Treasurer’s New Web Site Reveals a Bad Deal for Fullerton Taxpayers

On November 17, State Treasurer John Chiang launched a new web site that provides information on bonds issued by California state and local governments. The site, at, has detailed data on over 50,000 bonds sold to investors over the last thirty years.

In many cases, the Treasurer reports detailed cost of issuance data not previously available. Costs of issuance are roughly analogous to points you pay when taking out a home mortgage. They are funds paid by the government to various financial service providers that are deducted from bond proceeds – and thus not available to fund whatever public purpose motivated the bond issuance. Just as individuals hope to minimize points they pay on their mortgages, governments should try to economize on bond issuance costs.

While examining the new cost of issuance data, one school district bond in Fullerton (Orange County) raised an eyebrow. For this issue, the Treasurer’s data shows total issuance costs equaling 19.19% of bond principal. Since no one in their right mind would pay 19 points on a home mortgage, this case seemed worth investigating.

Fortunately for Fullerton taxpayers, the situation isn’t quite as bad as the data implies – but it still merits taxpayer scrutiny. The bond was one of two issued by Community Facilities Districts to refinance previously outstanding bonds that paid higher interest rates.

About 15 years ago, developers created new communities at Amerige Heights and on the site of a former oil field at the northwest corner of Bastanchury Road and State College Boulevard (redeveloped by Van Daele Homes). Because school aged children would be moving into these new communities, additional elementary and high school facilities would be needed. Consequently, the Fullerton Elementary and High School districts formed special districts – known as Community Facilities Districts (CFDs) or Mello-Roos districts – to issue bonds for new infrastructure and to levy special taxes on the new homeowners to service that debt. The original bond offering documents can be found here and here.

In 2013, the school district decided to refinance the CFD bonds to take advantage of lower interest rates (see pages 69-87 of the agenda packet at The overall result was lower debt service costs and thus lower property taxes for residents in the two developments.

But the tax savings were not as much as they could have been because intermediaries charged the CFDs over $470,000 to refinance the bonds – or 2.87% of principal. This rate is considerably higher than the 1.02% average I found in a recent study of nationwide municipal bond issuance costs.

A summary of the issuance costs can be found in the offering materials for the 2013 bonds available at The relevant table from that document is shown here:

Fullerton School District Bond Cost of Issuance

The new Treasurer data provides additional detail, while allowing us to see who actually received the issuance fees. Based on this new information, I created the more detailed table shown below:

 Type of Cost Service Provider  Amount
Underwriting Costs PiperJaffray $205,937.50
Financial Advisor Dolinka Group LLC 75,153.13
Bond Counsel Stradling Yocca Carlson & Rauth 70,000.00
Rating Agency Standard & Poor’s 17,000.00
Bond Insurance Assured Guaranty 76,924.01
Trustee US Bank 8,700.00
Other Costs Various 19,788.41
Total Costs of Issuance   $473,503.05

The underwriting, financial advisor and bond counsel fees all seem generous – especially when one considers that this was a refinancing as opposed to a “new money bond” in which additional analysis is often required.

Especially galling to this former rating agency employee is the bond insurance cost. Because Standard & Poor’s gave the CFD a relatively weak single-A rating, the district apparently decided that it needed bond insurance to hold down the interest rate (since investors typically expect more interest at lower ratings).  When the bonds were issued, S&P rated the insurer, Assured Guaranty, AA- which is two rating notches higher than that assigned the district.

Defaults among California educational districts are quite rare, especially because most of their bonds are secured by specific property tax levies. By contrast, insolvencies and defaults among bond insurers were quite common during the financial crisis as I discuss here. So the idea that Assured Guaranty is safer than Fullerton is dubious at best. But it is this dubious theory that cost local property taxpayers an additional $77,000.

Some of those who’ve gotten this far may be wondering how we got from a 19.19% cost of issuance rate in the Treasurer’s database to the 2.87% rate quoted in the foregoing analysis. As best as I can tell, the analyst who reported the Fullerton bond data to the Treasurer misallocated some costs between the smaller Van Daele bond and the larger Amerige Heights bond. As noted on the new web site, the data is unaudited and thus needs to be read with care.

But this is a small quibble. Treasurer Chiang has given us a terrific resource for holding bond issuers and the financial industry more accountable to taxpayers. As far as I can tell, nothing like this is available anywhere else in the US.  It will require effort to learn how to interpret and use this data, but I believe that many activists and researchers will find the effort worthwhile.

2 replies
  1. Avatar
    Bruce Whitaker says:

    My compliments to the writer/analyst. The continued use of CFDs, Mello-Roos districts violates and victimizes property owners and provides fertile ground for these sorts of abuses. Thanks for this- an informative and rare example of (financial) investigative journalism.

  2. Avatar
    uclalien says:

    A few observations:

    1) The bond issue described above was done without a Financial Advisor. The official statement clearly states that Dolinka Group served as Special Tax Consultant. There is a big difference between the two. FAs are now regulated by the SEC and have a fiduciary duty to the issuer; a STC does not. In the past, some consultants and underwriters attempted to pass themselves off as both, which is hopefully something we’ve seen the last of.

    2) I assume that Stradling Yocca Carlson & Rauth’s Bond Counsel fee also includes their services as Disclosure Counsel. If this is true, the BC fee shown above is in-line or lower than industry norms for a bond issue of this size.

    3) With regard to bond insurance, the underwriter is required to certify that there is a net benefit to the issuer from purchasing bond insurance. So arguing that $77,000 is too much ignores the fact that the total benefit to the issuer was something greater than $77,000. To further this point, if you look at the Maturity Schedule on the second page the official statement, you see that no bond insurance was purchased on the 2014-2016 Series A maturities or any of the Series B maturities, presumably because the cost outweighed the benefit.

    I agree that rating agencies and investors, in many cases, do not properly evaluate the risk of CFDs like the one referenced in this article. But the fact is that there were a ton of CFD defaults during the Great Recession. However, the defaulted CFDs were mostly undeveloped and developer owned, unlike the bond issue under discussion.

    In either case, the fact is that S&P rated Assured two notches higher than the bonds, and investors placed sufficient value on S&P’s opinion to more than offset the bond insurance premium. In addition, I would hope that the issuer received bids from as many bond insurers as possible to get the best possible price. But in 2013, there were only a couple insurers that would have provided any value to this transaction. And as mentioned, this deal was done without a financial advisor, so this responsibility was likely left to the underwriter, who has no fiduciary responsibility to the issuer.

    4) I agree that the underwriting costs seem a bit high. But we need to keep in mind that this was a land-secured bond issue in 2013. Selling these bonds was more of a task than it would have been in today’s market.

    5) I think we can all agree that the more transparency, the better. My hope is that the State Treasurer will continue to refine these tools as they are a great start, but a bit cumbersome to work with. I have found it more useful to download the entire data sets and do my own filtering.

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