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Friday, September 21, 2012

Sacramento Schools Nightmare Coming To Emeryville?

Sacramento School Bonds Reveal Emeryville's 
Near Future

The Sacramento Bee reveals the horrendous nature of the Capital Appreciation Bond (CAB), a popular new way for cash strapped school districts up and down the State to finance capital improvements to their schools.  CAB financing is what irresponsible school districts are using when they have champagne visions but don't have the borrowing capacity to fund them.  This type of financing is exactly what the Emery School Board is considering doing here.  
In order to close down the Anna Yates Elementary School and move the children over to the new high school site on San Pablo Avenue, a consolidation of the two schools called "co-location", the School Board is prepared to saddle Emeryville residents with an extra $107 million in debt to finance the $20 million they need to close the school via a CAB.  This extra debt will be added to the debt approved by Emeryville voters in 2010 that's already been taken on to rebuild the High School, some $48 million (plus interest).   
The proposed extra bond for the elementary school move, called the Series D bond, is the last in a series of four bonds that will push payments out to 2049, swamping the next generation of residents.  The School Board, in response to bad press about the Series D CAB financing recently rolled out a different bond proposal, technically not a CAB but will cost the same $107 million and take until 2053, four years longer to pay off.

Here is the Sacramento Bee story:

Some Sacramento-area school bonds have long-term, pricey payments

Published: Sunday, Sep. 16, 2012 - 12:00 am 
A 38-year loan with no payments for 26 years that will eventually cost $12 for every $1 borrowed.
This isn't a subprime mortgage sold during thehousing boom – it's a bond issued last year by a Sacramento-area community college district.
Across Sacramento and the state, school districts have issued a flurry of "capital appreciation" bonds to keep construction projects going even as property tax revenue falls. It's a borrow-now/pay-later approach that relies on today's students – and their children – for tomorrow's payments.
Or, as Robert Wassmer, a professor of public policy at Sacramento State, observes, it's like taking a 10-year car loan and not making payments for five years.
"The total cost of the car will be much higher due to higher interest payments," he said. "You will be making very high payments in years five to 10 on an asset whose productive life is near its end."
School districts have turned to these types of bonds for a range of projects, from new buildings to general upgrades, because they are wrestling with two constraints. One is the recent decline inproperty tax revenue; the other is the limits on tapping those funds.
Those two factors have rendered the more common approaches to raising the money – general obligation bonds – insufficient to meet the construction needs.
Most voter-approved general obligation bonds require immediate collection of revenue fromproperty taxes. There are limits to how much a district can get from taxpayers in any given bond election. For elementary districts, that limit is $30 annually per $100,000 in assessed property value. For community colleges, it's $25 per $100,000.
Because property values have fallen, those spending limits mean districts can't get as much from a general obligation bond as they would have during the boom years. Capital appreciation bonds allow districts to delay payment until a time in the future when, presumably, property values would be higher. The risk is in the higher costs, incorrect projections and the possibility of default.
In short, some districts can't take any more from today's taxpayers, but future taxpayers are fair game.
This practice received national scrutiny after Poway Unified School District near San Diego sold about $100 million in bonds at a cost of almost $1 billion over 40 years.
Here, large school districts such as Folsom Cordova Unified and Sacramento City Unified have issued capital appreciation bonds within the past five years.
Three other districts in the area stand out. They each will pay off bonds over 38 to 40 years, well above the standard 25 years. And they will collectively pay almost $10 for every $1 in bond proceeds:
• The Yuba Community College District, which operates schools in Woodland and Marysville, will pay $59 million to retire $4.6 million in bonds that trustees approved last year. The district won't make bond payments until 2038 and won't finish until 2050.
• The Dry Creek Joint Elementary School District in Roseville will pay $66 million toward $8.2 million in bonds from 2009. It won't start making payments until 2033 and won't finish until 2048.
• The River Delta Unified School District south of Sacramento will pay $19.5 million to retire $3.3 million in bonds from 2008. It won't start making payments until 2032 and won't finish until 2048.
Jim Estes, a finance professor at California State University, San Bernardino, called the interest payments the three districts will make "staggering." He said the bonds may ultimately threaten the districts' financial stability, though ratings agencies consider the risk of default low.
"There will be nobody around that voted for this in 30 or 40 years," Estes said. "There will be nobody to hold accountable. The bonds have a longer term than the facilities they want to build."
Some board members at the districts issuing the bonds either said they couldn't recall approving them or that they were misled about terms.
Other district leaders noted the bonds are part of larger portfolios. Some expressed hope that the bonds could be refinanced as the economy improves. Some hoped inflation would lessen the pain. A few said rising property values would make retiring them easy.
Despite their cost, the bonds, they said, let voter-approved projects continue.
"We had promises made to our local communities," said Kuldeep Kaur, chief business officer for the Yuba Community College District. "Our assessed property values would not have allowed us to pay."

