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Wednesday, August 8, 2012

Emery Unified's Dangerous Bond Strategy

School District Considering 
Paying $107 Million
To Borrow $20 Million 

Bond Interest To Principle Ratio Is A Whopping 5:1

Emery School District has released a bond financing document that details how punishingly expensive money for the District has become in the wake of Emeryville's economic slide.  The document, an algorithm depicting debt service requirements for the sale of the last school bond meant to fund the building of the proposed Kindergarten through 12th grade school on San Pablo Avenue, is being used to calculate how much money it's going to cost to borrow the last $20 million the District wants to spend.

It's going to cost a lot.

The District has issued three Measure J school construction bonds so far (called Series A, B, and C) for a total of $48.5 million, an amount the District now says is sufficient to complete the Kindergarten through 12th grade school, albeit a less then desirable one than they envision.  It should be noted that earlier before the economic slide, much higher minimum amounts were reported by the School Board as necessary.  However, at the last School Board meeting, officials stated at least $20 million more would be needed to add to the $48.5 million already borrowed to "build for excellence" as School Board member Josh Simon puts it.  
While over 70 concerned parents, guardians and residents have recently urged the District to work with the money we have by keeping the elementary students at Anna Yates Elementary School and building a less-costly middle and high school on the San Pablo Ave site, the District has instead indicated its intention to forge ahead with its more costly "co-location" vision. District officials admit the $48.5 million already in the bank would be plenty for a new high school without closing the existing elementary school.   
So, how might the District fill this $20 million financial gap?

Dangerous Strategy
The answer is a dangerous strategy known as a Capital Appreciation Bond (CAB) or a zero coupon bond, which is a type of bond that accrues interest until maturity at which time both interest and principal become due.  As the schedule shows (viewable here:, the District is considering issuing a Series D bond that would provide the District with $20 million now, in exchange for payments that don't begin until 2032 and that would end in 2049.
Like a mortgage with a balloon payment, the schedule also shows just how costly this strategy can be, as it indicates that Emeryville tax payers would end up paying over $107 million for that $20 million loan.

"This type of financing is not preferred 
but if that's what you need to do to 
bring the money sooner, it's done"

Emeryville City Manager Pat O'Keeffe

Last year the Los Angeles County Treasurer and Tax Collector, Mark Saladino, wrote a letter to school finance professionals in which he explained that CABs result in a significantly higher debt burden and explained that his office would not support transactions relying on such bond structures.

But unlike credit default swaps, CABs are not some new financial wizardry that confuse even seasoned financial professionals.  On the contrary, their risky and costly nature has been long-recognized and in 1994 the State of Michigan even banned the use of CABs for school construction financing.

These are the lengths that this School Board is willing to go to in an attempt to maintain their vision.  They would risk bankrupting future Emeryville residents with soaring property tax bills for a K-12 school site, which by 2049 when the bond is finally paid off, may itself be in need of replacement, as it will have been in use for nearly 35 years.

The schedule also shows the assumptions one has to make to believe that the District will be able to keep its promise to voters that their property tax bills for Measure J would not exceed $60 per $100,000 of assessed valuation. (See the far right column of the schedule.)  The only way the District can keep that promise is if Emeryville's assessed valuation grows at a steady 4% annually (second column from left in the series D document).
Some are saying given the 2011 decrease in assessed valuation of over 6%, and with the Redevelopment Agency gone, this 4% claim seems highly unlikely. Thus, the reality is that even if the District stops now and issues no more school construction bonds, the Emeryville taxpayers are likely to see bills in excess of $60/$100k because it's unlikely that assessed valuation will continually increase by 4% for roughly the next 20 years.  

In 2010, Oakland Tribune reporter Daniel Borenstein warned Emeryville residents about Measure J, the school bond financing scheme they were about to vote on, then pegged at $95 million.  He made a wild prediction: Emeryville taxpayers would have to pay back the bonds with almost three times that amount in interest.  It was bad financing based on overly rosy predictions of Emeryville's assessed valuation growth, he said.  City and School District officials pounced: Mr Borenstein was a lout they said, he didn't know what he was talking about and moreover he is from Oakland, what can he know about Emeryville?  
Some may now ask, what indeed.


