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News Clips 02/11/2013
California Schools Finance Upgrades by Making the Next Generation Pay
Source: The New York Times, 02/09/13
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By Ian Lovett
School officials in Santa Ana were in a bind several years ago: they wanted to build hundreds of new classrooms, but feared that voters would rebel against tax increases to pay for the construction.
So in 2009, the Santa Ana Unified School District borrowed $35 million using an inventive if increasingly controversial method known as capital appreciation bonds, which pushed the cost of the construction on to future taxpayers. Not a cent is owed until 2026. But taxpayers will eventually have to pay $340 million to retire that $35 million debt.
Since 2007, hundreds of school districts and community colleges across California have used capital appreciation bonds to raise nearly $7 billion for various construction projects, according to data from the state treasurer’s office. The bonds have allowed school districts that are short on cash to finance classroom renovations and new athletic facilities while delaying payment for years, or even decades.
But these new facilities often come at an enormous cost to future taxpayers, who will be liable for huge interest payments that sometimes balloon to more than 10 times the amount borrowed over as much as 40 years. By contrast, repayment on traditional school bonds usually costs no more than two to three times what was borrowed.
“It’s the school district version of printing money,” said Bill Lockyer, the state treasurer. “These bonds are bad deals for taxpayers, and they contribute to the general view that the government doesn’t spend their money intelligently.”
In San Diego, property owners owe $630 million on a $164 million bond. For the Folsom Cordova Unified School District, a $514,000 bond will cost $9.1 million.
And in the most expensive case yet, the Poway Unified School District borrowed $105 million to finish modernizing older school buildings, which local property owners will be paying off until four decades from now at an eventual cost of nearly $1 billion. Because payments on the bond do not start for 20 years, current school board members faced little risk of resistance from property owners.
Still, residents and elected officials have expressed growing outrage at the bonds since news of the Poway deal was reported.
A bill making its way through the State Assembly would cap the maturity of the bonds at no more than 25 years and the total debt at no more than four times the amount borrowed.
“Right now, if they don’t have the revenue, school boards can say, Let’s just kick the can down the road 20 years and let them deal with it,” said Assemblyman Ben Hueso, a Democrat from San Diego who co-sponsored the bill.
Capital appreciation bonds have become especially popular in California and Texas, according to Fitch Ratings, which evaluates risks for bond investors.
Some states — including, until recently, California — have strict laws to curb use of these bonds. Michigan has barred school districts in the state from selling capital appreciation bonds at all.
But in 2009, as the housing market crash drove down tax revenues for schools and state education financing was cut, California lifted its requirement that long-term bonds be paid off at approximately the same rate each year, opening the door for bonds that delay payments for 20 years.
Tom Duffy, a former superintendent of the Moorpark Unified School District who now works as a lobbyist for the Coalition for Adequate School Housing, said long-term capital appreciation bonds offered school districts needed flexibility. He criticized efforts to limit them again.
“California school districts have a very limited number of tools available to them when it comes to financing public infrastructure,” he said.
The bonds let school districts embark on costly school renovations with minimal immediate pain for property tax payers.
A bond measure that Santa Ana voters approved in 2008, which authorized the district to borrow $200 million, has financed the replacement of hundreds of temporary classrooms with new, permanent ones. More than 800 existing classrooms have been renovated.
District officials had pledged to complete all those projects without raising property taxes further. To keep those promises, they had to turn to long-term bonds, said Michael Bishop, an associate superintendent for the Santa Ana school district.
Although the 2009 capital appreciation bond brought in only 17 percent of the $200 million authorized by the 2008 bond measure, it accounts for more than half of the total debt the district incurred. As a result, more than half the cost of all the projects will fall on the shoulders of taxpayers decades from now.
In addition, if property values do not continue to rise in the intervening years, as district officials are anticipating, future school board members may have to raise taxes to pay for 30-year-old classrooms.
Still, Mr. Bishop said, the incentives to build as soon as possible included low construction costs in 2009 and the promise of millions of dollars in matching money from the state that would otherwise have gone to other school districts. And future taxpayers, he said, will also benefit from the new classrooms.
“We are not financing a computer over 30 or 40 years,” he said. “We are financing buildings that will probably be operating a good 50 to 60 years after that bond was issued.”
As Mr. Lockyer sees it, the only people these deals benefit are the financial advisers, who have collected millions of dollars helping school districts sell capital appreciation bonds, according to the treasurer’s office.
Many voters — and even some school board members — said they did not realize when they supported the bond measures that they would be signing up for huge debts that local homeowners would still be paying off 40 years from now.
“If you asked the average voter,” said Assemblywoman Joan Buchanan of Alamo, a co-sponsor of the Assembly bill, “I think they would have no idea what a capital appreciation bond is.”