bond issuing trends

7/29/2019 Bond Issuing Trends

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19852005

CDIAC# 08-03 | APRIL 200

CAL I FORNIA DEBT & INVESTMENT ADV ISORY COMMISSIO


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an overview o local governmentgeneral obligation bond issuancetrends (1985-2005) 1

WHAT ARE CALIFORNIAS GO

BOND REQUIREMENTS?

GO bonds are secured either by a

pledge o the ull aith and credit

o the issuer or by a promise to

levy property taxes in an unlimited

amount as necessary to pay debt

service, or both. GO bonds issued by

the State o Caliornia are ull aith

and credit bonds that are pledged

by the states general und instead

o tax revenue, whereas local

agencies typically are authorized toissue GO bonds payable rom ad

valorem property taxes. In addition,

State bonds require majority voter

approval as opposed to GO bonds

that are issued by local agencies,

which require either two-thirds or 55

percent voter approval. Article XVI,

Section 8 o the State Constitution,

states that local agencies (i.e.,

county, city, town, or school district)

may not incur indebtedness withouttwo-thirds voter approval.

In 2000, Proposition 39 modied

this article, which authorizes bonds

or repair, construction, or replace-

ment o kindergarten through 2th

grade school acilities, community

college districts, and county

education oces or saety, class

size, and inormation technology

needs i the bonds receive 55percent approval o the local vote.

General obligation (GO) bonds have historically provided

local agencies with the lowest borrowing costs among

the types o long-term bonds they may issue because

o their broad security pledge, which yield the highest

possible bond rating and widest investor acceptance. In

Caliornia, GO bonds are backed either by a pledge o

the ull aith and credit o the issuer or by a promise to

levyad valorem property taxes in an unlimited amount

as necessary to pay debt service. Local governments

use the latter approach because they generally are not

authorized to issue ull aith and credit bonds. Because

o this pledge o revenues, the State Constitution

requires that local governments seek voter approval

prior to issuing GO bonds (see sidebar What are

Caliornias GO Bond Requirements?).

Even though the voter approval process may be

time intensive and costly to mount, Caliornia local

governments have continued to rely on GO bonds

as a nancing tool to construct, acquire, and make

improvements to real property such as public buildings,

roads, school acilities, and equipment. While the

volume o issuance over the past two decades has

varied signicantly, several patterns emerge. This issue

brie provides an overview o changes in the volume olong-term local government debt issuance rom 985 to

2005 (ocusing on GO bonds), discusses the variation

in issuance by issuer and purpose, and identies where

the greatest changes have occurred. While this issue

brie does not seek to identiy the many actors that

infuence the issuance o debt on a micro level, the

signicant change in the level o GO bond issuance ater

999 coinciding with the approval o Proposition 39

points to the infuence this law change has had on the

municipal nance market.

The Caliornia Debt and Investment Advisory Commission (CDIAC)

provides inormation, education and technical assistance on public debt

and investments to state and local public agencies and other public

nance proessionals. CDIAC maintains a debt issuance database that

includes inormation on all public debt issuance sold since 985.


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what has been the trend in volumeo long-term debt issuance?

2 Revenue bonds include pooled revenue bonds, conduit revenue bonds, public enterprise revenue bonds, public lease revenue bonds, and sales tax

revenue bonds. The approval processes or these bonds varies considerably, and may or may not require a vote o the electorate, depending on the

issuer and source o repayment. For more inormation, see CDIACs Caliornia Debt Issuance Primer at www.treasurer.ca.gov/cdiac.

3 Two noticeable spikes in revenue bond issuance occurred in 985 and 993. In 985, there were 62 revenue bond issuances, more than any

other year over the period. While some o these issuances were signicant in size (e.g., Orange County issued a $787. million revenue bond), the

spike in issuance appears to be attributable to the shear number o issuances. While the number o issuances in 993 was second only to 985,

4 issuers accounted or over hal o the total volume issued ($8.2 billion o the $5.5 billion issued). These issuers included the Los Angeles

Department o Water and Power ($.8 billion), San Joaquin Hills Transportation Corridor Agency ($.2 billion) and Los Angeles County ($.0 billion).

4 Data presented are unadjusted unless noted. Adjusting or infation and population growth, while tempering the magnitude o change over the period

somewhat, did not change the overall ndings.

