California sets stricter rules on capital appreciation bonds
SAN FRANCISCO Oct 2 (Reuters) - Terms of future capital appreciation bonds (CABs), a form of municipal debt for which payments are deferred while interest compounds, will be tightened in California under a new law signed on Wednesday by Governor Jerry Brown.
The bill limits total debt service on a CAB to four times its principal and limits its maturity to a maximum of 25 years. The bill also requires deals for CABs to permit early repayment of the debt when maturities are longer than 10 years.
CABs attracted the scrutiny of California lawmakers over the past year following reports of a San Diego-area school district that issued the debt and would owe nearly $1 billion, or 10 times the initial loan.
State Treasurer Bill Lockyer applauded the bill, saying it "ensures school districts no longer can heap outrageous debt burdens on the backs of future generations of taxpayers, force them to pay for aging facilities their children won't fully enjoy and at the same time reduce those taxpayers' ability to finance the schools their kids need."
In addition to California, CABs have been popular in Texas and Illinois and with school districts in states with fast-growing student enrollments.
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