Nearly six years after making a bond refunding agreement that could allow the Peralta Community College District to generate additional proceeds, the district is suing JPMorgan Chase & Co. because it believes the multinational banking corporation is exercising an option that potentially denies money to the taxpayers who support higher education institutions.
The terms of the original agreement gave the bank an option to require the district — which consists of four community colleges in the East Bay including Berkeley City College, College of Alameda, Laney College and Merritt College — to issue new bonds and sell them to the bank, thereby allowing the bank to take advantage of the benefits of lower interest rates, according to the complaint filed by the district with the Superior Court of California.
The district originally made the bond refunding agreement with Bear, Stearns & Co. Inc., which was bought by JPMorgan in March 2008 after the former’s near-collapse.
The contract between the district and the bank, dated Jan. 19, 2006, “put in place a bond refunding transaction that resembles, in important substantive respects, a type of refunding commonly referred to as a ‘cash-out refunding,’” according to the complaint.
A “cash-out refunding” is a refunding of previously issued bonds by which the district not only obtained proceeds sufficient to retire outstanding bonds, but was able to generate additional proceeds that could be applied to other purposes, according to the complaint.
The California Attorney General had written an opinion in January 2009 that said cash-out refunding contracts for school districts were unconstitutional, according to district spokesperson Jeffrey Heyman.
According to the opinion, this agreement “means the district ‘would be depriving its taxpayers of the full benefits of refinancing; instead, the taxpayers would be taxed, without voter approval, to support this new debt -— a result that is not permitted under either the constitutional debt limit or the constitutional cap on taxes.’”
The opinion was written following a member of the state senate asking the attorney general in 2007 to review the validity of the transactions between the district and the bank, according to the complaint.
“We’re simply asking JPMorgan to return taxpayer’s money,” Heyman said. “We feel that JPMorgan has a moral obligation to follow through with this.”
Heyman also said there was no real timeline yet for the lawsuit.
A spokeswoman for JPMorgan declined to comment for the story.