Between 985 and 2005, local governments issued

9,920 long-term bonds totaling $429.5 billion.

fgure 01 shows the distribution o issuance byvolume in ve-year intervals over the 20 year period.

Revenue bonds, certicates o participation/leases

(COPs), and GO bonds accounted or $335.0 billion

(78.0 percent) o the total volume o local government

bond issuance. Revenue bonds, which are repaid

through a specic source o revenues but not via a

pledge to levy additional taxes as necessary, accounted

or $202.9 billion (47.2 percent) o the total volume

o debt issuance. COPs, which involve the leasing o

public property in connection with the sale o municipal

securities that represent undivided interests in therental payments under the tax-exempt lease, were $73.7

billion (7.2 percent) o the total volume. GO bond

issuance ranked third in terms o total issuance volume

($58.4 billion or 3.6 percent). 2

fgure 02 shows the trend in issuance over the periodor the three types o bonds with the greatest volume o

issuance.

Revenue bond growth over the period remained airly

steady, with a slight upward trend (see fgure 02). 3The annualized average growth rate o revenue bonds

over the 20 years was 0.6 percent. The same general

pattern holds or COPs, though their annualized average

growth rate over the period actually declined somewhat

(-2. percent). In contrast, the volume o GO bond

issuance grew signicantly rom 985 to 2005the

annualized average growth rate or GO bonds was 8.2

percent. The increase in GO bond volume is particularly

signicant ater 999the annualized average growth

rate rom 999 to 2005 is 30.6 percent. O the $58.4

billion in GO bonds issued over the period, $4.0 billion

(70. percent) was issued ater 999. Even when the

data are adjusted or infation and population growth,

these trends hold. 4


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fgure 02:comparison o local governments annual issuance,by bond types 19852005 (dollars in billions)

fgure 01:volume o long-term debt issuance 1

(dollars in millions)

Totals may not add due to rounding.

2 The types o projects nanced under other bonds were tobacco securitization, pension obligation, court judgments, and workers compensation.

3 This category encompasses the ollowing revenue bonds: pooled revenue bonds, conduit revenue bonds, public enterprise revenue bonds, public

lease revenue bonds, and sales tax revenue bonds.

debt type19851989 19901994 19951999 20002005

totaCerticates o Participation/Leases $ 5,505 $ 2,80 $ 6,535 $ 9,826 $ 73,67

General Obligation Bonds 2,003 5,057 0,373 40,969 58,40

Limited Tax Obligation Bonds 3,69 9,42 4,357 8,398 25,79

Other Bonds 2 ,396 4,25 4,634 2,360 22,64

Revenue Bonds 3 33,603 39,644 50,679 79,009 202,93

Special Assessment Bonds 4,45 3,067 3,66 2,520 2,89

Tax Allocation Bonds 5,523 8,456 5,360 3,822 33,6

Total $ 65,795 $ 9,705 $ 95,04 $ 76,905 $ 429,50

2003

2002

200

2000

999

998

997

985

2004

2005

99

992

993

994

995

996

990

986

987

988

989

$8

$2

$4

$6

$0

$0

$6

$4

$2

volume

Certiicates o Participation/Leases

General Obligation Bonds

Revenue Bonds

3


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2 Includes county issuers and the City and County o San Francisco.

3 Includes public nancing authorities, joint powers authorities, and conduit issuers, among others.

4 This category encompasses the ollowing revenue bonds: pooled, conduit, public enterprise, public lease, and sales tax revenue bonds.

what type o long-term debtinstruments do local governmentsuse?

The types o long-term debt issued by a local

government are a unction o many actors (such as

legal authorization, debt policy guidelines, existingportolio composition, project type, costs o issuance,

and market demand). fgure 03 details debt typeand volume (in aggregate) by ve local government

issuer categories with the largest total volume o bond

issuance over the period; the remaining local issuers

mostly special districtsare grouped together into the

sixth Other Issuers category. The largest issuers by

volume o long-term debt over the period (excluding

the Other Issuers category) have been authorities

($79.5 billion), ollowed by cities ($76.2 billion) andschool districts ($50.8 billion). The type o debt issued,

however, diered signicantly by issuer category. While

authorities and cities have mostly issued revenue bonds

over the period (approximately $64.5 billion and $42.0

billion, respectively), school districts largely have issued

GO bonds ($39.0 billion), ollowed by cities ($4.7 billion

or 8.0 percent) and counties ($2.6 billion or

4.4 percent).

