Bonds may finance California sex abuse claims unlocked by recent laws

The potential liability stemming from two California laws extending the statute of limitations for childhood sexual abuse victims to file civil claims is starting to appear in bond disclosure.

Assembly Bill 2777 and Assembly Bill 218 apply to children under 18 or adults who were victimized when they were minors.

They extend the liability for schools, counties, and cities back to the 1970s, long before current laws were passed that outlined mandatory reporting of sex crimes by people who work with children.

The public impact of the law so far has been seen in Catholic dioceses, two of which filed for Chapter 11 bankruptcy this year, each citing hundreds of sexual abuse claims.

But in recent months, several municipalities have included legal damage estimates in bond disclosure.

Los Angeles County, Los Angeles Unified School District, the city of Santa Monica and Stanislaus County have announced publicly through bond disclosure or elsewhere that they have financial exposure, according to a California bond attorney who has been tracking the potential fallout since the legislation was first discussed, and who asked not to not be named.

California’s schools and counties could be subject to massive liabilities. Given how the law is structured “it will probably come in one big wave,” said Justin Cooper, Orrick, Herrington & Sutcliffe’s co-head of public finance.

The near-term solution for municipalities and schools facing a large bill that insurance won’t cover is likely to be issuing short-term debt; and then refunding the shorter-term notes into judgment obligation bonds with 30-year maturities, according to public finance sources.

“They will have decades of cases and settlements to pay in a short time frame,” Cooper said.

“It would make sense for them to borrow money to pay for it, and then pay the borrowing back over time,” he said.

“Most school districts are not aware they can issue judgment obligation bonds,” said the attorney who asked to remain anonymous.

Financial advisors and bond attorneys have discussed the potential ramifications with clients before the first of the laws, AB 218, took effect in January 2020.

Those discussions were not only about what needed to be disclosed to investors, but also on how to shoulder liabilities that could reach billions of dollars in the case of Los Angeles County.

Judgment obligation bonds aren’t frequently issued in California, though there is a track record.

The City of Los Angeles contemplated issuing a $60 million judgment obligation bond in 2017 to cover legal settlements, but after successfully validating the bonds, ultimately was able to pay the judgments without issuing debt.

Los Angeles issued $71.4 million of judgment obligation bonds in 2009 and 2010 to pay for settlements related to police brutality, according to a Senate analysis of a 2021 bill that would have required more disclosure of city costs associated with settling such cases. It was vetoed by Gov. Gavin Newsom.

Los Angeles leaders are only aware of “minimal existing claims against the city” as a result of the enactment of AB 218 and AB 2777, which became effective in January 2023, the city disclosed in the official statement for $1.49 billion of tax and revenue anticipation notes the city sold in July.

Los Angeles County
When Los Angeles County officials unveiled their 2023-24 budget proposal in April the estimated exposure of up to $3 billion was “front and center,” said Mark Young, a managing partner with KNN Public Finance.

“Beyond the traumatic personal impact of the survivors of abuse, these cases could have a profound impact on the county budget for decades to come,” Chief Executive Officer Fesia Davenport told county supervisors April 17.

The claims present one of the “most serious fiscal challenges in recent history,” she wrote in a letter attached to the budget.

“As of May 12, 2023, the County has been served with approximately 782 lawsuits involving approximately 2,324 plaintiffs (whose age ranges from 22 to 70 years old), who allege they were sexually assaulted while in Department of Children and Family Services and/or Probation Department placements from 1959 to 2019,” according to the official statement Los Angeles County posted in June for $700 million of tax and revenue anticipation notes.

The county anticipates up to 1,300 additional lawsuits and estimates liability and settlement costs between $2.1 billion to more than $3 billion, the OS said.

Counties are exposed, Young said, because they have child protective services functions, including juvenile halls and responsibility for foster children.

Orrick, which is disclosure counsel on both the Los Angeles Unified School District’s bonds and Los Angeles County’s TRAN sale, “has been actively involved in looking at the ability to bond for settlement payments, and because of that they reached out to me and San Diego Unified School District, in particular,” said Young, the school district’s financial advisor.

After a discussion with San Diego Unified’s finance team over the extent of potential claims, district officials determined the exposure was minimal, and the school district’s insurance would cover any claims, Young said.

He added, however, that school districts have the biggest potential exposure to claims, because their entire purpose is educating children under 18, he said.

Los Angeles Unified School District, the nation’s second largest, said in preliminary offering documents for $384 million of certificates of participation pricing this week that the damages requested by the plaintiffs in various pending sexual misconduct cases “are substantial, but vary significantly, in multiple instances there are demands for several million dollars.”

LAUSD “is in various stages of litigation relating to such pending claims and cannot predict the outcome and effects of such claims or provide any assurances that such claims will not be successful,” according to the offering documents.

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The district is currently defending approximately 125 lawsuits arising from AB 218 and has resolved approximately 13 AB 218 claims to date, it says in the official statement.

Though it cannot “fully predict” the extent of its liability, the district “currently estimates its liability for the existing claims arising from AB 218 will likely exceed $200 million,” the OS said, adding that it has set aside a corresponding amount in its self-insurance fund.

