Dustup over expensive bonds provokes calls for new regulation
Controversy at a San Diego school district over the cost to taxpayers for new borrowing could lead to legislative controls on school bonds, a spokesman for the state treasurer's office said last week.
The issue has come to light in recent months following publicity and public outcry over Poway Unified School District obtaining $105 million in school construction bonds that will ultimately cost taxpayers nine times that amount.
Using a long-term financing method known as capital appreciation bonds, or CABs, the district has deferred payments on the debt for 20 years with the interest compounding through 2051.
By then, district taxpayers will have paid almost $1 billion for the original loan of $105 million.
Poway did nothing illegal - although residents of the district have reportedly accused the administration of non-disclosure. In fact, CABs are a commonly-used funding tool, especially at a time when stalled property values limit an entity's short-term borrowing ability.
According to a recent Bloomberg report, 11 California districts have, since 2011, issued CABs that have maturity dates out as long as 40 years.
However, some states have banned their use altogether, and the Poway deal led San Diego County Treasurer-Tax Collector Dan McAllister to craft proposed legislation that would place new controls on these financing vehicles.
Given that 46 percent of California's school districts have issued $19.6 billion in CABs since 2001, state treasurer Bill Lockyer supports the proposal, department spokesman Tom Dresslar said this week.
Not to ban them but to put some controls on them," Dresslar said. "More transparency, greater oversight and stronger taxpayer protections - we think these are reasonable steps that need to be taken."
One expert who advises school districts in financial matters said the problem highlighted in Poway is often less a regulatory issue than one of proper counsel and communication.
Capitol Public Finance Group's Jeff Small has worked with school districts on elongated CABs, he said, because in some cases, they do fit the client's needs. But in these cases, he makes sure everyone involved - from the county treasurer to school board members and the taxpayers - knows exactly what they're getting, and how much they'll be paying for it.
"Not all School boards receive proper disclosure; the public must also receive proper disclosure," Small said. "Why were the [Poway] taxpayers upset? Although I was not at the Board meeting, you'd think they were upset because they found out they were going to repay $1 billion for $105 million in bond proceeds.
"But they were probably upset because that's not what they were told when they approved the bonds" he pointed out. "I would argue that if there was proper communication, you wouldn't have had the uproar they had there."
Small said the professionals involved in complex school bonds bear some responsibility if taxpayers are unhappy after the fact.
"There are a lot of people who should be consulted in very complex transactions," he said. "County offices of education, county treasurers, county assessors, chief business officials - should be appropriately involved when complex deals are done. I think there's a certain amount of professional responsibility that's required when putting together a financial transaction."
McAllister's proposal, which he outlined Aug. 17 in a news conference in San Diego, would, among other things:
- Limit school district bond financing to 25 years;
- Require terms to be approved by the county Board of Supervisors, county Superintendent of Schools or a community college district governing board;
- Have the superintendent and school board members put in writing their understanding of the interest rate and funding ratio, and that they've communicated the figures to their constituents; and
- Make sure that districts are able to refinance their debt.
It is unclear at this time when or if McAllister's plan will be taken up by the legislature.