Back in the day (2009 thru 2011) California School Districts issued large amounts of non callable,  zero coupon bonds. Debt service caps forced them to issue these structures at very cheap yield levels; most often cheaper than 7%. 

As background, CA restricts the annual amount of debt service School Districts can pay on their outstanding ad valorem debt  to approximately .05% of property valuations (debt service caps). As property valuations fell, the annual debt service caps also fell and School Districts were prevented from issuing traditional current interest bonds (CIBs) that paid interest on a semi annual basis. 

Creative bankers helped School Districts in need of money (mostly for infrastructure improvements). Bankers projected that property values would increase 3% to 5% per year for the next thirty years; projecting property values would be 3 to 4 times the current valuations. They then calculated the future debt service cap using these future property valuations. Since zero coupon bond investors receive all of their principal and interest at the maturity date, in this case, when property values were projected to be much higher....debt service cap problem solved.

Most buyers of municipal bonds are looking for current income so the glut of zero coupon issuance needed to be sold cheap to attract interest; in many cases these yields were between 7% and 8%. Recently, the State passed legislation preventing the issuance of non call zero coupon bonds longer than 25 years in maturity citing the risk that property valuations may not rise as expected leaving higher property tax burdens on future generations.

Lots has changed since 2009-2011, most importantly, CA property values and debt service caps have increased. Proactive issuers are now taking advantage of this new cap room to issue current interest bonds and using the proceeds to buy back the "cheap" zero structures in the open market.

In our view, this makes complete sense as issuers smooth future debt service,  reduce the risk of higher property taxes for future generations,  AND create " debt service savings" by issuing at lower yields than the yields on outstanding debt (the debt they are buying back in the open market). 

Well done Stockton, Jefferson, and the others that will likely follow suit!!