Emery's Series D Bonds Slammed by Grand Jury Reports

Grand Jury Calls School Financing 
"Reckless" & "Ticking Time Bomb"

The Voice of San Diego, who broke the story the of California school districts issuing Capital Appreciation Bonds (CAB) for their school construction projects, is now reporting that numerous civil grand juries are issuing reports highly critical of this abusive method of buying now and paying much much later.   Our own Emery Unified School District recently issued such a bond as its "Series D" in which Emeryville tax payers will have to pay back nearly $70 million over 32 years in order to receive $17 million to put towards the construction of a new grammar school building at the Emeryville Center of Community Life (ECCL).
Emery is using its Series D CAB to finance the closing of popular Anna Yates Elementary School on 41st Street in order to move the children over to the Center of 'Community' Life site on San Pablo Avenue.  A Kindergarten through 6th grade building will be built on the site at a cost of approximately $17 million ($70 million including financing) School District officials have said.
The whole schools portion of the ECCL project is slated to cost in excess of $150 million, not including the City's $21 million portion and interest on that.

Emeryville's Anna Yates Elementary School
Photo shows an addition completed as part of a
 $9 million remodel a few years ago.  This will be 
replaced with a new $70 million building at the 
Center of 'Community' Life site.

As the Voice of San Diego reports, the San Diego County Grand Jury, the Santa Clara County Civil Grand Jury, and now the San Mateo Grand Jury have all issued reports that slam these balloon-payment bonds. San Mateo's report called Capital Appreciation Bonds, "reckless" and a "ticking time bomb." A spokesman for Bill Lockyer reiterated his position that using Capital Appreciation Bonds (CABs) "has been a big mistake that has hurt taxpayers." The recent San Mateo Grand Jury report was particularly harsh, calling CABs, "Too-Good-to-be-True Bonds" noting that the "taxpayers who approve these loans are presenting the tab to their children and grandchildren." Legislation to curtail CAB borrowing is currently under consideration in Sacramento.

The Voice of San Diego highlighted the story of Southern California's reckless Poway Unified School District bonds, in which that district borrowed $105 million and will have to pay back $1 billion because of the use of a Capital Appreciation Bond (CAB) that delays payments for years while interest accrues, making it the poster child for reckless school district financing.


Tattler readers will recall a recent debate via letters on the pages of the Tattler in which parent and former Bond Oversight Committee Chairman, Brian Carver, called Emery's dive into CAB financing through its Series D bonds "unbelievably bad" and CABs in general "absolutely terrible deals" while School Board Trustee, John Affeldt, defended the Series D bond as "prudent and measured."

It appears that counties across California are weighing in on the practice as well, and their conclusions are highly critical of Emery's choice.

They're both lawyers:  They can't both be right.

Who's telling us the truth?

Consider the source;

the insider or the oversight director.

Former Bond Oversight Chairman 
Brian Carver
 "This 'Series D' Capital Appreciation Bond
is a terrible deal for Emeryville taxpayers".

School Board Member 
John Affeldt
"This 'Series D' Capital Appreciation Bond
is a good deal for Emeryville Taxpayers."

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.

--------------------------------------------------------------------------------------------

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.

Emery Ignores State Issued Moratorium on CABs

Emery Defies State Moratorium

Below is a letter of moratorium issued from the California Department of Education.  The State is urging local school districts to not issue Capital Appreciation Bonds (CABS) to fund school facilities construction.  Emery Unified School District has just recently issued a CAB for the school rebuild associated with the Center of Community Life.  The District was aware of the looming moratorium and new law cracking down on the multi-generational CAB loans but beat the deadline and issued their CAB just under the wire.

  

Here is the State issued moratorium:

State Schools Chief Tom Torlakson, State Treasurer Bill Lockyer Caution School Districts Against Issuance of Capital Appreciation Bonds

January 17, 2013

SACRAMENTO—State Superintendent of Public Instruction Tom Torlakson 

and State Treasurer Bill Lockyer today issued the following letter to local 

educational agencies regarding capital appreciation bonds:

Capital Appreciation Bonds

Dear County and District Superintendents:

We understand many districts face a critical need to build or modernize 

facilities for their children, and we recognize that falling property tax 

assessments, revenue losses, and statutory debt service limits have 

all combined to reduce districts' debt financing options. As a result, 

some districts have turned to capital appreciation bonds (CABs), which 

have forced taxpayers to pay more than 10 times the principal to retire 

the bonds.

Thus, we urge you and your Board of Education not to issue CABs until 

the Legislature and the Governor have completed their consideration of 

this year's proposals to reform the CAB issuance process by improving 

transparency and protecting taxpayers against exorbitant debt service 

payments. Through this process, we welcome and encourage your input 

to ensure that the needs of districts are still being met.

In too many cases, CAB deals have forced taxpayers to pay more than 10 

times the principal to retire the bonds. Also, the transactions have been 

structured with 40-year terms that delay interest and principal payments 

for decades, resulting in huge balloon payments and burdens on future 

taxpayers that cannot be justified. Too frequently, board members and the 

public have not been fully informed about the costs and risks associated 

with CABs. In some cases, board members have reported they were not 

even aware they approved the sale of CABs.

It is important to note that CABs with terms exceeding 25 years place the 

repayment obligation on future taxpayers who likely will not benefit from 

the capital improvements financed by the CABs. At the same time, the 

CABs payments will reduce those taxpayers' capacity to finance 

construction and modernization projects their own children will need.

We are convinced that remedial legislation is needed to prevent abuses 

and ensure that both school board members and the public obtain timely, 

accurate, complete, and clear information about the costs of CABs, and 

alternatives, before CABs are issued. The Governor has told us he wants 

reforms. Key lawmakers and legislative leaders have made clear they 

agree statutory changes are needed.

For all these reasons, we believe your district and every other district in 

the state should impose a moratorium on issuing CABs. The moratorium 

should remain in effect until the Governor and Legislature decide on 

reforms in the current legislative session. If reforms are enacted, 

subsequent CABs deals can be conducted in compliance with the new 

statutory requirements.

Thank you for your consideration. Should you have any questions or 

concerns, please contact Jeannie Oropeza, Deputy Superintendent, 

California Department of Education, by email at joropeza@cde.ca.gov.

Sincerely,

Tom Torlakson

State Superintendent of Public Instruction

California Department of Education

Bill Lockyer

State Treasurer 

California State Treasurer's Office