Districts urged to hold off buying high-risk construction bonds

Screen Shot 2013-01-18 at 12.38.47 AMState 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.

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8 Responses to “Districts urged to hold off buying high-risk construction bonds”

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  1. navigio on Jan 19, 2013 at 10:49 pm01/19/2013 10:49 pm

    • 000

    Note that a PTSA member from Poway even now says, “It was well worth it. In my son’s experience, there’s a big difference between using a trailer and having a new classroom.”

    Sad that those are the only alternatives.

    Also, it seems important to note that the large payments are not necessarily a result of exorbitant interest rates or dubious lending behavior, rather they are a function of simply deferring the payment schedule for a really long time (and board members agreeing to (or being duped into) doing that).

    I think that acting in good faith is different than due diligence. Its amazing to imagine that bond measure terms are not pored over in detail by board members and district employees. Its not like a district issues dozens of these things every year.

    Anyway, as I’ve said before, our bond system is bad news. The public has virtually no control over the process and terms, similarly for the eventual construction. And it is even hurting general education funding because most voters dont know that there is a distinction between the two types of funding.

  2. John Fensterwald on Jan 18, 2013 at 4:56 pm01/18/2013 4:56 pm

    • 000

    navigio: The bond terms do not need to be disclosed to voters as part of the ballot article. Tom Dresslar, who is quoted above, said that mandating this is one of the ideas under discussion.


    • el on Jan 19, 2013 at 10:30 pm01/19/2013 10:30 pm

      • 000

      If that’s so, I wonder if the district administration or trustees ever even chose the financing form or knew there was a choice in many of these cases. How often did the consultants just sell them in the form that allowed them to create a nice fat bonding?

  3. navigio on Jan 18, 2013 at 11:46 am01/18/2013 11:46 am

    • 000

    A question: Do the terms that equate to a CAB need to be specified at the time the bond initiative is voted on, or is that simply one of the many bond funding options available when the district later actually secures the financing from the moneybags?

  4. el on Jan 18, 2013 at 10:09 am01/18/2013 10:09 am

    • 000

    In Willits, there was a CAB balloon payment that had escaped the notice of the administration, the district, and the auditors, and was found only at the relatively last minute by the county office of education. I’m sure all of those people were acting in good faith, and yet they all missed it. That points to a problem beyond the nature of the CAB type financing, it seems to me.

  5. el on Jan 18, 2013 at 10:05 am01/18/2013 10:05 am

    • 000

    This whole issue concerns me not just because of the abuses of the CAB type bond, but because it seems to me that most districts are somewhat at the mercy of paid consultants when it comes to bond measures, consultants who work for a percentage of the total bond size and who have no skin in the game. I’ve asked around a couple of times for guidance on how one might put together a school bond without consultants and only heard crickets … it seems to me that at the very least the State would do a big service to districts to have a good informational page about school bonds for trustees, the steps needed to pass and implement one, such that it would be possible to understand what the consultants are doing for the money they charge.

  6. John Fensterwald on Jan 18, 2013 at 9:30 am01/18/2013 9:30 am

    • 000

    Thanks, Chris. Voice of San Diego deserves credit for bringing the issue to California readers.

  7. Chris Reed on Jan 18, 2013 at 9:24 am01/18/2013 9:24 am

    • 000

    It wasn’t the L.A. Times and the Contra Costa Times that exposed the practice. A Michigan blogger did in the spring, with a follow-up in the summer by the Voice of San Diego.

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