Districts urged to hold off buying high-risk construction bonds
January 17, 2013 | By John Fensterwald | 8 Comments
State Superintendent of Public Instruction Tom Torlakson and State Treasurer Bill Lockyer called Thursday for school districts to stop issuing capital appreciation bonds, or CABs, which can leave taxpayers with huge balloon payments, until the Legislature has had time to impose new restrictions on their use.
“We are convinced that remedial legislation is needed to prevent abuses and ensure that both school board members and the public obtain timely, accurate, complete, and clear information about the costs of CABs, and alternatives, before CABs are issued,” they wrote.
Faced with declining property values that have restricted borrowing capacity, some school districts have turned to capital appreciation bonds for school construction projects. They offer the advantage of providing upfront money that does not have to be repaid for decades; for districts needing schools rebuilt or repaired now, they offer a way around statutory caps on school districts’ annual debt payments. The problem is that interest obligations pile up; in some cases, by the end of a 40-year CAB, total payments can be nine or ten times the principal – more than twice the rate considered reasonable.
Districts assume that rising property values over the next 30 or 40 years will minimize the high debt ratio, but, as Lockyer noted, CABs are risky and stick the next generation of taxpayers with unjustifiable burdens.
Articles in the Los Angeles Times and the Contra Costa Times in November exposed the practice. The Los Angeles Times estimated that 200 districts – about 20 percent of the total in the state – have issued CABs, although some used them for only a small piece of their bond portfolio. The poster child for abuse was Poway Unified, whose $105 million in CABs will cost nearly $1 billion by the time they’re repaid.
Tom Dresslar, spokesman for Lockyer, said that a number of statutory changes are under discussion:
Transparency: Some school board members say they never understood the terms and interest rate structures when they approved the bond sales. In the future, school boards would have to be informed about the details of a bond issue. “We want enough transparency for school boards to know what they are doing,” said Jeannie Oropeza, deputy state superintendent of public instruction. Another idea is to include restrictions on bond issues in the ballot measure that voters see.
Bond restrictions: Some ideas, Dresslar said, include limiting the maturity period of bonds to 25 years, requiring that districts be able to recall bonds every 10 years to pay them off, and setting a maximum ratio of total interest payments to principal – such as 4 to 1 – to prevent extensive use of CABs.