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Friday, November 2, 2012

School Districts Pledge: No CAB Financing

Emery Style School Bonds Seen As Toxic 

The Emery Unified School District may find itself on the wrong side of history.  
School Districts across California  are wising up to a particularly bad kind of bond financing called the Capital Appreciation Bond, or CAB that saddles taxpayers with crippling debt for generations.  It's a type of financing irresponsible School Districts with champagne dreams but only Budweiser budgets have come up with to construct new facilities.  
Here at Emery, the School Board wants to finance the closing of the newly remodeled elementary school and move it over to the site of the Center of Community Life, where they are building a new high school.  The elementary school move will cost $20 million, before interest.  
The problem is Emery doesn't have enough bond raising capacity to build the new high school and move the elementary school over to the site.  Emery has proposed using CAB financing for the move, putting taxpayers on the hook for $107 million to borrow the $20 million.  Additionally, taxpayers will have to continue to pay for up to 40 years for the last $20 million. 
The soon-to-be-abandoned elementary school, Anna Yates, was remodeled in 2008 to the tune of $9 million.  The City of Emeryville last week forgave $700,000 of that 2008 loan.
A populist prairie fire is starting at the prospects of arrogant school districts using CAB financing as citizens are getting wise to the pitfalls of CABs.  Legislation is being proposed in Sacramento to not allow school districts to use this ruinous form of bond financing and now starting in the south land, districts are pledging not to use CABs for their capital improvements.  Emery, is still on record as possibly supporting CAB financing as it considers funding for the Anna Yates move it should be noted.
From the Voice Of San Diego: 

Local School Districts Pledge Not to Use Bonds Like Poway's
Posted: Wednesday, October 31, 2012 12:16 pm | Updated: 3:56 pm, Wed Oct 31, 2012.

Six districts in San Diego County will ask voters to approve new bond measures. Between them, those districts could raise as much as $3.5 billion by selling bonds, which would be spent updating and modernizing local schools from Chula Vista to Ramona.
School bonds have been getting a lot of bad press of late. A Voice of San Diego story in Augustoutlined a bond in Poway where taxpayers will pay back almost $1 billion on a $126 million debt.
The type of loan used in that deal, called a capital appreciation bond, has since become politically toxic. Legislation is being crafted to ban the use of bonds like Poway's, and the state treasurer has vowed not to do business with any companies that work on similar deals.
That controversy has led local districts with pending bond measures to rush to distance themselves from capital appreciation bonds. Spurred on by the San Diego County Taxpayers Association, five of the six districts in the county floating new bond measures recently passed resolutions saying they won't use capital appreciation bonds like Poway's. The remaining district plans to pass a similar resolution in November.
"What they are essentially doing is adopting a guiding principle moving forward about how the board would operate,” said Chris Cate, vice president of the Taxpayers Association.
But while the six districts seeking new bond money might have taken a step toward banning themselves from issuing bonds like Poway's, taxpayer advocates caution that their actions don't necessarily put a stop to the practice.
The resolutions have no legal weight, and in most cases, the districts have left the door open to using capital appreciation bonds like Poway's in some limited instances.
Absent legislation outlawing the loans, the only way to truly ensure that districts stick by their word is for residents to remain vigilant, said Michael Turnipseed, executive director of the Kern County Taxpayers Association in central California, which has lobbied the state Legislature to tighten laws on school district borrowing.
"This is all good stuff, everybody's waking up," Turnipseed said. "But they're going to stick it to you one way or another if you're not watching."
Why Districts Don't Want to be Poway
Poway Unified's 2011 bond deal embarrassed a district that for decades was renowned as one of the best-run in the state.
Voters in 2008 gave the district a green light to borrow more money to finish ongoing construction projects. In getting that approval, the district promised voters they wouldn't raise taxes.
As the state's real estate market collapsed, that promise came back to bite Poway.
Without raising taxes, the district didn’t have enough money trickling in to borrow money in the conventional way, by making payments on its loan each year. So, instead, it took out a more exotic loan — a capital appreciation bond that won't be paid back for 40 years and will eventually cost taxpayers almost $1 billion to repay.
As Poway's bond became national news this summer, local school districts that were planning to float new bond measures in November's general election faced a significant public relations problem: how to convince a skeptical public that they weren't about to saddle their community with a loan like Poway's.
The San Diego County Taxpayers Association offered a suggestion.
Making a Pledge
Support from the Taxpayers Association on a new bond is a big deal for local school districts.
Especially in smaller, more conservative districts, a seal of approval from the association can be instrumental in getting a bond passed. And a refusal by the association to endorse the measure gives fuel to its opponents, said political consultant Tom Shepard.
"That support can be determinative for a bond measure's success," Shepard said.
In the wake of the Poway debacle, the association drew up a policy recommendation for local districts. It suggested that local school boards pass resolutions barring capital appreciation bonds except in instances where using the loans would be cheaper for the district than other forms of borrowing.
Over the next few weeks, three of the four districts whose bonds the association had endorsed approved resolutions along those lines. A fourth, Chula Vista Elementary School District, has pledged to pass a resolution in November.
And two other districts, San Diego Unified and Del Mar Union, neither of which had the association's endorsement, also took it upon themselves to pass resolutions. San Diego Unified's resolution pledges not to use capital appreciation bonds on the new bond in any instance, while Del Mar's leaves the door open for the loans, but only in certain limited circumstances.
“We wanted to reassure the public that that is not where we’re going as a board,” said Scott Wooden, president of the Del Mar Union School District board. “It’s not our intent to go through and issue debt that will be repaid generations from now.”
'A Positive Step'
The resolutions don't legally bar a school board from issuing capital appreciation bonds.
In theory, future school boards could quietly renege on their promise to voters, or could pass new resolutions trumping the ones passed in 2012.
But taxpayer advocates who have raised concerns about school bond financing say the resolutions are a step in the right direction.
"Clearly having the resolutions is better than not having them," said Glenn Byers, Los Angeles County assistant treasurer and tax collector, whose office published a white paper last year warning against long-term capital appreciation bonds. "If [the school boards] then try to change it, they have to face the political ramifications of going back on their word.
Ideally, districts would have codified their pledge not to use the exotic bonds in the actual ballot language that will be voted on in November, said Byers.
"If it was locked down in the ballot, you couldn't change that," he said.
The Taxpayers Association's Cate acknowledged that the resolutions are an imperfect patch, but pointed out that that the ballot language for most if not all of the propositions was decided before capital appreciation bonds became a hot-button issue.
Cate said the important thing now is for residents to remain informed about the bonds the districts are selling. Taxpayers need to stay alert and attend school board meetings to make sure school districts don't end up going down the same path as Poway, he said.
"We have the documentation that shows what they’re committing to, but we still have to hold them accountable," Cate said. "It takes an informed electorate to hold their feet over the fire."
Correction: An earlier version of this story identified Scott Wooden as the superintendent of Del Mar schools. He is the school board president. We regret the error.
Holly Pablo is an investigative intern at Voice of San Diego. You can reach her or 619.325.0525.
Disclosure: Voice of San Diego members and supporters may be mentioned or have a stake in the stories we cover. For a complete list of our contributors, click here.

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