“Further, the district may finance or refinance certain judgements arising from AB 218 claims,” its OS says.

LAUSD is also entangled in litigation with liability insurers, according to the OS, including a suit the district filed in September 2015, seeking $200 million in damages from 27 of its current and former insurance providers who according to LAUSD failed to fund the defense and reimburse the district for settlement amounts paid by the district in connection with claims by hundreds of students and parents alleging that negligent hiring, supervision, and retention of two teachers at Miramonte Elementary School resulted in sexual abuse of the students.

The district reports having paid about $185 million in settlements with more than 200 plaintiffs in the Miramonte cases, with nine active cases remaining with 46 plaintiffs.

The laws
AB 218 brought about several changes that expanded the rights of sexual abuse victims.

Notably it increased the amount of time that victims could file civil lawsuits against abusers and/or entities that failed to prevent their abuse. Now abuse victims can bring claims until the age of 40, or within five years of their discovery of the abuse and/or damages associated with their abuse, whichever is later.

It created a three-year revival window for adult victims who were abused as minors to file civil sexual abuse lawsuits that were previously barred by the statute of limitations, giving them until 2026 to file lawsuits. In cases where defendants willfully concealed or covered up sexual abuse the law allows victims to be awarded triple the damages.

After AB 218’s passage, Assemblymember Buffy Wicks, D-Oakland, introduced AB 2777, the Sexual Abuse and Cover-Up Accountability Act, during the 2021-22 legislative session. It was signed by Newsom, and took effect on Jan. 1.

AB 2777 allows two types of claims that would otherwise be barred solely because of the expiration of applicable statute of limitations: any claim seeking recovery of damages suffered as a result of sexual assault alleged to have occurred on or after Jan. 1, 2009, and on or after Jan. 1, 2019, that would have been barred because of the statute of limitations; and any claim seeking to recover damages suffered as a result of a cover up of a sexual assault, including a claim that was time-barred prior to Jan. 1, 2023, as long as such claims are commenced during a one-year period from Jan. 1, 2023, until Dec. 31, 2023.

The bill takes into account that sexual assault has a “long-term psychological impact on survivors,” and that it is a “widespread and serious problem in our society,” according to an Assembly staff analysis of the bill. It adds that the shame that victims feel may have prevented them from coming forward within the statute of limitations.”

The law prior to the passage of the two bills required that action for recovery of damages suffered as a result of childhood abuse be commenced within eight years of the date the plaintiff attains the age of majority or within three years of the date the plaintiff discovers or reasonably should have discovered that psychological injury or illness occurring after the age of majority was caused by sexual abuse, according to the language in AB 218. It also barred childhood-related claims past the age of 26.

“Several states have already taken this step and have eliminated the civil statute of limitations for these cases,” said former Assemblywoman Lorena Gonzalez, D-San Diego, who authored AB 218, in an Assembly staff analysis of that bill.

“There should not be a reasonable expectation that if simply enough time passes, there will be no accountability for these despicable past acts by individuals and entities,” Gonzalez said. “This bill ensures that ‘times up’ for the perpetrators of childhood sexual assault, not for victims.”

Gonzalez defended the triple damages aspect, saying in the analysis: “This reform is clearly needed both to compensate victims who never should have been victims and who would not have been if past sexual assault had been properly brought to light — and also as an effective deterrent against individuals and entities who have chosen to protect the perpetrators of sexual assault over the victims.”

The bill received support from the Victim Policy Institute but was opposed by public and private school officials, insurance associations and joint powers associations.

All of the opponents raised the same basic concern, according to the Assembly analysis, that “it is very difficult to defend against old claims when records and witnesses may be unavailable, insurance may no longer be available, and the cost of defending these actions could be astronomical and could prevent the impacted entities from being able to support their main work.”

AB 218’s treble damages stricture and extension of claims until victims are 40 is likely to have the biggest impact on school and county budgets of the two bills, according to the unnamed bond attorney. He added that in other states, including Maryland, a ceiling was set on damages in order to avoid wreaking financial havoc on school and county services — and taxpayers, who ultimately pay the cost of any claims.

What started in California could become a national legislative trend, according to a newsletter post by William Fields, a Maryland lawyer at the firm PK Law.

The focus of Fields’ article was legislation signed into law by Maryland Gov. Wes Moore in April. The Child Victim Act of 2023 takes effect on Oct. 1.

Maryland’s law will completely eliminate all time limits on sexual abuse civil lawsuits, allowing victims to file suit no matter how long ago the abuse occurred.

For government agencies, the defense of sovereign immunity, typically available for claims over $400,000, is only available in these cases when the claim is over $890,000. For nongovernmental defendants, the cap on damage is $1.5 million.

New York’s Child Victims Act, which took effect in August 2019, extended the statute of limitations for civil sexual abuse claims, allowing survivors to file lawsuits until the age of 55. It created a one-year look-back period during which survivors can file civil lawsuits against at-fault parties, regardless of how old the survivor is and no matter how long ago the abuse occurred.

According to the New York State Senate, the Child Victims Act has allowed over 3,000 survivors to step forward to seek justice.