Mark Campbell looks at how California debt Issuers are performing: A three-part series on LinkedIn [Part 3]

This is the third in a series of articles on compliance among public agencies with the requirement to submit an annual debt report to the California Debt and Investment Advisory Commission pursuant to Senate Bill 1029 (Chapter 307, Statutes of 2016). In a sample of issues sold between April 4, 2017 and May 8, 2020, I found that only 32 percent of the reports were filed on time, forty-four (44%) percent were late or past dues, and twenty (20%) percent were pending. For another four (4%) percent of the issues the requirement to submit a report had ended. In July, I reported that the lowest rates of compliance were among counties, joint powers authorities (JPAs) and the State of California. In this article I focus on these three types of issuers to determine whether there are underlying causes for their noncompliance.

New Research Question, New Sample

One of the limitations to my prior findings regarding the relative differences in compliance between issuers was that my sampling could not provide significant results when comparing types of issuers. To address this, I decided to pull a new sample set from CDIAC’s DebtWatch website (https://debtwatch.treasurer.ca.gov) that included debt sold between January 21, 2017 and July 22, 2020 by counties, JPAs and the State of California. The total sample size – hold on here – was 6,442 issues with a principal of $128 billion.

 The allocation of issues to CDIAC’s five categories, Ended, Filed, Late, Past Due, and Pending, was upended in this new sample set because CDIAC switches all issuers to a PENDING status after July 1st, except for those for which the report requirement has ENDED. The reason for doing so is that July 1st is the beginning of a new reporting period and issuers have until January 31st to submit a timely report for the prior fiscal year. To create significant results (95% confidence level, 5% confidence interval), I narrowed my sampling to January 21, 2017 to June 30, 2019 so that issuers had time to submit their reports by January 31, 2020. If CDIAC did not record having received a report by July 22, 2020 the issuer was deemed to be non-compliant for the 2019 filing period. Based on a random sampling, the compliance rates for counties, JPAs and the State of California issues for this period were consistent with my original findings. But there’s more to the story.

Administrative and technological challenges limit the ability of issuers of commercial paper and PACE financings to comply with SB 1029.

This accounted for much of the non-compliance reported earlier among counties, JPAs and the State of CA

For each of these groups compliance rates were skewed by one factor: whether they had issued commercial paper or residential energy financings (PACE). Because commercial paper often has a short fuse, daily turn, in some cases, filing timely annual debt reports, which is required by CDIAC, is difficult, labor intensive and of uncertain value. Residential energy financings, usually done as assessment bonds or Marks-Roos pooled financings and benefiting individual property owners, also present challenges to annual reporting because of the number and difficulty acquiring the data. I eliminated all commercial paper debt and residential energy financing or PACE debt from the sample set to remove this chatter. Compliance rates rose tremendously, but more importantly, doing so helped to reveal some interesting observations regarding non-compliance and the process of filing reports.

State of California Compliance

The sample of State of California issues included 226 transactions, totaling $14 billion. During this period the State had issued conduit revenue bonds and notes (34%), general obligation bonds (64%). As well as other enterprise and lease revenue bonds (1%). The State’s compliance with their annual debt reporting was perfect for all but their general obligation debt. Of the 144 issues, the State had failed to deliver an annual debt report to CDIAC for forty-six (46) issues. In other words, they had submitted sixty-eight (68%) percent of the reports on time.

The State of CA may be late in filing its Annual Debt Transparency Reports because of its allocation of resources, including database technology

 Looking more closely at the data, however, it was evident that the State’s non-compliance may be an administrative and, possibly, technology problem. All forty-six (46) of the non-compliant issues were sold between September 6, 2018 and April 4, 2019. The ninety-eight (98) issues for which the State had submitted reports were issued prior to April 17, 2018. This seems to suggest that the State completes its annual debt reports on a scheduled basis, no doubt as resources allow. I suspect that this is during times the State is not preparing for or conducting a sale. Ironically, the State has a sophisticated debt management system, but it does not communicate with CDIAC’s database. So, completing the annual reports requires staff time to access data and file reports. Were the State to commit the needed resources to linking the two systems it might be able to meet its annual debt reporting obligations automatically and on time.

 County Compliance

When filtering the population of county issues for commercial paper, date of sale, and PACE financings, I arrived at 211 issues with a total principal of $21 billion. I randomly selected 136 of these issues, finding that 7 were not required to report and 15 issuers had failed to file a report by January 31, 2020. Non-compliance in this modified sample (11%) was substantially lower than previously reported. The highest rate of non-compliance was present in issues of certificate of participation/lease revenue bonds. Of the 33 such structures, ten (10) or thirty (30%) percent were late in filing their reports. However, I found no factors among the data to explain why some counties fail to submit their annual debt report.

Non-Compliance Among Counties is Issuer Specific

 Joint Powers Authority Compliance

Assessment financing of residential energy projects represented the majority of JPAs transactions. When filtered out, I derived a statistically significant sample of 61 issuers, representing $1.5 billion. Twenty-two (22) issuers had not submitted their annual debt reports by January 31, 2020. That is, sixty-four (64%) percent of JPA issuers were compliant. Excluding assessment and commercial paper from the sample produced a higher compliance rate over the prior report. The majority of non-compliant issues were conduit revenue bonds or notes. Forty-six (46%) percent of the issuers of this structure were non-compliant. Among these, 11 of the 26 (42%) non-compliant issues were sold by two JPAs. So, non-compliant reporting was again issuer-specific.