fgure 03:

long-term debt issuance, by debt type and issuer category 1

19852005 (dollars in millions)

debt type

Certicates o $ 7,89 $ 5,595 $ ,664 $ 6,65 $ ,073 $ 2,54 $ 73,6

Participation/Leases

General Obligation Bonds 4,655 2,572 39,045 0 0 2,3 58,4

Revenue Bonds 4 4,972 4,320 85 64,463 5,973 76,2 202,9

Other Bonds 2,43 2,769 24 8,426 27,495 33,368 94,4

Total $ 76,229 $ 45,256 $ 50,88 $ 79,504 $ 34,54 $ 43,6 $ 429,5

cities

coun

ties

2

scho

ol

districts

auth

orities

3

rede

velopm

ent

agen

cies

othe

r

issu

ers

tot


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The increased use o GO bonds particularly by school

districts becomes more apparent when viewed over

time. fgure 04 shows a comparison o GO bondissuance by issuer category aggregated in ve year

increments over the 20-year period. Between 985 and

990, water districts issued the greatest volume o GO

bonds ($. billion), ollowed by school districts ($425

million) and counties, cities and city/county ($396

million). From 990 to 994, however, this rank-order

changedschool districts exceeded all other public

agency issuers in volume o GO bond issuance, though

the amount (approximately $3.0 billion) was still less

than hal o the total volume o GO bond issuance.During 995 to 999, school districts became the

dominant issuer o GO bonds, selling $8.0 billion

(77.2 percent). The amount o school district GO bond

issuance grew dramatically ater 999; rom 2000

to 2005, school districts issued $36.2 billion (88.4

percent) o the total volume o GO bonds.

fgure 04:

comparison o go bond issuer category by volume 119852005 (dollars in millions)


issuercategory

School Districts $ 425 2.2 % $ 2,48 42.5 % $ 8,02 77.2 % $ 36,99 88.4 %

Counties, Cities, 396 9.8 ,594 3.5 ,685 6.2 3,55 8.7

City/County

Special Districts 64 3.2 82 .6 264 2.5 46 0.4

Water Districts ,078 53.8 ,47 22.7 386 3.7 70 .7

Miscellaneous 0 0.5 27 0.5 25 0.2 32 0.8

Utility Districts 3 .6 59 .2 0 0.0 42 0.

Total $ 2,003 00.0 % $ 5,057 00.0 % $ 0,373 00.0 % $ 40,969 00.0 %

%oftotal

volu

me

vo

lume

%oftotal

volu

me

vo

lume

%oftotal

volu

me

vo

lume

%ofto

volu

mvo

lume

19851989 19901994 19951999 20002005


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what types o projects have beenfnanced with go bonds?

The types o projects nanced through debt issuance

vary widely depending on the type o debt being issued.

For example, counties, cities and school districts mayuse GO bonds to nance the acquisition, construction,

or completion o projects involving real property such

as hospitals, parks and school buildings. Revenue

bonds (such as public enterprise revenue bonds and

public lease revenue bonds) typically are used to

nance projects or which a stream o revenues, rents,

or ees are generated to support repayment o the

bonds including power systems, stadiums, and airports.

COPs may be issued to nance a project or which the

local agency has statutory authority to lease the acility

including school buildings, police stations and restations.

fgure 05 shows the distribution by purpose o thetotal volume o long-term debt issuance. From 985-

2005, local governments issued a total o $227.4 billion

(52.9 percent) or capital improvements, $75.2 billion

(29.6 percent) or education purposes, and $38.6 billion

(9.0 percent) or housing purposes using both GO bonds

and non-GO bonds. 5

While the amount o issuance or capital improvements

exceeds all other categories, issuance or this purpose

is done primarily using non-GO bonds (see fgure 06).Capital improvements were the primary purpose or

issuing $26.8 billion (58.4 percent) o non-GO bonds

over the period, ollowed by $38.5 billion or housing

(0.4 percent) and $37. billion or redevelopment

(0.0 percent).

