Department of Audits
The appropriate use of bond proceeds and savings generated by bond refundings conducted in accordance with Art. IX, Sec. V, Para. III of the Georgia Constitution.
You have requested my opinion on two questions that present themselves when a local governmental political subdivision, specifically a county board of education, chooses to issue bonds to refund existing debt pursuant to the authority found in Art. IX, Sec. V, Para. III of the Georgia Constitution. First, you asked whether it is appropriate to use the proceeds of such a refunding bond issue for any purpose other than the retirement of the original bonds such as additional capital projects. Secondly, you inquire whether it is legal for an issuer to continue to levy and collect taxes at the same level necessary to retire the original refunded debt which is in excess of the amount necessary to retire the refunding debt, thus generating cash savings, and use such excess funds on capital improvement projects.
A. THE APPROPRIATE USE OF BOND PROCEEDS
Typically, a bond refunding is accomplished by generating sufficient proceeds to retire the refunded bonds, either by immediately calling them or funding an escrow account which over time will earn sufficient income to pay off the original bonds and all interest and premiums associated therewith.
The situations that have prompted your request for an opinion are those in which a County Board of Education, as authorized by O.C.G.A. § 20-2-430, issues general obligation debt pursuant to Art. IX, Sec. V, Para. I of the Georgia Constitution and then refunds the original debt issuance pursuant to Art. IX, Sec. V, Para. III of the Constitution which provides:
The governing authority of any county, municipality, or other political subdivision of this state may provide for the refunding of outstanding bonded indebtedness without the necessity of a referendum being held therefor, provided that neither the term of the original debt is extended nor the interest rate of the original debt is increased. The principal amount of any debt issued in connection with such refunding may exceed the principal amount being refunded in order to reduce the total principal and interest payment requirements over the remaining term of the original issue. The proceeds of the refunding issue shall be used solely to retire the original debt.
With respect to the appropriate use of proceeds from such a refunding, it is clear that the guiding constitutional principle which must be adhered to is the requirement that the proceeds of the refunding shall be used solely to retire the original debt. Official Code of Georgia Annotated § 36-82-1(e)(1)(C), which is a Code Section applicable to all local governmental issuers availing themselves of the refunding authority provided by the above quoted constitutional provision, specifically states that "[t]he principal amount of the refunding bonds may only exceed the principal amount of the bonds being refunded to the extent necessary to effectuate a refund [sic] and to allow the reduction of the total principal and interest requirements over the remaining term of the bonds being refunded." (Emphasis added.)
Based on these specific directives it seems clear that the principal amount should only be increased in the amount necessary to effect the refunding, i.e., reduce the principal and interest requirements over the life of the bonds and pay premiums and any other costs associated with the refunding issue. Thus, the Constitution and statutes do not provide any latitude to use bond proceeds for additional capital expenditures whether or not they are spent on projects which may have been approved by the voters at the time of the original bond referendum. Accordingly, all proceeds generated at closing of the refunding issue should be spent on costs of the refunding or used to pay principal, interest and premiums on the refunded debt.
B. THE LEVY OF TAXES WHEN DEBT SERVICE REQUIREMENTS HAVE BEEN REDUCED
Once all payments on the refunded bonds have been provided for by the proceeds of a refunding, it is clear that the obligation to levy taxes to provide for the repayment of the refunded bonds (as set forth in Art. IX, Sec. V, Para. VI of the Constitution) ceases because such bonds shall cease to "constitute a debt within the meaning of Article IX, Section V, Paragraph I of the Constitution." O.C.G.A. § 36-82-1(e)(2). However, the issuer is then obligated prior to the issuance and delivery of the refunding bonds to "provide for the assessment and collection of an annual tax sufficient in amount to pay the principal and interest on such refunding bonds as same become due and payable, all as is provided in Article IX, Section V, Paragraph VI of the Constitution of Georgia." O.C.G.A. § 36-82-7.1. In order to adhere to Art. IX, Sec. V, Para. VI of the Constitution, the issuer must levy taxes to repay the principal and interest on the bonds within thirty years. Specifically, "[t]he proceeds of this tax, together with any other moneys for this purpose, shall be placed in a sinking fund to be used exclusively for paying the principal of and interest on such bonded debt." Ga. Const. 1983, Art. IX, Sec. V, Para. VI (emphasis added).
Given these very specific constitutional and statutory directives, it appears that a new tax levy should be set at the time of the refunding which is appropriately sized to meet the debt service needs on the refunding bonds. During the time the refunding bonds are outstanding, the taxes must go into a sinking fund which cannot be used for any other purpose but the repayment of that debt. Only if there were to be an excess remaining in the debt service fund for the refunding bonds at the time that they were completely repaid, would it be possible to consider releasing funds for other educational capital improvements. Once such bonds have been retired, earlier opinions of this office have taken the position that such funds may then be made available for similar educational purposes and released from the debt service fund. See 1967 Op. Att'y Gen. 67-447 and 1945-47 Op. Att'y Gen. p. 163.
Accordingly, it is my opinion that a refunding bond issue undertaken pursuant to Art. IX, Sec. V, Para. III of the Georgia Constitution should not generate proceeds at closing in excess of the amount needed to refund the existing debt and pay costs incidental to the refunding. Furthermore, a new tax levy appropriately sized to retire the new refunding bonds should be provided for prior to issuance of the refunding bonds. If any excess proceeds result from the new tax levy, such excess proceeds would not be available for transfer to capital projects until all refunding bonds are repaid.
LUCY T. SHEFTALL
Senior Assistant Attorney General
As referred to herein, bond proceeds are considered to be funds which were actually available to the issuer at the time of the closing of the refunding bonds.