California schools haven’t had a healthy, stable funding base since Proposition 13 eviscerated property tax revenues in 1978. To maintain infrastructure and build new schools, districts often issue bonds that are repaid over long periods of time using whatever tax money they can lay their hands on.
State law limits how much debt a particular bond issue can engender, but school districts―hammered by the bad economy that further depressed property tax revenues― have been turning to capital appreciation bonds (CABs) to structure their payments with value-added flexibility.
CABs allowed the Poway Unified School District in San Diego County to borrow $105 million over 40 years by deferring the start of repayment for a couple decades, according to John Thurtell, a blogger who first publicized Poway’s dilemma in May.
But it will cost $1 billion to pay back the loan and its deferred, compounded interest.
CABs are not callable bonds and cannot be paid off early, according to Chris Cate, vice president of the conservative San Diego County Taxpayers Association, which endorsed the Poway bond measure as part of a larger referendum in 2008.
The ballot measure received 64% approval from voters after the school board promised it would use the money to complete a decade-long building program and not raise taxes in the process. Because taxes are often used by districts to pay off bond debt, Poway looked to push its debt payments down the road, eschewed conventional bonds and turned to CABs.
The school district of 33,000 students will not have to begin paying back its loan until 2033, but will have to pony up $300 million, its biggest payment, in 2046 and again in 2051, according to Bloomberg News.
Poway is not alone. Data compiled by Bloomberg indicates that 55 school districts were selling bonds last year that didn’t mature for 25 years. At least three other school districts in San Diego County have used the exotic instrument. Escondido Union School District owes $247 million on a $27 million loan, Oceanside Unified will need to pay $280 million to make good on a $30 million loan and San Diego Unified is on the hook for $1.2 billion for its $164 million loan.
It is unclear exactly how many similarly structured loans, which were banned in Michigan in 1994, exist in California. But the potential fallout from their existence can be surmised.
“It’s not so much kicking the can down the road as it is burying a drum of toxic waste in the back of the school,” Jonathan Fiebach, a partner at Grant Williams LP, a Philadelphia investment advisory firm, told Bloomberg.
–Ken Broder
To Learn More:
California Schools Barring Taxes Push Bills to 2051: Muni Credit (by James Nash, Bloomberg News)
School Bonds Could Trigger Fiscal Shock (by Gillian Tet, CNBC)
Bonds for $105 Million to Cost School Over $1 Billion (by James Nash, Bloomberg News)
California School District Will Spend $1 Billion to Borrow $100 Million (by Elizabeth MacDonald, Fox Business News)
Where Borrowing $105 Million Will Cost $1 Billion: Poway Schools (by Will Carless, Voice of San Diego)
A Creative Borrowing Boom: Poway Not Alone in High-Interest Financing (by Will Carless, Voice of San Diego)
CABs = Compound Trouble for California (by Joel Thurtell, JoelonTheRoad.com)