One of California's top education officials is urging school districts across the state not to issue a type of bond that recently has come under close scrutiny for its potential cost.
In a letter to school administrators, California Superintendent of Schools Tom Torlakson urged against issuing capital appreciation bonds until new legislation aimed at limiting their use is completed.
"We urge you and your Board of Education not to issue CABs until the Legislature and the governor have completed their consideration of this year's proposals to reform the CAB issuance process," Torlakson said in the letter also signed by State Treasurer Bill Lockyer.
"We are convinced that remedial legislation is needed to prevent abuses and ensure that both school board members and the public obtain timely, accurate, complete and clear information about the costs of CABs, and alternatives, before CABs are issued," the letter reads.
Capital appreciation bonds came under scrutiny last year after media reports publicized one issued last year by the Poway Unified School District in San Diego. The $105 million Poway bond will take 40 years to pay off and cost taxpayers nearly $1 billion.
Media outlets began examining bonds at a local level. The Salinas Taxpayers Association rang alarm bells about a bond Hartnell College issued in 2009, scheduled to run about 10 times the cost of the bond to repay over a 25-year period.
The Los Angeles Times identified all school districts that issued CABs in the past five years. The list identified 14 capital appreciation bonds issued in Monterey County.
Of the bonds, only three fall under the category the newspaper identifies as "risky" because of the length of repayment or cost: at Bradley Union School District, where a $500,000 bond is scheduled to cost almost $3.5 million to repay over 37 years; at the Santa Rita Union School District in Salinas, where a $2.6 million bond could cost about $13 million to repay over 25 years; and at Hartnell.
Hartnell officials have said they plan to refinance the bond so it is not as expensive.
The proposed legislation, still not introduced, would require school districts to repay their bonds in no more than 25 years, limit their cost to no more than four times the original amount, and require all capital appreciation bonds to have terms for refinancing, said Steve Ma, vice president of administrative services at Monterey Peninsula College.
Although not every district issued expensive bonds, it is probably a good idea to limit their use, Ma said.
"Not all CABs are bad, it's really how you use them," he said. "But it takes a few to spoil it for the many."
MPC issued a capital appreciation bond in 2008, but it will cost 2.5 times to repay and close to 25 years.
Measure I in 2002 approved $145 million in bonds to build MPC's Marina center and rebuild the Monterey campus. Administrators are already looking to restructure almost $28 million of it in the next few weeks. The current rate on that bond is 4.9 percent and, depending on the rate that can be locked, refinancing could save taxpayers between $600,000 and $900,000 a year in repayment costs, Ma said.
The bond to be refinanced is not capital appreciation.
"What happens with the refunding we're doing, our debt service goes down," Ma said. "Those savings go back to the taxpayers. We're not extending the term of our loan, nor are we pulling out more dollars — all savings go back to taxpayers."
The college is refinancing because market conditions are right, he said. Refinancing could cost up to $270,000.
"A few districts across the state are doing the same thing," he said. "Where rates are right now, it makes sense to refinance. That's what prompted this."
School administrators said they used capital appreciation bonds because there were no other means of financing and projects needed to be completed.
Hartnell Superintendent Willard Lewallen said he supports anything that would result in savings to taxpayers, but he wonders how it could affect school districts.
"It's catch-22," he said. "In some districts, they have projects started and they need the dollars to complete them. I'm not opposed to some reform, but I think it needs some further and broader discussion about what it means for school districts."
Claudia Meléndez Salinas can be reached at 753-6755 or firstname.lastname@example.org.