In contrast, fgure 07 shows that GO bonds werealmost exclusively issued or education purposes(80.7 percent), ollowed by capital improvements

(8.0 percent) and hospital/health care acilities (.

percent). The signicant use o GO bonds or education

purposes is a relatively new phenomenon.

fgure 05:

long-term issuance(go and non-go debt by purpose type)19852005

total volume

$429.5 billion

5 CDIAC denes capital improvements as those inrastructure or

public property improvements, construction or acquisition that are not

related to education, hospital/health care or housing. Projects that

would be grouped under capital improvements include those involving

correctional acilities, airports, water, waste water, public transit, etc.

CapitalImprovements52.9%

Education17.5%

Housing9.0%

Hospital/Health

Care Facilities6.3%

Other5.7%

Redevelopment8.6%


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fgure 06:non-go bond issuance

by purpose type 19852005

total volume

$371.1 billion

fgure 07:

go bond issuance by purpose type19852005

total volume

$58.4 billion

CapitalImprovements58.4%

Commercial/IndustrialDevelopment0.8%

Education6.3%

Hospital/HealthCare Facilities

7.1%

Housing10.4%

Insurance/

Pension Funds3.7%

Other2.0%

PollutionControl0.1%

Redevelop-ment10%

StudentLoans1.2%

Education80.7%

CapitalImprovements18%Other

0.01%

Housing0.2%

Hospital/HealthCare Facilities

1.1%

7


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2003

2002

200

2000

999

998

997

985

2004

2005

99

992

993

994

995

996

990

986

987

988

989

$6

$20

$0

$2

$8

$4

volume

fgures 08 and 09 show the variation in non-GObond issuance and GO bond issuance or the types o

projects with the highest total volume over the period:

capital improvements, education, and housing. Non-GO

bond issuance includes revenue bonds and COPs.

For most o the period, non-GO bond issuance remained

airly steady, regardless o project type. Except or 993

and 2003, the volume o non-GO capital improvement

issuance generally ranged between $6 billion and $2

billion annually. The variation in volume o non-GO

bond issuance or education or housing purposes had a

smaller rangebetween $0 and $4 billion annually over

the 20 year period.

By contrast, the variation in volume o GO bond issuance

or education purposes is signicant.

fgure 08:non-go bond issuance

19852005 (dollars in billions)

fgure 10 contrasts the increased use o GO bondsin the latter hal o the period with COPs issued or

education purposes. From 985 to 995, issuance

levels are airly fat. Beginning in 996, and particularly

ater 999, the volume o GO bond issuance or

education purposes increases rapidly. GO bond issuance

grew rom $2.0 billion in 999 to $0.4 billion in 2005.

The average annualized rate o growth over this six-yearperiod was 3.2 percent. By comparison, the average

annualized rate o growth or COPs during this period

was 0.03 percent.

This rather sharp increase in the use o GO bonds or

education purposes coincides with the passage o

Proposition 39 in November 2000.

Capital Improvements

Education

Housing


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2003

2002

200

2000

999

998

997

985

2004

2005

99

992

993

994

995

996

990

986

987

988

989

$8

$2

$0

$0

$6

$4

$2

volume

$4

2003

2002

200

2000

999

998

997

985

2004

2005

99

992

993

994

995

996

990

986

987

988

989

$8

$2

$0

$0

$6

$4

$2

volume

fgure 09:go bond debt


fgure 10:comparison o certifcates o participation to go bonds

or education 19852005 (dollars in billions)

Capital Improvements

Education

Housing

Certiicates o Participation

General Obligation Bonds

9


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Proposition 39

Proposition 39 permits K-2 school districts, community

college districts, and county education oces to issue

bonds or school acilities i the bonds are approved by

55 percent o the vote, as opposed to the previous two-

thirds approval requirement. However, in order to qualiy

a GO bond under Proposition 39, certain requirements

must be met, such as class size, technology needs,

independent perormance and nancial audits (see

sidebar What Does Proposition 39 Require?).

fgure 11 displays the major propositions aecting alocal governments ability to issue bonds or raise ees

overlaid on a graph o GO bond issuance volume. 6

The change in volume o GO bond issuance pre- and

post-Proposition 39 is signicant. The variation can be

attributed in large part to a signicant increase in the

number o issuances since 2000. Since the passage o

Proposition 39, both the number o education measures

on the ballot and percent approved have increased

substantially. Figure 2 provides a list o the passage

and ailure rate or Kindergarten through 2th grade (K-

2) GO bond measures ound on local general election

ballots since 986. During this period, the number o

such measures increased rom two in 986 to a high o

88 in 2002. Also, the passage rate has increased since

2000. In 2000, 53 percent o the measures passed.

Since then, in each election over three-ourths o all

measures passed.

