The Assembly passed AB182 by Assemblywoman Joan Buchanan, D-Alamo. An original co-author, Ben Hueso, moved recently from the Assembly to the Senate.
The bill passed 73-0 in the 80-member chamber and was sent to the Senate.
"This is one bill that deserves our total support," said Assemblywoman Diane Harkey, a Republican from Dana Point.
The bill limits the ability of school districts and community colleges in issuing so-called capital appreciation bonds, a type of municipal borrowing that has come under scrutiny because of its high costs to taxpayers. The bonds have allowed school districts to build and renovate, but do so by allowing payments to be delayed for years while interest keeps accruing.
Unlike typical municipal bonds, capital appreciation bonds delay payments for decades and prevent schools from paying them off before maturity. The result is massive balloon payments that sometimes inflate debt service to 10 times or more the principal.
State Treasurer Bill Lockyer has been warning about this type of borrowing and said the conditions for repaying the bonds often come at a cost for taxpayers.
"This bill would protect taxpayers from terrible bond deals while maintaining school districts' ability to provide their parents and children needed facilities," Lockyer said in a statement on Monday.
According to his office, 574 school districts and community colleges have raised nearly $7 billion through capital appreciation bonds. The debt service on that principal amount is $23.6 billion three and a half times what the entities borrowed.
In one example, Poway Unified School District in San Diego County borrowed $105 million on a capital appreciation bond in 2011. The bond won't mature until 2051 after the district's taxpayers have paid $981.6 million.
In another, Rim of the World Unified School District in San Bernardino County sold $283,612 in bonds in 2010. The district will have paid $6.65 million, or more than 23 times the principal, by the time the bond is paid off in 2039.
The authors say the bill seeks to prevent some of the worst abuses of capital appreciation borrowing. It would prohibit bond maturities that exceed 25 years, limit debt service to four times the amount borrowed and require deals to allow early repayment on bonds that have maturities longer than 10 years.
The Association of California School Administrators and California Association of School Business Officials oppose the bill in its current form. Opponents say the bill would inhibit school districts' ability to secure funding and want to expand the maturities to 30 years. Some also want the debt service ratio to be expanded to six times the principal, not four.
Laura Preston, a lobbyist for the Association of California School Administrators, said most school districts use capital appreciation bonds responsibly, and the group hopes to get the Senate to make changes so that districts can still use this type of financing for school construction.
She said the use of such bonds is part of a complicated and necessary element in bond issuances.
"It's wrong to think school districts aren't sophisticated enough to deal with complex financial deals," Preston said.
In a related move, Lockyer has asked the state attorney general to issue a legal opinion about whether local school district officials can provide sole-source contracts to underwriting firms to sell bonds in exchange for those firms providing campaign-related services.
He sought the opinion after observing how school districts were being advised to take out capital appreciation bonds at alarming rates. The advisers have collected millions of dollars helping districts sell those bonds.