CAB Controversy: Emery School Board Answers

Emery School Board Moves to Mollify Critics

Facing a withering media onslaught railing against California school districts use of Capital Appreciation Bond (CAB) financing including a State of California moratorium against this type of bond, Emery Unified School District having recently issued a CAB of its own, has released a letter to Emeryville citizens.  The letter comes two weeks after the State handed down the moratorium.

Here is the letter from the Emery Unified School District: 

Jan. 31, 2013

Dear Emeryville Citizens:

Today, the Emery Unified School District and the community achieved a financial milestone in pursuit of our commitment to provide EUSD students a rigorous education in a welcoming, safe school environment that supports student learning. The District successfully obtained $17.5 million through a negotiated general obligation bond sale as authorized by Emeryville voters with the passage of Measure J in the fall of 2010. This money will be used to provide EUSD’s portion of the design and construction costs for the Emeryville Center for Community Life (ECCL). http://www.emeryusd.k12.ca.us

Specifically the funds will be used to design and construct a state-of-the-art, multi- use campus and city services offering K-12 education, continual learning, recreational, health and social services for all Emeryville citizens. The Districts priorities for the funds include:

• Build a seismically safe school facility; 

• Provide a quality and equitable learning environment; 

• Improve energy-efficiency and lower utility costs, putting more money into the classroom;

• Bring classroom technology up to date; 

• Provide facilities for youth after-school recreational and learning programs; 

• Update school science labs; 

• Establish a job-training center for students and the community.

The bonds issued were primarily capital appreciation bonds and the timing of the sale was carefully anticipated by our financial advisors to achieve the best possible interest rates that a school district of our size and history could achieve. The total debt principal and service costs will result in reasonable costs and are well within the parameters carefully set by the EUSD Board.

The District gave special consideration to recent attention surrounding the use of capital appreciation bonds by school districts before it agreed to the bond sale. With the firm belief that capital appreciation bonds are a useful financial tool for school districts, the EUSD Board and its financial advisors set rigorous, yet measured and prudent guidelines keeping in mind the interests of Emeryville taxpayers and citizens.

We are confident that the capital appreciation bonds we sold are in close conformity with the reforms and guidelines for issuance currently being discussed at the state capital. We are also confident that capital appreciation bonds provide a useful financial tool to fund school construction and modernization during a time when there are limited financial alternatives. The state has not issued school construction bonds in many years, leaving financing entirely up to districts to secure. Please join with us in recognizing this milestone in meeting our ongoing objectives of improving the quality of education and the quality of life in Emeryville.

Our special appreciation to the Finance Team, to EUSD Trustees, Board President Melodi Dice, John Affeldt, Joy Kent, Miguel Dwin, Vice President Joshua Simon, and to the voters of Emeryville for their consistent, overwhelming support of Measure J today and since its passage in 2010.

We have included a more in-depth Q and A [see below] should you have any questions.

Sincerely,

Melodi Dice, President EUSD Board of Education 

Dr. Debbra Lindo, Superintendent, EUSD

“We are gratified by the completion of this critical transaction which brings us closer to the much needed funding to rebuild of our schools,” said EUSD Superintendent Dr. Debbra Lindo. 

“We are grateful to the community for their support. This is one step closer to providing all of our students with a quality education in an energy efficient and equitable learning environment” said Board President Melodi Dice.

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Q&A EUSD Bond Sale January 31, 2013

Q. What are the features of the Series D Bond?

A. The payback ratio achieved is less than 4.0; a standard 10-year call back feature was obtained, and the maturity date is in 32 years and 6 months. 
• Overall tax rates required to pay debt service are projected to remain within the statutory $60 per $100,000 of current assessed value.

• When all the Measure J bonds are combined, including the newly issued Series D, the overall payback ratio on the entire ECCL project debt is a very reasonable 2.29 times the amount borrowed. This reasonable debt burden is due to the fact that the Series D bonds were obtained at some of the most favorable interest rates on CABs in years and to the fact that the district was able to secure very low interest rates on Series A through C bonds.

Q. How will the bond funds be used?

A. Specifically, the funds will be used to design and construct a state-of-the-art, multi-use campus and city center offering K-12 education, continual learning, recreational, health and social services for all Emeryville citizens. The Districts priorities for the funds include: 
• Build seismically safe schools; 
• Improve energy-efficiency and lower utility costs, putting more money into the classroom; 
• Bring classroom technology up to date; 
• Provide facilities for youth after- school recreational and learning programs; 
• Update school science labs; 
• Establish a job-training center for students and the community

Q. Don’t bonds just create more debt for the next generation?

A. Not necessarily. It’s the same principle as a home mortgage. Bonds enable much needed projects to launch when they are needed and allow for payment over a period of time. These bonds also have an “optional redemption” feature which means they can be paid off early to reduce debt and financing costs. For the EUSD, bond financing will literally enable this generation to prepare for the next generation.

