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been controlled by the state Legislature, which freely authorized municipal bond measures without the
consent of local voters—often to finance speculative land development schemes which would be
classified as private activities today. The two-thirds voter approval requirement was erected as a
barrier to reckless borrowing.
Over time, the effect of the constitutional debt limitation has been not so much to restrict public
borrowing as to shift the composition of public borrowing toward obligations not subject to the limit.
As discussed in Chapter III: Legal Guidelines, government agencies subject to the debt limit
frequently structure their borrowings as special fund obligations and lease obligations to satisfy
judicially created exceptions to the debt limit.
2
This structuring decision depends upon the legal
availability of options for funding the project.
Government enterprises, which are self-supporting through fees, typically finance capital
assets, such as water and sewer projects, through special fund obligations. Though exempt from the
constitutional debt limitation, special fund obligations may be subject to majority voter approval and
other requirements, depending upon the type of agency involved and the statutory authority for the
borrowing.
The Revenue Bond Law of 1941, for example, requires majority voter approval (and prior
to 1991, it required competitive bid). To avoid such restrictions, government enterprise financings
frequently are structured as installment sale agreements and marketed as COPs.
3
Government
enterprises can raise fees without a popular vote to pay financial obligations arising from installment
sale agreements. User charges, or fees, are legally distinct from taxes, and consequently are exempt
from restrictions on taxation, most significantly those imposed by Propositions 13 and 62. Most
government enterprise financings in California today are not subject to voter approval requirements.
Projects financed through special assessment bonds also qualify for the special fund exception
to the constitutional debt limitation. Special assessments are legally distinct from taxes, in that
assessments are levied according to the special benefit property receives from a public improvement
(over and above that received by the general public). Taxes, alternatively, do not have to be levied
according to the benefit received by taxpayers. Consequently, special assessments do not require
voter approval, though they are subject to majority protest.
4
Both enterprise and nonenterprise
projects may be eligible for financing through special assessment bonds. Nonenterprise projects
eligible for assessment bond financing tend be localized improvements, such as street grading and
paving, sidewalks, landscaping and lighting. By requiring property owners who benefit most from
public improvements to pay for them, special assessments offer an equitable means of financing capital
projects, without recourse to the general fund of the issuing agency.
The range of financing options is most limited for nonenterprise projects which provide a
general benefit to the community—projects such as schools, city halls, police stations, jails and
courthouses. For these types of projects, often the only available financing options from local sources
are general obligation bonds and tax-exempt lease obligations.
5
From a purely financial standpoint, the
general obligation bond alternative usually is preferable. Unlike tax-exempt lease obligations, general
obligation bonds do not impose a burden on the general fund of the issuing agency, because they are
secured by a dedicated property tax override (as well as the full faith and credit of the issuing agency).
Moreover, general obligation bonds attract more favorable interest rates than tax-exempt lease
obligations, befitting their status as the most secure form of local government debt. The two-thirds
voter approval requirement, however, poses a prohibitive barrier for all but the most popular projects.
Tax-exempt leasing offers an attractive alternative, if an agency can afford the annual lease
payments.
6