WHAT DOES PROPOSITION 39

REQUIRE?

Caliornia voters approved Proposition

39 in the 2000 General Election. This

proposition lowered the voting require

ment or passage o local school

bond measures rom two-thirds to 55

percent. In addition, it allows property

taxes to exceed the one percent

cap in order to repay the bonds. To

issue a bond under the lower voter

threshold, certain requirements must

be ullled:

Bond proceeds can be usedonly or construction, rehabilitation,

equipping school acilities, or

acquisition/lease o real property or

school acilities.

A list o school projects to beunded must be included in the

issuance and certication that the

school board has evaluated saety,

class size reduction, and inormation

technology needs in developing the

list.

School boards are required to

conduct annual, independent nanciaand perormance audits until all bond

unds have been spent to ensure that

the bond unds have been used only

or the projects listed in the measure

Proposition 39 also requires that

each local K-2 school district provide

charter school acilities sucient to

accommodate the charter schools

students. The district, however, would

not be required to spend its general

discretionary revenues to provide

these acilities or charter schools.

Instead, the district could choose

to use these or other revenues

including state and local bonds.

6 The enactment o Proposition 3 in 978 restricted the ability o a

local government to make an unlimited pledge o repayment on GO

bonds by limiting (with certain exceptions) the ad valorem tax rate to

not greater than one percent. With the passage o Proposition 46 in

June 986, voters were able to consider local GO bonds or the rst

time since 978. Proposition 46 allowed the sale o GO bonds only

or the acquisition or improvements o real property (e.g., re and

police stations, schools, streets and various public works projects),

i such sale is approved by two-thirds o the voters. The approval o

Proposition 28, the Right to Vote on Taxes Act, in the November 996

General Election increased existing voter approval requirements or

general taxes, property-related ees, and assessments. It also imposed

restrictions and new procedural requirements or the passage o local

ees and assessments. Additionally, Proposition 28 allowed voters to

repeal by initiative previously approved taxes.


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fgure 11:annual go bond issuance and passage o signifcant propositions


fgure 12:number o local government k12 go bond measures 1

passage, ailure, and passage rates

general ellections, 19862006

2003

2002

200

2000

999

998

997

985

2004

2005

99

992

993

994

995

996

990

986

987

988

989

$8

$2

$0

$0

$6

$4

$2

vo

lume

$4

proposition

46

passed ailed total passageyear measures measures measures rate

986 2 0 2 00.0%

988 8 5 3 6.5%

990 3 9 2 25.0%

992 8 9 7 47.%

994 5 5 20 25.0%

996 7 8 6.%

998 20 8 38 52.6%2000 23 7 30 76.7%

2002 70 8 88 79.5%

2004 47 6 53 88.7%

2006 50 2 62 80.6%

Source: CDIAC State and Local Bond and Tax Ballot Measures reports or appropriate year.

proposition

218

proposition

39


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where have the greatest changesin go issuance occurred?

The volume o GO bond issuance varies widely by region.

This analysis divides the state into nine dierent regions

as ollows:

1 los angeles: Los Angeles, Orange, and VenturaCounties

2 san diego: Imperial and San Diego Counties

3 inland empire: Riverside and San BernardinoCounties

4 san rancisco (SF Bay Area): Alameda, ContraCosta, Marin, Napa, San Francisco, San Mateo,

Santa Clara, Solano, and Sonoma Counties

5 san joaquin valley: Fresno, Kern, Kings, Madera,Merced, San Joaquin, Stanislaus, and Tulare

Counties

6 sacramento valley: Butte, Colusa, El Dorado,Glenn, Placer, Sacramento, Shasta, Sutter, Tehama,

Yolo, and Yuba Counties

7 central coast: Monterey, San Benito, San LuisObispo, Santa Barbara, and Santa Cruz Counties

8north coast:

