Some school bonds resemble payday loans
Since voting for the first time in 1972, I have backed every school-bond measure on my ballot. Strong schools, I believe, build strong cities.
But California Treasurer Bill Lockyer last week provided me reason to think twice and dig into the weeds before saying yes to future school bonds.
A couple things have happened. First, a 2000 state law limited property tax levies school districts could use to pay off bonds.
The law, by the way, was Proposition 39, which also allowed districts to sell bonds with 55% voter approval instead of the previously required two-thirds.
Then there was the financial crisis of 2008, which sent property taxes plunging. Together, these things triggered the run to so-called capital appreciation bonds, or CABs.
Needing to renovate aging facilities and build schools but unable to raise taxes, districts turned to these nothing-down, pay-nothing-for-decades bonds, which typically include balloon payments and terms of up to 40 years.
The problem is, this flexibility often comes at a high price. Lockyer says many CABs are “terrible deals” and calls them the equivalent of “payday loans.” The state of Michigan, concluding that the bonds were toxic, banned its school districts from issuing CABs in 1994.
The poster district for CABs is Poway Unified in San Diego County. The district received $105 million up front in 2011 to complete a 10-year modernization effort and won’t have to pay a penny on the principal — or any interest — for more than 20 years. But when the bill comes due, it’s a whopper: nearly $1 billion.
Then there is Patterson Joint Unified in Stanislaus County, which sold a $9.5 million CAB three years ago and will wind up paying $96.5 million for the privilege come 2049.
And you thought creative financing died with the sub-prime mortgage collapse? Some school districts might be better off dealing with Lenny, the connected guy who hangs out at the barber shop.
Data compiled by Lockyer’s office indicates that about 200 public school and community college districts in California, including many in the Central San Joaquin Valley, have turned to CABs since 2007.
It’s important to note that not all CABs are created equal.
Clovis Unified, for example, sold an $18 million CAB this year, for which it will pay $46.5 million over 23 years.
This indebtedness is 2.6 times principal — well within the three-times rule deemed prudent by finance experts and the four-times safeguard Lockyer hopes the state Legislature adopts.
By paying off the bond in 23 years, the district is within the 25-year guideline recommended by experts.
Fresno Unified also has dipped into the CAB well with separate bond sales of $55.6 million and $25.6 million last year. About 29 years from now, when the ledger is squared, the district will have paid about $377 million, or 4.6 times principal, for $81.2 million.
Ruth Quinto, Fresno Unified’s deputy superintendent and chief financial officer, said that unlike Poway Unified’s CAB, the district’s can be paid off early and replaced with lower-interest bonds.
In addition, Quinto said, CABs allow districts to build facilities without increasing property taxes: “It’s what we had to do to provide facilities for kids so they are in the best position to learn.”
Kings Canyon Joint Unified in Reedley sold two CABs in 2007 totaling $9.1 million that will cost district taxpayers about $20.5 million over nearly 25 years.
Good deals both.
But an $8.5 million bond sold this year by Kings Canyon is an example of government pushing debt to future generations — unless the bond can be retired early. When the note is due in 39 years, the district will have paid $56 million — a debt ratio of 6.6 times principal inflated by a higher interest rate than on ordinary bonds.
Cheers to Lockyer for sounding the alarm. Cheers, too, to Joel Thurtell, a Michigan blogger and retired Detroit Free Press reporter, who first blew the whistle on Poway this year.
If you’re wondering why the high costs and increasing popularity of CABs in California wasn’t exposed before, look in the mirror.
A supermajority of voters rejoiced in 1978 upon passage of Proposition 13, the state’s landmark property tax reform that radically changed education financing. But schools still must be built and updated.
So we pat ourselves on the back for passing bond measures, rarely questioning what bonds really cost or how long taxpayers are on the hook.
By Bill McEwen