Dozens of school districts in the Bay Area are among 200 statewide that have borrowed billions of dollars to build and upgrade schools using bond financing that critics are blasting because it burdens homeowners with high debts that take up to 40 years to pay off at exorbitant interest rates.
A Los Angeles Times analysis of statewide school district bond financing released this week has district officials and financial advisers buzzing, with some critics saying the practice of using capital appreciation bonds should be banned altogether. The critics point to the Poway district in Southern California, where taxpayers will spend about $1 billion to pay off a little more than $100 million in construction funding.
Districts essentially have two basic options when issuing bonds: Current interest bonds or capital appreciation bonds. Current interest bonds cost less over the long term but could cost more up front, as homeowners make regular payments.
With capital appreciation bonds, or CABs, most of the debt is deferred until later in the repayment term, by which time large amounts of interest have accrued and taxpayers are on the hook for huge payments.
Districts in Alameda, Contra Costa, San Mateo and Santa Clara counties have turned to the risky financing tool in part to compensate for sinking property values that have made it harder for districts to raise money and keep tax rates to repay the bonds below the state's cap of $60 per $100,000 in assessed valuation, per bond measure.
Construction costs are low right now, and some districts don't want to wait until property tax revenues increase to make needed capital improvements, so they turn to CABs to finance all or part of the bond construction that local voters have approved.
Some districts disputed the numbers presented by the LA Times, while others pointed out that CABs make up only a small portion of their total portfolios. A few districts said their CABs were "callable," which enables districts to refinance the bonds and obtain better terms in the future. Most did not view CABs as a problem, but acknowledged that the debate is causing them to analyze their options more closely.
"The whole discussion has made many districts ask more questions to be clear about what are we entering into?" said Rebecca Wright, assistant superintendent of the Gilroy district. "'We're looking at what the overall cost will be and whether capital appreciation bonds are necessary and whether there's other options."
Districts throughout the Bay Area have them in their portfolios:
"If we didn't issue the $2.5 million in CABs," said school board President Charles Ramsey, "we wouldn't have gotten the $25 million to build the school for 1 percent interest, so we felt that was the responsible thing to do. We're not like Poway."
Voters must approve each bond measure, but they have no say in what financing method the districts use, even though they are the ones who will pay them off. This became a major issue in the Mt. Diablo district in Contra Costa County, which promised voters in 2010 that it wouldn't raise their tax rates above what they were already paying on a $250 million bond passed in 2002, if they would agree to approve another $350 million.
The public didn't find out until after the board voted to put the measure on the ballot that the total repayment could span 40 years and cost $1.8 billion. A group of residents later persuaded the board to renege on its previous promise and raise tax rates so it could replace the CABs with current interest bonds -- which had a higher initial cost but a lower overall cost.
"It was important because it was going to cost our community a lot of money and we were able to save them about $500 million by having the district agree to sell regular bonds rather than capital appreciation bonds," said Linda Loza, a Walnut Creek resident who spearheaded the effort. "I think capital appreciation bonds should be banned. I think if they aren't, that we would be facing some really severe issues down the road as a state because so many have been issued. It's just not fair for us to get $348 million and ask our children and our grandchildren to pay for it when they're going to have needs of their own."
But financial adviser Jon Isom said CABs can be beneficial when used judiciously as part of an overall financing strategy, based on an evaluation of interest rates, construction costs and the time it will take to complete projects.
California Treasurer Bill Lockyer, on the other hand, compares CABs to the kind of Wall Street financing that contributed to the housing bubble, which led to the debt crisis and the country's stagnant economy.
"They are terrible deals," Lockyer said. "The school boards and staffs that approved of these bonds should be voted out of office and fired."
Steve Fuentes, associate superintendent of business services in the Jefferson district, disagreed, suggesting that Lockyer is out of touch with districts' day-to-day concerns.
"He's not working in a district, is he?" Fuentes said.
Staff writers Katy Murphy, Rebecca Parr, Aaron Kinney, Eve Mitchell, Jennifer Modenessi and LA Times wire contributed to this report.