Most other districts across the state are using this risky borrowing to satisfy deferred general maintenance needs because citizens are balking at increasing taxes however in Emeryville, CAB financing is being considered on a voluntary basis to satisfy district officials desire to 'co-locate' the existing newly remodeled Anna Yates Elementary School to the San Pablo Avenue high school site. This closure of Anna Yates will cost Emeryville taxpayers $107 million for a $20 million loan, the interest going to Wall Street traders. The payback will be shouldered by Emeryville taxpayers until 2049, an effective passing of debt to the next generation.
The New York Times reports on the new extreme school borrowing trend in California:
HIGH & LOW FINANCE
Schools Pass Debt to the Next Generation
Sam Hodgson
By FLOYD NORRIS
Published: August 17, 2012
The deleveraging of America is well under way, as individuals and companies recover from the excess borrowing that helped to produce the boom and left many people vulnerable when the bust arrived. Household debt is down nearly $900 billion over the last four years, partly from repayments and partly from defaults.
For property buyers, those days are gone,
But for some borrowers, it is still possible to borrow now and pay nothing for decades.
There is a furor in California because the Poway Unified School District, in San Diego County, borrowed money last year on terms that even Countrywide would have laughed at during the boom. It will not pay a dime of interest or principal for more than two decades. Only then will it begin to service the bonds.
It is paying a high price. Although it has a good credit rating - Aa2 at Moody's and AA- at Standard & Poor's - it will eventually pay tax-exempt interest of up to 6.8 percent for the borrowings. When it issued more conventional bonds last year, it paid rates that were much lower, ranging up to just 4.1 percent.
For borrowing $105 million in 2011, taxpayers - or perhaps it would be more accurate to say the children and grandchildren of today's taxpayers - will pay $877 million in interest between 2033 and 2051.
In San Diego, the bond issue first gained attention on The Voice of San Diego, a Web-based publication, which published an article this month headlined "Where Borrowing $105 Million Will Cost $1 Billion: Poway Schools." As the Voice noted, others, including Joel Thurtell, a Michigan blogger, had written outraged articles about the bond issue. But it was the Voice article that attracted national attention, including a report on CNBC.
It turns out the Poway bond issue is not unique. This kind of borrowing has been going on for years, particularly in California, where the tax revolt that began with Proposition 13 in 1978 has made it harder and harder to finance education or other local government services. Assorted propositions approved by voters have made it very difficult to raise taxes at all.
According to a Thomson Reuters database, school districts issued nearly $4 billion in such bonds last year, and have sold almost $3 billion more this year. Back in 2006, when the credit boom was in full bloom, $9 billion worth of so-called capital appreciation bonds were sold.
The Poway issue is unusual in delaying interest payments for so long, but there have been others. Its neighbor, the San Diego Unified School District, borrowed $150 million in May, promising to begin payments in 2032.
School districts' logic for borrowing for construction projects always was that those who benefit should pay for a construction project. In the case of the Poway bond, however, it is at least possible that it will be the children of today's students who end up paying the bill. By then, many of these school buildings may be obsolete, or at least in need of another refurbishing.
In a statement, the Poway district pointed out that the bond issue was the fifth part of a plan to modernize the 24 oldest schools in the district, adding that while that bond "has a total repayment ratio of 9.3 times the principal amount," the overall borrowing program has a repayment ratio of just 4.2. That means that for every dollar borrowed, $3.20 in interest will be paid.
To put that into perspective, a 30-year mortgage at the same 6.8 percent interest rate would require $1.35 in lifetime interest payments for each dollar borrowed, or a repayment ratio of 2.35.
"The most important value received from the building program that is difficult to quantify is the educational value of providing today's students with quality learning facilities," said John Collins, the superintendent of the district, which has 34,000 students. "It is also difficult to calculate the dollar value of savings realized by avoiding the inflated construction costs of postponing the completion of the building program for a decade or more."
Your guess may be as good as his as to just how inflated those costs will be. But it is hard to believe that the district would not have been better off borrowing on terms that called for repaying the loan more quickly. The interest rate would have been lower, and the power of compound interest would not have caused the total payments to rise into the stratosphere.
But the option of getting reasonable financing may not have been available to the Poway district, or to many of the other districts that have resorted to these capital appreciation bonds. Poway officials had promised not to raise taxes, and this way they won't have to. At least not until 2033. They set the payments to begin after earlier bonds are paid off.
Nationally, it appears that fewer and fewer school districts have been able, or willing, to find ways to finance new buildings - or even to pay teachers, as property tax revenue plunged with the deflating of the housing bubble and pinched states reduced assistance. State and local governments are spending less and employing fewer people now than they were before the recession. Adjusted for inflation, state and local investment in buildings and other assets is at the lowest level since 1998. Over the last 30 months, the economy has gained about half a million jobs in manufacturing, and lost nearly as many in state and local government.
Should districts issue such bonds? It is not an easy question to answer. Much of this expensive borrowing is a result of local officials searching for a way to meet their responsibilities at a time when opposition to taxes has become a mantra. This generation will not pay for what it needs, so some of its leaders have decided to saddle future generations with the bills.
Floyd Norris comments on finance and the economy at nytimes.com/economix.
This is a train wreck happening in slow motion and the interested parties' leadership are too personally invested at this point to see the forest through the trees. This disaster can be stopped and a reasonable solution reached if we'd stop barreling down this path toward leveraging the future generation's financial solvency for a k-12 plan only.
ReplyDeleteProperty values aside, won't the school also fail if the student population continues to decrease? Have we any money left over to fund the sports programs? The arts programs? Any money left to fund the types of enrichment programs that attract students who would like to participate on a swim team, a football team, a track team, a drama program? Will we have any money left over to fund any of these programs? If the answer is no then I suspect the student enrollment will continue to decline until it is not sustainable. Then what happens to the district and all of the money owed?
Anybody have the numbers for this year's enrollment? I would bet, the last nail in the coffin has been whacked. Have we no shame?
ReplyDeleteDoes anyone know how many Council members are actually FOR the ECCL? Nora, Ruth, and Kurt do not have children in the district, Jac has one or two and the Mayor sends her children to a "charter school," essentially a "no confidence vote."
ReplyDeleteWho on the Council WANTS the ECCL?
Plenty of gripes here but how about a solution? Can we carrot mob the decision makers or something? The last comment about personal investment of the council members is quite salient.
ReplyDeleteThe City Council voted 5/0 last night to give $22 million of TAX PAYER money to the school district for the ECCL. The public was not informed of this conversation. Total secrecy. Not a single EUSD parent or concerned Emeryville resident, save for Ken Bukowski, there to speak out. There were several other projects that could have used that money including the bicycle pedestrian bridge or the art center. The Council touts transparency but does not practice it. This is our money, WE should decide how it is spent. Where is the public meeting? The public input? Shame on the Mayor and shame on the Council.
ReplyDeleteI am glad the school district got the money. The Redevelopment Agency was "robbing" the school district (via the state) for years by siphoning off "tax increment" money for even more redevelopment. That's why Jerry Brown killed the redevelopment program at the state level - it had gone from fixing urban blight, to subsidizing development, all at the eventual expense of the schools.
ReplyDeleteNOW what the money should be spent on, is a bone of contention in my book. I think Anna Yates should stay right where it is, not combined with Emery Secondary. Using a good school to lift up a bad school (per recent state investigation, not my personal opinion) doesn't work. The bad school will drag down the good school.
Is everyone actually IN OFFICE afraid to speak out?