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Friday, December 7, 2012

NPR Warns Emeryville Against Ultra High Interest 'CAB' School Bonds

Emery To Decide Monday Whether To Issue Its Own CAB
National Public Radio reports today on the looming danger of Capital Appreciation Bonds (CABs) that recently have been used by cash strapped California school districts to fund expensive building projects.  After a glut of school districts up and down the State leveraged their children's future over the last couple of years with this kind of usurious borrowing, NPR chronicles the multi-generational school bond debt plaguing the districts that have turned to CAB financing.  
As other school districts across the State reel from the deferred principle CAB borrowing, Emery is on the cusp of approving just such a bond in order to move the elementary school over to the new high school site at the Center of Community Life on San Pablo Avenue.  
School Board members will decide Monday whether Emery is to join these other school districts with a CAB loan of its own.

Here's the text of the NPR story aired today:

School District Owes $1 Billion On $100 Million Loan

More than 200 school districts across California are taking a second look at the high price of the debt they've taken on using risky financial arrangements. Collectively, the districts have borrowed billions in loans that defer payments for years — leaving many districts owing far more than they borrowed.
In 2010, officials at the West Contra Costa School District, just east of San Francisco, were in a bind. The district needed $2.5 million to help secure a federally subsidized $25 million loan to build a badly needed elementary school.
Charles Ramsey, president of the school board, says he needed that $2.5 million upfront, but the district didn't have it.
Why would you leave $25 million on the table? You would never leave $25 million on the table.
"We'd be foolish not to take advantage of getting $25 million" when the district had to spend just $2.5 million to get it, Ramsey says. "The only way we could do it was with a [capital appreciation bond]."
Those bonds, known as CABs, are unlike typical bonds, where a school district is required to make immediate and regular payments. Instead, CABs allow districts to defer payments well into the future — by which time lots of interest has accrued.
In the West Contra Costa Schools' case, that $2.5 million bond will cost the district a whopping $34 million to repay.
'The School District Equivalent Of A Payday Loan'
Ramsey says it was a good deal, because his district is getting a brand-new $25 million school. "You'd take that any day," he says. "Why would you leave $25 million on the table? You would never leave $25 million on the table."
But that doesn't make the arrangement a good deal, says California State Treasurer Bill Lockyer. "It's the school district equivalent of a payday loan or a balloon payment that you might obligate yourself for," Lockyer says. "So you don't pay for, maybe, 20 years — and suddenly you have a spike in interest rates that's extraordinary."
It's so irresponsible, that if I were on a school board — which I was, 40 years ago — I would get rid of that superintendent.
Lockyer is poring through a database collected by the Los Angeles Times of school districts that have recently used capital appreciation bonds. In total, districts have borrowed about $3 billion to finance new school construction, maintenance and educational materials. But the actual payback on those loans will exceed $16 billion.
Some of the bonds can be refinanced, but most cannot, Lockyer says.
Perhaps the best example of the CAB issue is suburban San Diego's Poway Unified School District, which borrowed a little more than $100 million. But "debt service will be almost $1 billion," Lockyer says. "So, over nine times amount of the borrowing. There are worse ones, but that's pretty bad."
A Statewide Problem
The superintendent of the Poway School District, John Collins, wasn't available for comment. But he recently defended his district's use of capital appreciation bonds in an interview with San Diego's KPBS Investigative Newsource.
"Poway has done nothing different than every other district in the state of California," Collins told the program.
And he's right. In some cases, districts are on the hook to pay back anywhere between 10 and even 20 times the amount they borrowed.
But Lockyer says it distresses him to hear school officials defend these bonds.
"It's so irresponsible, that if I were on a school board — which I was, 40 years ago — I would get rid of that superintendent," Lockyer says.
Back in the '90s, the state of Michigan banned capital appreciation bonds altogether. But Lockyer says California needn't go that far. He supports a series of reforms such as capping the payback of debt to four times the amount borrowed. Otherwise, says Lockyer, these bonds will be paid well into the future, by the children of today's students.

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