B.1.3.1.2 GO Bond Structures

B.1.3.1.2 GO Bond Structures

CURRENT INTEREST BONDS. A current interest bond (CIB) is a bond with a debt schedule that is structured with interest payments due on a periodic basis, typically twice per year. CIBs are also referred to as current coupon bonds. See Section 2.2.2.1 Long-Term Fixed-Rate Debt.

CAPITAL APPRECIATION BONDS. A Capital Appreciation Bond (CAB) is a financing structure that allows issuers to raise capital for projects while postponing debt service during periods when property tax or other revenue needed for debt service is low. In a CAB structure, the borrower is not required to make periodic interest payments to the investor; instead, for each payment period (typically twice per year), the interest is added to the unpaid principal balance. The rate at which interest grows is called the “accretion rate.” The accretion rate is to a CAB what the coupon rate is to a CIB. When the bond is due to be repaid (maturity) the issuer makes a single payment (maturity value) representing both the principal amount of the bond and all of the accumulated and compounded interest. As a result of compounding, CABs are issued at a significant discount to their maturity value. See Section 2.2.2.1 Long-Term Fixed-Rate Debt.

School districts issue CABs to address challenges faced when financing facilities, including stagnant property values, demand for capital improvements, and limited state support for the construction of educational facilities. CABs are usually issued in combination with CIBs to securitize the projected growth in tax revenues, smooth debt service schedules and reduce the negative effects of fluctuating revenues. Districts can also issue a “convertible CAB,” which is structured as a CAB for a period of time, then “converts” to a CIB on a specified date, at which time the interest payment calculation is based on the accreted value of the CAB at the conversion date. The convertible CAB structure allows the issuer the flexibility to postpone debt service payments during periods of low tax revenue while increasing them during periods of higher projected tax revenue, thereby smoothing debt service schedules.

School and community college districts are subject to the following statutory limitations when issuing CABs secured by a levy of ad valorem taxes:200 

  1. The term is not to exceed 25 years (Ed Code 15144).
  2. The ratio of total debt service to principal for each bond series is not to exceed 4:1 (Ed Code 15144.1).
  3. Bonds may be subject an interest rate limit of 8% (Ed Code 15143). 
  4. If the bond matures more than 10 years after its date of issuance, the bond may be subject to redemption 10 years after its issue date and before its fixed maturity date (Ed Code 15144.2).