Del Norte, Humboldt, Lake, and

Mendocino Counties

9 mountain: Alpine, Amador, Calaveras, Inyo, Lassen,Mariposa, Modoc, Mono, Nevada, Plumas, Sierra,

Siskiyou, Trinity, and Tuolumne Counties

fgure 13 shows the total GO bond issuance volumeor each region. Not surprisingly, the Los Angeles

region issued the greatest total volume o GO bonds

over the time rame, approximately $22 billion (37.6

percent) ollowed by the SF Bay Area ($6.8 billion, 28.7

percent) and San Diego ($4.8 billion, 8.3 percent). The

region with the least amount in GO bond issuance was

the North Coast region ($39.0 million, 0.2 percent).

fgure 14 shows similar trends or the total GO bondissuance or education purposes or each region. The

rising volume o issuance ater 999 is signicant or

many regions o the state, resulting in two- and three-

old increases rom the previous period.


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fgure 14:

go bond issuance by region or education 11985-2005 (dollars in millions)

fgure 13:go bond issuance by region 1

1985-2005 (dollars in millions)

region 19851989 19901994 19951999 20002005 total

1 - Los Angeles $ 874 $ ,767 $ 3,333 $ 5,980 $ 2,954

4 - SF Bay Area 292 ,470 3,82 ,69 6,752

Multiple 2 485 54 56 3,544 5,059

2 - San Diego 88 25 479 4,052 4,834

5 - San Joaquin Valley 96 496 930 ,834 3,456

3 - Inland Empire 4 348 54 ,779 2,682

6 - Sacramento Valley 5 204 433 ,598 2,250

7 - Central Coast 2 42 268 768 ,080

9 - Mountain 7 45 4 94

8 - North Coast 2 0 32 05 39

Total $ 2,003 $ 5,057 $ 0,373 $ 40,970 $ 58,402


region 19851989 19901994 19951999 20002005 total

1 - Los Angeles $ 8 $ 39 $ 2,64 $ 3,925 $ 6,939

4 - SF Bay Area 65 802 2,909 9,606 3,482

2 - San Diego 5 79 440 3,944 4,478

5 - San Joaquin Valley 77 495 904 ,70 3,277

3 - Inland Empire 9 25 443 ,698 2,40

6 - Sacramento Valley 5 200 39 ,58 2,77

7 - Central Coast 0 39 235 698 972

9 - Mountain 7 43 03 54

8 - North Coast 0 32 99 32

Total $ 459 $ 2,86 $ 8,0 $ 33,355 $ 44,02


2 Includes bond issues that span more than one cou


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1985

1986

46prop

4


17/20

20

39prop2000

218prop

1996

conclusion

GO bonds have long been a useul nancing method

that local governments have relied on to assist in

nancing inrastructure projects because o their low

borrowing costs and widespread investor appeal. Theiruse over the past 20 years has changed signicantly,

most notably ater the passage o Proposition 39.

Once primarily used by public utilities or capital

improvements, GO bonds now are primarily issued by

school districts or K-2 improvements. Most o the

GO bond issuance or education purposes occurs in

three regions o the stateLos Angeles, SF Bay Area

and San Diego. However, even in other areas o the

state, the use o GO bonds or education has increased

substantially. Whether this trend will continue over the

next 20 years will depend on many actors including the

level o interest rates, population growth, inrastructurecapacity/maintenance needs, and the use o alternative

nancing methods. While this issue brie does not

address these causal actors, it does provide a baseline

or understanding historical local government GO bond

issuance patterns that may promote discussion on the

choice o nancing methods or providing or current and

uture inrastructure needs o local agencies throughout

the state.

5


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ACKNOWLEDGEMENTS

Nova Edwards, Research Analyst,

researched and authored this

issue brie.

John Decker, Executive Dire ctor,

and Kristin Szakaly-Moore, Director

o Policy Research, reviewed and

edited this issue brie.

CALIFORNIA DEBT & INVESTMENT

ADVISORY COMMISSION

Caliornia Debt and Investment

Advisory Commission

95 Capitol Mall, Room 400

Sacramento, CA 9584

Phone: 96.653.3269Fax: 96.654.7440

Email: [email protected]

Website: www.treasurer.ca.gov/cdiac

All Rights Reserved.

Permission is granted to use this document with written credit given to CDIAC.

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