Q. Why has EUSD issued a capital appreciation bond when the media and politicians are raising serious concerns about them? 
A. The Capital Appreciation Bond authorized by the Emery School Board is a measured and prudent bond, in close conformity with reform principles being discussed in Sacramento. The bond is essential to meeting current district needs. No one is talking about eliminating Capital Appreciation Bonds entirely as a financial instrument for school districts. Capital Appreciation Bonds will continue to play a role in school construction. In the meantime, it is important to realize that not all CABs are created equal. The EUSD Board and its financial advisors set rigorous, yet measured and prudent guidelines keeping in mind the interests of Emeryville taxpayers and citizens. The total debt principal and service costs will result in reasonable costs and are well within guidelines carefully set by the EUSD Board.

Q. Why Are Capital Appreciation Bonds controversial?

A. Because Capital Appreciation Bonds operate by deferring the bulk of principal and interest payments to the latter years of the life of the bond. Doing so increases the ultimate amount needed to pay off the bond by taxpayers. A typical 30-year home mortgage might result in a homeowner paying twice the amount of principal borrowed in total principal and interest payments over the life of the mortgage. Some Capital Appreciation Bonds have payback ratios of 10, 15, even 23 times the amount borrowed.

Q. Why do school districts issue Capital Appreciation Bonds?

A. The state has not issued school construction bonds in many years, leaving financing entirely up to districts to secure. Over 200 of California’s 1,000 odd districts have issued Capital Appreciation Bonds in the last few years according to the Los Angeles Times. Without this mechanism, school construction and modernization in most or all of these districts would have ground to a halt. District bonding capacity is limited by law to $60 of bond debt per $100,000 of assessed valuation. Once the Great Recession hit in 2008 and property values plummeted, so too did the ability of many districts to issue bonds. Here in Emeryville, our $60 per $100,000 of bonding capacity is currently largely dedicated to paying off the bonds from Series A, B, and C under Measure J for approximately the next 20 years.

Q. What prudent parameters did the EUSD Board place on the bond?

A. Overall debt burden to Emeryville taxpayers from all Measure J bonds must result in projected tax rates that remain at all times during the life of the bond at or below $60 per $100,000 of assessed valuation. 
• Total payback ratio on Series D must not exceed 4 times the amount borrowed.

• The bond must contain an “optional redemption” or “call-back” feature—the ability for the district to call it in and refinance it before its scheduled payoff date (whereas school bonds without this feature would have to be paid off over periods as long as 40 years), a call back feature allows districts to pre- pay or refinance the CAB after 10 years.

• Rather than the maximum allowed 40-year maturity timeframe, the Series D bond must be paid off in no more than 32 years and 8 months.

Q. How do the Board’s parameters compare to CAB reforms being proposed by state politicians?

A. The Board’s conditions are generally consistent with those being discussed in Sacramento when CAB reforms have been proposed last year and this. The 4.0 payback ratio is the primary reform feature being proposed in bills that have been introduced and is the payback ratio generally considered reasonable by county assessors across the state. Also, the same bills have proposed instituting a requirement that CABs should have a call back feature, generally around ten years, as was procured with the Series D bond.

Thus far, legislative proposals have suggested that the maturity period for CABs be limited to 25 years. The Board (and many others involved in school bond financing in California) consider the 25-year maturity limitation the least important and least workable feature being discussed in the reform proposals—and also the most likely to be modified once negotiations begin with stakeholders. For the Series D bond, 25 years of maturity would not have allowed the district to generate sufficient funds to cover the ECCL project. Thus, the Board chose to limit the maturity date for Series D to significantly below the common 40-year period, but did not feel it necessary to adhere to the still in flux and somewhat arbitrary 25-year period where doing so interfered with the best interests of the district’s students. For the Board, the most important parameter is the payback ratio. A 4.0 limit for taxpayers is a 4.0 limit whether it takes 25 or 35 or some other number of years to pay off the bond. Second in importance is the call-back feature. We insisted there be a call back feature to give the district the potential to refinance in ten years if property values have recovered and interest rates so warrant.