December 3 2012

Shaky School Construction Financing in California

Vicki E. Alger

It was recently reported that one California school district didn’t read the fine print about just how much all their bonding was going to cost tax payers—$9.1 million and change.

The Los Angeles Times now reports that some 200 California school and community districts will pay 10 to 20 times more than they borrowed because they used capital appreciation bonds, or CABs. The LA Times even put together a great capital appreciation bond database detailing when the bonds were bought, for how much, and how much interest taxpayers will be stuck paying. According to the LA Times:

The practice is controversial and has been banned in at least one state [Michigan since 1994]. …California Treasurer Bill Lockyer, who compares CABs to the sort of creative Wall Street financing that contributed to the housing bubble, [says]… "They are terrible deals…The school boards and staffs that approved of these bonds should be voted out of office and fired."…

Overall, 200 school systems, roughly a fifth of the districts statewide, have borrowed more than $2.8 billion since 2007 using CABs with maturities longer than 25 years. They will have to pay back about $16.3 billion in principal and interest, or an average of 5.8 times the amount they borrowed.

Nearly 70% of the money borrowed involves extended 30- to 40-year notes, which will cost district taxpayers $13.1 billion, or about 6.6 times the amount borrowed on average.

State and county treasurers say debt payments of no more than four times principal are considered reasonable, though some recommend a more conservative limit of three times.…

“These things are all over the place right now and should be of massive concern to taxpayers," said David Wolfe, the legislative director for the Howard Jarvis Taxpayers Assn. Capital appreciation bonds "kick interest and principal payments 40 years down the line. Property owners who never voted for these bonds will have to pay for them."

Forget taxation without representation. Property owners who haven’t been born yet will have to pay dearly for construction projects on buildings that likely won’t be around. As the Education Intelligence Agency’s Mike Antonucci put it:

This being California, not everyone thinks this debt is a bad thing. “It was well worth it,” said Jennifer Zaheer, president of the Palomar Council Parent Teachers Association. “In my son’s experience, there’s a big difference between using a trailer and having a new classroom.” Zaheer’s son might be living in a trailer because he won’t be able to afford the property taxes, special assessments and local levies needed to pay off the CABs when he’s an adult.

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