ROUNDING OUT MATURITIES

BONDS ‑- ADVANCE REFUNDING ‑- INVESTMENT OF PROCEEDS ‑- ROUNDING OUT MATURITIES
 
(1) Prior to applying the proceeds derived from the sale of advance refunding bonds to the purposes for which such bonds shall have been issued, those proceeds may be invested in "government obligations" as defined in RCW 39.53.010.
 
(2) Under RCW 39.53.090, the issuer of general obligation bonds issued to refund voter general obligation bonds may increase the principal amount of annual maturities over that of the bonds to be refunded for the purpose of rounding out maturities to the nearest $5,000

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                                                                   April 11, 1974

Honorable Robert V. Graham
State Auditor
Legislative Building
Olympia, Washington 98504                                                                                                              Cite as:  AGLO 1974 No. 44
 
 Dear Sir:
 
            This is written in response to your recent request for our opinion on two questions relating to the "Refunding Bond Act," chapter 138, Laws of 1965, Ex. Sess., which we paraphrase as follows:
 
            "(1) Prior to applying the proceeds derived from the sale of advance refunding bonds to the purposes for which such bonds shall have been issued, may those proceeds be invested in obligations of the state of Washington, other states, counties, cities, districts and foreign governments as well as obligations of the United States of America?
 
            "(2) Does an issuer of advance refunding bonds have the authority to provide that annual bond principal maturities of the refunding bonds will be greater in a given year by amounts of $5,000 or $10,000 than the bond principal maturities of the voted general obligation bonds being refunded for the same year?
 
            We answer question (1) in the qualified affirmative and question (2) in the negative.
 
                                                                     ANALYSIS
 
            By its enactment of chapter 138, Laws of 1965, 1st Ex. Sess., now codified as chapter 39.53 RCW, the legislature authorized the state of Washington, together with its agencies, institutions, political subdivisions and municipal and quasi-municipal corporations, to provide for the issuance of refunding bonds, including a type of such bonds now known as "advance refunding bonds."  Basically speaking, an advance refunding bond is one issued for the purpose of obtaining funds to redeem a prior bond issue before its maturity and is typically issued to take advantage of intervening interest rate reductions which have occurred following issuance of the earlier bonds.  Once obtained, the proceeds of a  [[Orig. Op. Page 2]] refunding bond issue may either be immediately expended ‑ where the prior issue is immediately callable ‑ or they may be held for payment in the future where the earlier bonds being refunded cannot be called immediately without the payment of a penalty.
 
            Question (1):
 
            In recognition of this latter concept, commonly referred to as "advance refunding," the legislature, by § 7, chapter 138, Laws of 1965, 1st Ex. Sess., (now RCW 39.53.060) provided for the investment of the subject bond proceeds, where not immediately expended, as follows:
 
            "Prior to the application of the proceeds derived from the sale of advance refunding bonds to the purposes for which such bonds shall have been issued, such proceeds, together with any other funds the governing body may set aside for the payment of the bonds to be refunded, may be invested and reinvested only in direct obligations of the United States of America maturing or having guaranteed redemption prices at the option of the holder at such time or times as may be required to provide funds sufficient to pay principal, interest and redemption premiums, if any, in accordance with the advance refunding plan.  . . ."  (Emphasis supplied.)
 
            However, by § 4, chapter 25, Laws of 1973, 1st Ex. Sess., the legislature amended this provision so as to cause it now to read, in material part, as follows:
 
            ". . . such proceeds, together with any other funds the governing body may set aside for the payment of the bonds to be refunded, may be invested and reinvested only in government obligations . . ."
 
            Pursuant to this 1973 amendment, we answer your first question, as above paraphrased, in the affirmative ‑ subject, of course, to the restraints imposed by the definition of "government obligation" now contained in RCW 39.53.010 by virtue of § 1, chapter 25, supra.
 
            Question (2):
 
            Your second question pertains to RCW 39.53.090, which provides that:
 
             [[Orig. Op. Page 3]]
            "The various annual maturities of general obligation bonds issued to refund voted general obligation bonds shall not extend over a longer period of time than the bonds to be refunded.  Such maturities may be changed in amount or shortened in term if the estimated respective annual principal and interest requirements of the refunding bonds, computed upon the anticipated effective interest rate the governing body shall in its discretion determine will be borne by such bonds, will not exceed the respective annual principal and interest requirements of the bonds being refunded:  Provided, That the issuer may increase the principal amount of annual maturities for the purpose of rounding out maturities to the nearest five thousand dollars."
 
            Under this statute, the issuer of general obligation bonds issued to refund voted general obligation bonds may only increase the principal amount of annual maturities over that of the bonds to be refunded for the purpose of rounding out maturities to the nearest five thousand dollars.  Accordingly it would not be permissible, under this statute, for the issuer of advance refunding bonds to provide that annual bond principal maturities for the refunding bonds are to be greater in a given year by amounts of $5,000 or $10,000 than the bond principal maturities of the voted general obligation bonds being refunded for the same year.
 
            We trust that the foregoing will be of some assistance to you.
 
Very truly yours,
 
SLADE GORTON
Attorney General
 
PHILIP H. AUSTIN
Deputy Attorney General