This client alert provides an overview of recent changes to Section 8855 of the Government Code of the State of California (“Govt. Code Section 8855”) that impose additional reporting requirements and impact how and when state and local government agencies (referred to herein as “Issuers”) submit information to the California Debt and Investment Advisory Commission (“CDIAC”) in connection with debt issuance.

Background

CDIAC is California’s clearinghouse for public debt issuance information and was established pursuant to Govt. Code Section 8855. CDIAC has compiled data on all public debt issuance since 1982. All Issuers are required to submit to CDIAC, within specified time frames, issue-specific information relating to the proposed issuance of debt (in a Report of Proposed Debt Issuance, referred to herein as an “ROPD”) and the final sale of such debt (in the Report of Final Sale, referred to herein as an “ROFS”).

Senate Bill 1029, which was recently signed by California’s governor, amends Govt. Code Section 8855 and imposes additional reporting requirements on government agencies that issue debt. As further discussed below, (i) starting January 1, 2017, Issuers will be required to certify on each ROPD filed that they have adopted a comprehensive written debt management policy concerning the use of the debt and that the proposed debt issue complies with such policy, and (ii) Issuers who subsequently submit an ROFS to CDIAC will have an ongoing obligation of submitting annual debt reports to CDIAC specifying certain information on such debt issuance(s).

Changes to Report of Proposed Debt Issuance Form: Issuer Certification of Adoption of Debt Policies

In addition to the items currently reported by all Issuers in an ROPD, effective January 1, 2017, Issuers will need to certify in each ROPD that is filed that they have adopted (by act of the Issuer’s governing body) a local debt policy that includes specified provisions concerning the use of such proposed debt and that the proposed debt issuance is consistent with such policy. Where an Issuer is a conduit Issuer (an Issuer who issues debt on behalf of and for the use of another governmental entity, the conduit borrower), an Issuer can rely on a certification by the conduit borrower that the conduit borrower has adopted (by act of the conduit borrower’s governing body) local debt policies addressing the use of such debt and that the proposed debt issue is consistent with such adopted policies of the conduit borrower. Such certification can be based upon either direct observation by the Issuer or representation received from the conduit borrower that the conduit borrower has adopted local debt policies. Under amended Govt. Code Section 8855, a local debt policy needs to include: (1) the purposes for which the debt proceeds may be used; (2) the types of debt that may be issued; (3) the relationship of the debt to, and integration with, such Issuer’s (or conduit borrower’s, where applicable) capital improvement program or budget, if applicable; (4) policy goals related to the Issuer’s (or conduit borrower’s, where applicable) planning goals and objectives; and (5) the internal control procedures that the Issuer (or conduit borrower, where applicable) has implemented, or will implement, to ensure that the proceeds of the proposed debt issuance will be directed to the intended use.

Additional Reporting Requirements After an Issuer Submits the Report of Final Sale

Amended Govt. Code Section 8855 requires CDIAC to collect, maintain and provide comprehensive information on all state and local outstanding debt until fully prepaid or redeemed. As a result, amended Govt. Code Section 8855 places additional reporting obligations on Issuers in California.

Pursuant to amended Govt. Code Section 8855, an Issuer will have an ongoing obligation to submit an annual debt report for any issue of debt in which an ROFS was submitted on or after January 21, 2017. Each annual debt report covers a reporting period of July 1 through June 30 (the “Reporting Period”) and must be submitted to CDIAC no later than seven months after the end of the reporting period (before January 31 of the following year). Issuers are required to submit an annual debt report to CDIAC before January 31 of each year that the debt is outstanding or until the proceeds of such debt are spent, whichever is later.

Amended Govt. Code Section 8855 provides that the annual debt report shall consist of the following information:

    A. Debt authorized during the Reporting Period, which includes: 
        a. Debt authorized at the beginning of the Reporting Period; 
        b. Debt authorized and issued during the Reporting Period; 
        c. Debt authorized but not issued at the end of the Reporting Period; and 
        d. Debt authorized that has lapsed during the Reporting Period.

    B. Debt outstanding during the Reporting Period, which includes: 
        a. Principal balance at the beginning of the Reporting Period; 
        b. Principal paid during the Reporting Period; and 
        c. Principal outstanding at the end of the Reporting Period.

    C. The use of proceeds of issued debt during the Reporting Period, which includes: 
        a. Debt proceeds available at the beginning of the Reporting Period; 
        b. Debt proceeds spent during the Reporting Period and the purposes for which they were spent; and 
        c. Debt proceeds remaining at the end of the Reporting Period.

CDIAC desires to make the submittal of the annual debt report as user friendly as possible and, in accordance with amended Govt. Code Section 8855, recently distributed a “Request for Comment on the Implementation of SB 1029” in order to learn about the challenges and impediments to submitting such annual debt reports. CDIAC is currently in the process of reviewing the comments received so that the reporting method implemented will be more efficient and less burdensome for Issuers.

Takeaways for 2017, 2018 and Beyond

Starting January 1, 2017, Issuers will be required to certify on each ROPD filed that they have adopted a comprehensive written debt management policy concerning the use of the debt and that the proposed debt issue complies with such policy.

Before submitting an ROPD, Issuers (or conduit borrowers, where applicable) that have previously adopted a debt policy should review such debt policy to ensure compliance with amended Govt. Code Section 8855. Debt policies not in compliance with amended Govt. Code Section 8855 will need to be amended to include the specified debt policy provisions. An Issuer (or conduit borrower, where applicable) that has not previously adopted a debt policy will need to adopt a debt policy that includes the debt policy provisions specified in amended Govt. Code Section 8855.

An Issuer will be required to submit an annual debt report, on or before January 31, 2018, covering the Reporting Period starting January 1, 2017 and ending June 30, 2017 if the Issuer submitted an ROFS on or after January 21, 2017. Given the effective date of Senate Bill 1029, the Reporting Period for an annual debt report submitted on or before January 31, 2018 will be shorter than the Reporting Period for following years (as provided above).

Issuers have an ongoing obligation to submit an annual debt report to CDIAC before January 31 of each year that the debt is outstanding or until the proceeds of such debt are spent, whichever is later, covering the Reporting Period.

Additional Information

CDIAC has sought input from Issuers and members of the public finance community on the implementation of Senate Bill 1029. As indicated above, CDIAC is currently in the process of reviewing the comments received as a result of its “Request for Comment on the Implementation of SB 1029.” A few of the questions asked included: “Are there concerns with regard to how CDIAC intends to interpret the term ‘authorized’?,” “Are there concerns with CDIAC’s understanding of the term ‘adopted’ with respect to local debt policies?” and “In the case of conduit Issuers, are there concerns with how CDIAC will implement the requirements that the Issuer obtain a certification from a governmental entity that may use the proceeds of the debt issue that it has adopted local debt policies?” CDIAC will be forthcoming with additional information on implementation of Senate Bill 1029.

If you have questions regarding the additional reporting requirements and how and when local government agencies submit to the CDIAC in connection with debt issuance due to changes to Govt. Code Section 8855, contact your Kutak Rock LLP attorney or one of the authors of this client alert, listed below.