Bill Lockyer Calls Emery School Bond "Terrible Deal"

Emery Bond Likened To A "Pay Day Loan"

The Wall Street Journal weighs in on the California school districts use of Capital Appreciation Bonds (CABs) to finance their school improvement projects.  Here at Emery, the School Board is considering its own CAB.  
Here's the Wall Street Journal story:

California Targets School Borrowing

• November 29, 2012, 7:15 p.m. ET
• By JIM CARLTON And MIKE CHERNEY

SAN FRANCISCO—California Treasurer Bill Lockyer Thursday called for overhauls in school districts' sales of so-called capital-appreciation bonds, saying too many schools are locking themselves into what he described as "terrible deals" with onerous terms such as debt payments of more than 10 times the principal.

Mr. Lockyer, a Democrat, said he has been meeting with legislators, underwriters and bond attorneys in recent weeks. His office has compiled spreadsheets showing that about 200 K-12 schools and community-college districts in California issued billions of dollars of this type of bond over the past five years.

Many districts turned to capital-appreciation bonds, or CABs, after 2009, when the housing bust and recession dried up property-tax receipts the schools depend on.

"It's the equivalent of payday loans," Mr. Lockyer said, adding that he plans to push for overhauls when the legislature convenes next week. "They go to voters and say they can build all these facilities with bonds. But as a consequence of that borrowing, they wind up with a huge balloon payment in the later years of borrowing."

The Los Angeles Times on Thursday reported that California schools have billions of dollars in CAB debt.

CABs, which are tapped for everything from school construction to maintenance and education materials, defer principal and interest payments until they mature, ultimately costing districts more than if they made regular interest payments on ordinary bonds.

Mr. Lockyer's data show the Patterson Joint Unified School District in Patterson, Calif., a city of 21,000 that is 90 miles southeast of San Francisco, in 2009 borrowed $9.6 million in CABs that are repayable in 2049 for $96.6 million. District officials declined to comment.

CABs aren't new, although they have become popular for school districts in fast-growing areas such as Texas and Florida, as well as California, according to Fitch Ratings. In August, Fitch said it is concerned about relying on this type of debt, which has come under more scrutiny recently after the recession and financial crisis.

"People are more sensitive to the perceived abuses of Wall Street," said Matt Fabian, managing director at research advisory firm Municipal Market Advisors who has been in the business for 20 years. "I have never heard any stories about them before. It is interesting to have them come under attack for the first time," he said.

Michael Johnson, managing partner at Gurtin Fixed Income Management, said his firm has no reservations about buying CABs. Not all the bonds mature in the same year, so school districts often structure the deal so their debt payments don't vary greatly year to year, he said, and "generally, the credit quality of California schools is pretty stable."

Tom Dresslar, a spokesman for Mr. Lockyer, said the CABs came into vogue among California school districts after a measure in 2000 imposed limits on property-tax rates the schools could levy to pay off bonds.

After the state's recession eroded property values and taxes, Mr. Dresslar said, many districts began turning to CABs to meet capital needs. Unlike ordinary bonds, CABs didn't require immediate and regular interest payments. Instead, some districts could go years without repaying any interest or principal on CABs. Ultimately, Mr. Dresslar said, the schools hope that property taxes will rebound enough by the time the payments are due to offset the increased debt load.

Supporters of the bonds say they provide essential financing. At the Poway Unified School District near San Diego, Jennifer Zaheer, president of the local Parent Teacher Association, said the state wasn't providing funds for desperately needed duct work, plumbing and rewiring a few years ago. The district issued $105 million in CABs in 2011 and Ms. Zaheer says her children, who are 15 years old, 12 years old and 5 months, are benefiting from the improvements. She said the nearly $1 billion price tag on those bonds is a "concern," but she doesn't regret voting for the measures.

Mr. Lockyer said he would ask legislators for overhauls including a cap on indebtedness of about four times principal. "That would still be a little high because the rule of thumb when we do borrowing is we expect debt to be two to three times the principal borrowed," he said. Mr. Lockyer said he might also seek shorter time limits on repayment of the bonds. A spokesman for legislative leaders said they plan to take up the issue.

Pending any new legislation, Mr. Lockyer said he has met privately with underwriters to seek voluntary restrictions on CABs, including a possible moratorium on their issuance.

Los Angeles County Treasurer and Tax Collector Mark J. Saladino has been working with Mr. Lockyer and the California Association of County Treasurers and Tax Collectors to draft a proposal to reform school-bond issuance laws. "The bill is going to come due eventually and it's going to be a whopper," he said.

—Erica E. Phillips contributed to this article.