Peralta Community College District in Oakland is suing JPMorgan Securities, LLC, over claims that a contract for a bond refinancing deal violates the California constitution. According to the Chronicle of Higher Education the suit seeks to block efforts from the bank to compel the school to issue new bonds at above-market interest rates which would be sold to JPMorgan and net the bank $4 million.
The bond purchase contract was part of a 2006 refinancing deal that allowed the school to issue new bonds that could be sold at a premium and provide more funds than needed to retire existing debt, money that could be used by the school for purposes other than what was promised to voters, reported Bloomberg Business Week. The practice of cash-out, or forward-purchase, bond refinancing was common throughout California until the state’s Attorney General issued a 2009 opinion declaring that it violated the state constitution, which prohibits schools from taking on additional debt in a refinancing of taxpayer-approved bonds without a vote from the public.
Peralta initially entered into a contract with Bear Stearns, which was acquired by JPMorgan in 2008, to redeem callable bonds, issue new non-callable bonds, and then sell the new bonds to Bear Stearns. The school received $550,000 from Bear Stearns upon entering into the contract. In June, JPMorgan notified Peralta of its desire to exercise the contract and issued a demand that the school issue new bonds at the state of California’s interest rate, which is much higher than the current market rate, reported Businessweek.
Reuters reported that Peralta is also claiming the deal is improper because it would shift savings from interest rate declines away from taxpayers at a time when California colleges are coping with severe budget problems.
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