  1. Is there any way we can stop this? It seems such an incredible waste of money.

    1. The School Board has said they are moving forward with shutting down the existing Elementary school, Anna Yates, end of discussion. Even a 'save Anna Yates' letter signed by more than 70 parents and citizens had no effect on the Board's hardened position. The Board has not yet signed on to this bond for the final $20 million but it would appear that they have every intention of doing so.
      At this point I think the only palliative measure available to citizens can come from the ballot box. Probably too late to save us from having to pay this $107 million though.

    2. It would be like stopping a freight train with tissue paper.
      Good luck, once the city and school board get a massively stupid idea in their heads, they wont stop until they've screwed every last tax payer.

      While the something does need to be done about getting the high school a new building, this isn't it. This is one of the biggest boondoggles Emeryville has ever embarked on, and residents will be feeling the pain for DECADES.

  2. I thought the City managed to save the ECCL funding. $22.5 million?

    1. You are referring to the $22 million from the former Redevelopment Agency. That money, if it can be acquired by permission from the State, can only be used for the community portion of the Center of Community Life. It can only be used to build the community rec center and other community facilities on site. By law, it may not be used for school building.

  3. Your pie chart is graphically misleading. The principal and the payback amount do not make a whole. That double counts the principal, since it is also included in the payback amount. The principal and the interest together make the whole payback amount. That is what you mean to depict.

    1. The blue part is the payback amount...the total of what we have to pay. The orange is the amount of the principle...that part we get to spend on facilities. There is nothing misleading here. The intent is to show how skewed this whole thing is toward interest. The principle and the interest together make a whole; the whole amount taxpayers must pay, in this case $107 million. The way you're proposing it be depicted is simply another way to do it, not wrong, just another way. Both ways are two side of the same coin so to speak.


    2. Maybe the graph doesn't make the most natural "whole" here, but everything's labeled, so I don't feel misled by this article. What I feel misled by is this School District. Several of our School Board members have experience with financial matters, but I suppose it's at least possible that they did not understand this. In that case, we just have a problem of incompetence, not deception. However, I cannot believe that the District Staff or even the City Staff did not understand this aspect of the finances. Those individuals deal with bonds like this all the time as part of their jobs. For them to not make this information crystal clear to both our elected officials and to the public is the real disgrace. The list of people who should be fired now goes beyond just the Superintendent who cannot work constructively with the teachers: it includes everyone who knew about this insane financing plan and didn't raise numerous red flags.

    3. No, that is not correct. A pie chart is used to depict portions of a whole. In this case, the payback amount is the whole and the orange portion should represent the principal and the blue portion should represent the INTEREST. The whole circle makes the payback amount. In the chart you are showing, the principal is part of both pieces of the pie. It is being double counted and the whole circle represents the payback amount plus the principal again. This is not a relevant number. That's like saying the cost of your mortgage is twice the principal plus interest. That is incorrect. If you are trying to show the relationship between the payback amount and the principal, you either want to use a pie chart in the way I have described or use a bar graph or two correspondingly scaled circles in the way that you are describing, but a pie chart in the way that you have done is incorrect and deceitful. That's nothing new for this blog, however. If you could lose the stubbornness for 5 minutes and think about what I'm saying, you'd realize I am right. It's not that complicated.

    4. You are correct; it's not that complicated. I want to show how much the taxpayers will have to pay to close the elementary school. Against that, I want to show how much of that number is principle. This pie chart does that. What you're advocating is to show a different relationship. Not wrong, just different. I don't wish to show the relationship you want me to.
      The pie chart is very clearly labeled so there is no deception, even though you may want to say there is. A pie chart is meant to convey information and there is no law saying how it is to be used,.
      This Series D zero coupon bond financing is extremely expensive and I understand you wish to not draw attention to that fact. This is an uncomfortable subject for you and I sympathize but I'm not interested in making taxpayers think it's not as bad as it is. I want them to know how bad it really is

  4. Jesus, Brian, The Tattler is phenomenal and...a lot of work. I admire your tenacity no less than your fine appreciation of The Hypocritical. SB