3.3.1 Local Agency General Obligation Bonds

General obligation bonds (GO bonds) issued by California local government entities are payable from unlimited ad valorem taxes on real property within the public agency’s jurisdiction, the payment of which is secured by liens on the taxed properties. Tax rates are established annually at levels necessary to generate amounts sufficient to pay debt service and are collected with general property tax. Because they are secured by the issuer’s taxing power, GO bonds are considered to be low risk obligations and are consequently a source of low cost, long term, fixed rate financing. GO bonds may be aimed to satisfy the requirements of Article XIIIA, Section 1(b)(2) of the California Constitution (Proposition 46 General Obligation Bonds) or the requirements of Article XIIIA, Section 1(b)(3) of the California Constitution (Proposition 39 General Obligation Bonds). See Section 1.4.4, Ad Valorem Real Property Taxes Securing Voter-Approved Obligations.

The principal challenge with GO bonds is obtaining the voter approval required by the California Constitution. Election scheduling requires planning and foresight and obtaining the requisite vote—two-thirds for Proposition 46 GO bonds and 55% for Proposition 39 GO bonds—requires broad based public support, especially because public funds may not be expended to promote passage of a bond measure.

PRINCIPAL USES – Proposition 46 GO bonds may be issued only to finance “the acquisition or improvement of real property.” This phrase is subject to interpretation but as a general matter includes rehabilitation, acquisition, installation of fixtures, and the payment of financing and other soft costs directly connected to real property acquisition and improvement and excludes routine maintenance costs and the acquisition of equipment. Proposition 46 GO bonds are most commonly used to finance buildings for general governmental use but are also issued to acquire property for open space or future public use. The property acquired or improved is usually owned by the issuer of the bonds but may be owned by others if in furtherance of public purposes (e.g., a GO, bond financed program to promote the development of affordable housing or seismic safety improvements). The proceeds of Proposition 39 GO bonds may be used to finance the construction, reconstruction, rehabilitation, or replacement of school facilities, including the furnishing and equipping of school facilities, or the acquisition or lease of real property for school facilities, but may not be used for salaries or other operating expenses.

PRINCIPAL ISSUERS – GO bonds may be issued only by public agencies with taxing power. Proposition 46 GO bonds may be issued by cities, counties, and some special districts. Proposition 39 GO bonds may be issued only by school districts and community college districts. Proposition 39 GO bonds are the principal financing tool for school districts and community college districts. School districts may form school facility improvement districts to issue bonds payable from taxes levied on property in an area constituting less than the entire jurisdiction of the district.

LEGAL AUTHORITY – GO bond issuance authority must generally be derived from statute, as follows:

Cities – California Government Code Section 43600 et seq. Charter city authority may also be derived from the city charter.
Counties – California Government Code Section 29900 et seq.
School Districts and Community College Districts – California Education Code Section 15100 et seq.

Most special districts created before the passage of Proposition 13 in 1978 are authorized in their respective governing statutes to issue GO bonds. In addition, local agencies may issue GO bonds in accordance with the provisions of California Government Code Section 53506 et seq.

APPROVAL PROCESS – An election to approve GO bonds must generally be called by the issuer’s governing board. Statutes vary:

The calling of a GO bond election by a general law city requires a two-thirds vote of the city council (see California Government Code Section 43608).
The calling of a GO bond election by a county requires a majority vote of the board of supervisors (see California Government Code Section 29901).
A GO bond for a school district may be called by a majority vote of the school board (see California Education Code Sections 15100 and 5304) or by a voter petition (see California Education Code Sections 15100 and 5321).

The bond election must be called a specified number of days in advance of the election date and voters must be provided a statement of the estimated tax rate required to pay debt service on the bonds. A Proposition 46 GO bond election may be held on any Tuesday. A Proposition 39 GO bond election may be held only on a statewide election date or the date of a regularly scheduled election for the governing board of the issuer or of another governmental entity with a jurisdiction completely overlapping that of the issuer. If approved by voters, GO bonds may be issued in multiple series over time, so long as the total principal amount issued does not exceed the amount authorized and bonding capacity limits and if tax rates are under statutory tax rate limits.

Issuance of refunding bonds that result in debt service savings does not require additional voter approval.

STRUCTURE AND DOCUMENTATION – GO bonds are generally issued as long term, fixed rate bonds. Capital appreciation bonds can be used to defer debt service, but generally at a higher interest cost, and school districts must comply with the additional requirements of California Education Code Sections 15144.1, 15144.2, and 15146.

OTHER CONSIDERATIONS – Bond proceeds may be spent only for projects approved in the bond election, so care must be taken to ensure that the approved projects are described neither too loosely nor too specifically. Further, in seeking voter approval for the issuance of GO bonds, a public agency is asking for approval of an increase in ad valorem real property taxes. Establishing the amount for which approval will be sought (“sizing the bond measure”) requires making assumptions about assessed valuation growth, having awareness of the extent of public support for the acquisition and construction of the improvements on the project list, and anticipating the degree to which voters are willing to pay for the projects through increased taxes.

POST-CLOSING ADMINISTRATION AND OVERSIGHT – GO bond issues must establish procedures to ensure that bond proceeds are spent only for the specific purposes approved in the bond measure. For Proposition 39 GO bonds, annual independent performance and financial audits must be conducted by a citizen’s oversight committee. See Appendix B, Section B.1.3.1, Local General Obligation Bonds – Proposition 39.