Law Change Urged to Alert Home Buyers to Mello-Roos Bond Costs : Finance: State treasurer labels bonds ‘imperfect’ but necessary to pay for schools and other facilities. She calls for more disclosure.

State law should be changed to alert people to the extra costs they face when buying homes in areas serviced by Mello-Roos municipal bonds, California Treasurer Kathleen Brown and a key legislator said Wednesday.

After leading a lengthy hearing of the California Debt Advisory Commission, Brown said she views the bonds as “imperfect” but necessary to pay for school construction and other public facilities in growing communities.

The bonds were authorized by a 1982 law and have been used most extensively in Riverside, Orange and San Bernardino counties. According to the Debt Advisory Commission, $3.6 billion of Mello-Roos bonds have been sold. The proceeds have paid for a panoply of facilities and amenities--including schools, fire stations, curbs, gutters and sewers.

Brown, who chairs the commission, said in an interview that she is now prepared to back legislation requiring developers and local agencies that form Mello-Roos districts to provide more information to home buyers.

“I think at the top of the list is the disclosure issue: Ensuring that at the time of closing (escrow) that the Mello-Roos home buyer is put on notice as to what their taxes will be, how much the taxes can be increased and over what period of time,” Brown said. “And then additionally--and very importantly--notification of secondary, subsequent home buyers.”

State law now requires only that buyers of those resold homes be informed of the added tax burden in a title report--a technical document not apt to be reviewed thoroughly by many purchasers.

Brown’s proposal won quick backing at the conclusion of Wednesday’s hearing from another member of the commission who is in a position to push such legislative changes.

“I would support legislation (requiring) increased disclosure, particularly for the secondary home buyer,” said Sen. Marian Bergeson, (R-Newport Beach), who is chairwoman of the Senate Local Government Committee. “I think that’s absolutely essential.”

The issue of inadequate disclosure of information also was stressed by taxpayers and by representatives of two prominent bond-rating agencies--Standard & Poor’s and Moody’s Investors Service. Investors buying the bonds, they said, need more and better information.

“This is an enormous market, and it’s one, however, with very limited disclosure,” said Steven Zimmerman of Standard & Poor’s. “ . . . There needs to be more information available on an ongoing basis, after the sale of these (bond) issues. . . . I think people should be aware of the risk of their investments and the exposure of the funds that they hold.”

Zimmerman said that without increased information, people have little ability to discern between poorly structured Mello-Roos projects and ones that are more viable.

Similarly, Mello-Roos taxpayers from Aliso Viejo and the San Joaquin Delta community of Tracy complained that they have no control over how their higher taxes are spent.

“There is no adequate disclosure to the taxpayer of the operation and financial condition of a Mello-Roos” district, said Donald C. Swift, a member of the Aliso Viejo Community Assn. Swift urged legislation that would require yearly, audited financial statements.

Brown organized the hearing following a three-day Times series last month that reported the significance of Mello-Roos bonds to growth and the emerging downsides of such financing.

As reiterated on Wednesday, one threat to the viability of the bonds is the real estate recession. That is because the bonds are secured ultimately by developed or raw land--collateral that in some areas of the state has declined markedly in value.

During the 4 1/2 hours of questioning and testimony, a wide range of officials and other specialists involved with Mello-Roos bond financing offered opinions and some suggestions.

Some of the 25 witnesses said that the only thing wrong with Mello-Roos financing is media coverage not to their liking.

David A. Celestin, a top executive with the Mission Viejo Co. and also chairman of the Orange County chapter of the Building Industry Assn., said: “There’s an old saying: ‘If it ain’t broke, don’t fix it.’ ” Celestin also said the association would work to develop a standardized, buyer-disclosure form.

Others who spoke at the hearing recommended that some legislative changes be enacted to protect both home buyers who pay the higher taxes and the investors who buy the tax-exempt bonds.

Scott Sollers, a bond underwriter with the firm of Stone & Youngberg, called for requirements that land appraisals and related sale-projection studies be conducted independently of developers. He also said public unease with Mello-Roos bonds could be best assuaged by requiring increased disclosure for home resales.