Dave Liedtka