WATSONVILLE -- Two top state officials are warning school districts against issuing a controversial type of bond until the legislature can enact new rules governing their use.
The call for a moratorium on capital appreciation bonds comes as Pajaro Valley Unified joins school districts across the state in preparing to issue bonds approved by voters in November.
Critics argue capital appreciation bonds, or CABs, have placed an unreasonable and unhealthy debt burden on school districts. Others counter that the bonds can and have been used responsibly.
"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 cost of CABs, and alternatives, before CABs are issued," say state Superintendent of Schools Tom Torlakson and state Treasurer Bill Lockyer in a letter sent to school districts Thursday.
Concern about CABs was sparked by a deal struck by Poway Unified School District, which came to light last summer. Poway, a suburban San Diego County district, borrowed $105 million and stretched payments 40 years into the future, driving up cost of the loan to nearly $1 billion.
The Los Angeles Times subsequently put together a database detailing the use of CABs in hundreds of California school and community college districts in the past five years. Among them were three in Santa Cruz County: Live Oak
In 2009, the Santa Cruz County school district used a CAB to borrow $154,000 for 26.1 years. With interest, the final payback would be $2.1 million, nearly 14 times the initial loan.
But district leaders say the assessment is taken out of context. The CAB was a small piece of a $12 million package with a total payback of $30 million. The 2.5-1 debt ratio for the entire package was much lower than the 4-1 ratio conservative financial advisers think should be tops, said Superintendent Tamra Taylor.
The loan also wasn't a traditional school bond, paid through additional taxes on property owners, Taylor said. Instead payments are covered by redevelopment funding restricted for work on facilities. Because the obligation was incurred before the state eliminated redevelopment agencies, the money continues to flow to the school district to pay the debt.
Taylor said the district also saved money by going out when the construction market was weak, and so was able to update its schools at a lower cost.
"It was about timing for us," she said. "We took advantage of the market like good entrepreneurs do."
But Lockyer and Torlakson said some districts are in too deep, using CABs to put off repayment while interest grows. In some cases, taxpayers face paying 10 times the principal to retire the bonds. When terms exceed 25 years, they say, future taxpayers are burdened with the debt, reducing their capacity to borrow for the facility needs of their own children.
Brett McFadden, Pajaro Valley Unified's chief business officer, said he is concerned that potential legislation could impact district building plans. He's preparing to go to the market in February with a $65 million bond with a 35-year term, the first of what he hopes will be three bond issues related to the $150 million Measure L, passed by voters in November. The payback ratio is not yet set, but he expects it to be 2.5-1 or lower.
McFadden does not plan to use CABs, but he said proposals circulating in Sacramento would place restrictions on all school bonds. While he's not opposed to capping payback ratios at 5-1 or 6-1, a 4-1 ratio depends on low interest rates. When rates climb, he said, so does the payback.
"We're going to pass something that's fixed, and things like interest rates, credit ratings and credit availability fluctuate year to year," he said. "You have to be able to handle changes in the world."
Worse, he said, is changing the rules for approved bonds. He went to voters in November with a proposal based on current law, and pledged to complete $150 million in facility improvements in six years. That promise requires the district to release the final round of bonds in 2015. Assuming interest rates stay stable and don't rise to more than 7 percent, he expects a 2.2-1 payback ratio for the entire $150 million.
But McFadden said if he has to limit the term to 25 years, he'll have to do at least four bond issues, and the last one won't go to market until 2026. That means projects won't get done until after this year's kindergartners have graduated from high school and left the district.
"The standard rate for bonds has been 30 or 35 years, and so, if you lower that amount, that affects me and other school districts in terms of our abilities to get our bond funds in an appropriate time to get services to our kids," McFadden said.
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