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Right Here Right Now: Ending bad finance deals in education

Posted: April 19, 2013 9:40 a.m.
Updated: April 19, 2013 9:40 a.m.
 

In a rare display of solidarity, the California Assembly approved AB 182 by a vote of 73-0.

What could possibly garner unanimous support from both sides of the aisle? Education bond reform.

Assembly Bill 182 attempts to reduce the future debt burden by limiting the length of capital appreciation bonds to 25 years and restricting money owed to a maximum of four times the borrowed amount. The bill would also let districts refinance these bonds at a lower interest rate and require increased disclosure to the school districts’ governing boards.

Following the 2007 subprime-mortgage market debacle, many local school boards utilized the bond market at an increased rate, as they could no longer depend upon the property-tax revenue they had previously used to build schools and modernize classrooms.

In August 2012, the pitfalls of this strategy hit the spotlight when The Voice Of San Diego reported the story

“Where Borrowing $105 Million Will Cost $1 Billion: Poway Schools,”

The article, written by Will Carless, chronicled the experience of Poway Unified School District. In an effort to avoid raising taxes and continue with desired projects, the school board took the advice of a consultant and jumped into the capital appreciation bond market.

This allowed them to borrow money that they would not have qualified for in a traditional bond market, stretch out the payments for 40 years (verses 20 in a traditional bond), and not make payments for the first 20 years!

What’s the catch? The debt grows for those first 20 years with interest continuously compounded. Thus, in the example of Poway Unified School District, for borrowing $105 million in 2011, the total payoff price in 2051 is $981 million.

Several additional stories followed in the Sacramento Bee. “Some Sacramento-area school bonds have long-term, pricey payments,” written by Phillip Reese and Loretta Kalb, shine a light on:

--The Yuba Community College District, which operates schools in Woodland and Marysville, will pay $59 million to retire $4.6 million in bonds that trustees approved last year. The district won’t make bond payments until 2038 and won’t finish until 2050.

-- The Dry Creek Joint Elementary School District in Roseville will pay $66 million toward $8.2 million in bonds from 2009. It won’t start making payments until 2033 and won’t finish until 2048.

--The River Delta Unified School District south of Sacramento will pay $19.5 million to retire $3.3 million in bonds from 2008. It won’t start making payments until 2032 and won’t finish until 2048.

“Each $1 from bonds to cost schools $18,” by Diana Lambert and Phillip Reese, exposes the how the bond issued by Folsom Cordova Unified will cost taxpayers $9.1 million to retire $514,000 in debt.

Tom Dresslar, spokesman for California State Treasurer Bill Lockyer, released a statement saying AB 182 is necessary because: “They shove debt on the next generation of taxpayers who won’t benefit directly from the facilities the bonds finance, which means (the next generation will) have less ability to finance what their kids need.”

Robert Wassmer, a professor of public policy at Sacramento State, compares the problem school boards will soon face to that of many homeowners in the mortgage crisis.

“The homeowner gets underwater and ends up with an asset worth less than what they owe on it,” he said.

“These school districts will face the same concern 20 to 30 years from now when they are still paying on buildings that are now obsolete and need to be rebuilt with another bond issue.”

The state Senate will vote on AB 182 in the following months. If passed and signed by the governor, the bill will be implemented beginning Jan. 1, 2014.

For the sake of our children’s educational needs in generations to come, let us all hope this bill becomes law.

Alice Khosravy is a resident of the Santa Clarita Valley. “Right Here, Right Now” runs Fridays in The Signal.

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