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New Law Series, Part 7: SLONs Reinstated

By Kristin Withrow posted 11-23-2020 10:41 AM


Special Districts Ability to Issue Securitized Limited Obligation Notes Reinstated

By Albert Reyes, Partner, Kutak Rock LLP

Under California State law, special districts have limited express authorization to issue debt to finance the acquisition or improvement of land, facilities, or equipment without obtaining voter approval.  Section 53835 et seq. of the California Government Code, which provides this express authorization to special districts, expired on December 31, 2019.  However, thanks to AB 2107 approved by the Governor on September 28, 2020, this authorization was extended to December 31, 2024.

Section 53835 et seq. of the California Government Code allows special districts to issue securitized limited obligation notes (“SLONs”) in order to borrow money to finance the acquisition or improvement of land, facilities, or equipment. Proceeds of SLONs may only be used for such purpose. SLONs provide special districts, of all sizes and type, the benefit of incurring short term obligations in an efficient, cost-effective manner. SLONs are especially useful to smaller districts with limited revenues and facilities available to them given that SLONs can be issued directly by such districts without having to pledge or utilize real property or obtain voter authorization.

To issue SLONs, a special district is required to adopt a resolution by a four-fifths vote of all the members of its governing board authorizing the issuance of the SLONs.  The adopted resolution must specify certain parameters for the SLONs such as the purpose of the SLONs, estimated amount of the SLONs, the maximum amount of the SLONs to be issued, maturity date and the source of revenue or revenues to be used to secure the SLONs. Other requirements with respect to the resolution are set forth in Government Code Section 53838.

There are certain express limits and terms the Government Code imposes on the SLONs. For instance, the total amount of the SLONs outstanding at any one time may not exceed two million dollars ($2,000,000), the SLONs may not mature later than 10 years after the date of issuance and the interest rate cannot exceed 12 percent. Due to these limits, SLONs may not be practicable to finance all special district projects but nevertheless certain special districts have and will be able to take advantage of them.

In order to repay the SLONs, a special district must specify the revenues pledged for the repayment in the resolution and in the agreement with the SLONs purchaser setting forth the terms of the SLONs. The pledged revenue must be sufficient to pay the principal and interest on the SLONs. Examples of the revenues that a special district may pledge include revenues generated from an enterprise such as a water, wastewater or utility system or a specific tax, assessment or other special revenue available to the special district issuing the SLONs.  The general funds of the special district are not liable for the payment of the principal of, or the interest on, the SLONs since the special district is not obligated to pay the debt service on the SLONs except from the pledged revenue. 

With the adoption of AB 2107, special districts are now able again to take advantage of the benefits SLONs offer them and to issue SLONs until December 31, 2024 in order to finance the acquisition or improvement of land, facilities, or equipment.

This article was written by Albert Reyes, Partner, Kutak Rock LLP, as part of CSDA’s New Laws Series, where experts explain recently enacted laws and how they will impact special districts moving forward. This article is provided for general information only and is not offered or intended as legal advice. Readers should seek the advice of an attorney when confronted with legal issues, and attorneys should perform an independent evaluation of the issues raised in these materials.

Stay tuned to the New Laws Series in CSDA eNews for more in-depth analyses on new laws affecting special districts.

Missed Part 1? Read it now: Water Districts Must Complete Federal Risk & Resilience Assessment and Emergency Response Plan

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