The good and the bad

The Yuba district, which serves a mostly rural area with high poverty, offers a good example of the advantages and pitfalls offered by capital appreciation bonds.
Many of its buildings needed renovation, and the district couldn't serve all students who wanted to attend. So the district put a $190 million bond measure on the 2006 ballot, needing 55 percent approval. It hit 57 percent.
A year later, the district issued bonds for $95 million. Some were capital appreciation bonds, with the district promising to pay $3 toward interest for every $1 in principal.
Property values then fell fast, limiting the district's ability to borrow more.
Last year, the district issued another $30 million in bonds with traditional payments before approaching statutory limits. But it needed $4.6 million more to finish projects, including a new Sutter County campus.
So the district's eight-member board approved $4.6 million in capital appreciation bonds that put off payments for 26 years – at a cost of $12 per $1 borrowed. The payments will be $7 million in 2038, followed by annual payments of about roughly $17 million in 2048, 2049, 2050.
Two board members this week said district staff did not, at the time, fully explain the structure of the bonds to them. They called the bonds a raw deal.
One of the board members, Jim Kennedy, served as Yuba County's treasurer-tax collector for three decades, often administering complex bonds. The board never would have approved the bonds, he said, if college staff had given an honest account of the bond terms.
"These were done without the knowledge of the board of trustees," he said. "They were done at the last minute. There weren't a whole lot of specifics. It's frustrating."
Xavier Tafoya, a retired small-business manager who chaired the board at the time, said he is happy about buildings constructed with bond proceeds. But, referring to when the first bond payments come due: "I'll probably be dead by then. That's a hell of a note to leave your grandchildren. It's just insane."
Former Yuba College Chancellor Nicki Harrington, who retired last year, had a different recollection. She, along with the financial adviser hired by the district, said the board was clearly apprised of the cost of the bonds.
"There were pictures, documents, overheads – everything was laid out," she said. "We were all very transparent and very open."
As to the terms of the bonds, Harrington said, "People were pretty confident that by that time (when the bonds matured), we would be able to catch up financially."
Current Yuba College Chancellor Douglas Houston, declined to comment on the actions of his predecessors, but said the district is looking for a way to refinance the bonds.
It will be tough. The terms say the capital appreciation bonds "are not subject to redemption prior to maturity" between 2038 and 2050.
"I'm concerned about the burden that will be placed on our taxpayers," he said. "I'm looking for solutions."

Expensive decisions

At Dry Creek Joint Elementary, which operates schools in Roseville and Antelope, taxpayers will spend $66 million to retire $8.2 million in capital appreciation bonds. Dry Creek won't finish paying off the bonds until 2048 – and won't start making payments for more than 20 years.
The district's bonding capacity – although not the bonds' structure – was approved by a thin margin, needing 55 percent voter approval and receiving 56.6 percent.
The $8.2 million helped relieve overcrowding through construction of Creekview Ranch Middle School in 2009. The school has a life expectancy in excess of 50 years, so a decade after the bonds are retired, the school will near the end of its life span.
Why choose such an expensive bond? The short answer from district officials: The $8.2 million was accompanied by more traditional bonds that cost far less; the district had bumped into borrowing limits; and projects couldn't otherwise go ahead.
Superintendent Mark Geyer expects the district's tax base to grow before payments from $3 million to $7 million annually start in 2033 (with a two-year break in 2046 and 2047).
"We're using the $8.2 million as a kind of bridge financing to get to some point in the future where we're going to have the (taxing) capacity," he said.
The board president, Scott Otsuka, said the decision was sound.
"We're a high-performing school district in a fairly affluent area, and the citizens demand a high-quality project," Otsuka said.
At River Delta Unified School District, five capital appreciation bonds have been issued in the past seven years for renovation and updates of schools. Most are for terms of 25 years or less. But the district's most expensive capital appreciation bond pushes payments to April 2048.
By then, the $3.3 million in proceeds will have cost the district $16.2 million in interest.
Superintendent Rick Hennes joined the district after that bond deal went to market in 2008. "We had some dire facility needs that had to be addressed," Hennes said.
Construction costs were falling then, district Chief Business Officer Sonnya Kale said, adding a sense of urgency. Property owners in an area covering 2,350 parcels will pay for the bond.
Alicia Fernandez, president of River Delta's board of trustees, said she did not recall the details of the $3.3 million bond issue. But she saw the use of the bond as necessary.
"There is no money coming from the state," she said "If it's costly, it's unfortunate. But I'd rather have all of our children go to facilities they can be proud of. Not ones that are falling down."

Heading underwater?

Several bond experts equated capital appreciation bonds with "balloon payment" home mortgage loans, which were popular during the housing boom and let buyers put off big payments until the end of the mortgage.
Wassmer, the public policy professor, noted that many local residents who took out balloon payment mortgages later regretted it.
"The homeowner gets underwater and ends up with an asset worth less than what they owe on it," he said. "These school districts will face the same concern 20 to 30 years from now when they are still paying on buildings that are now obsolete and need to be rebuilt with another bond issue."
Much like lenders sometimes didn't adequately explain the risks of balloon payment mortgages, some districts don't adequately explain the risks of capital appreciation bonds to their governing boards, said Estes, the CSU San Bernardino professor.
"Nobody reads all the stuff in these," he said. "When they are told about them later, they say they wouldn't have voted for it."
These bonds are more common today, but not universal.
Some districts face the same choice as Dry Creek, River Delta and Yuba Community College – use capital appreciation bonds or forgo construction projects – but say no thanks.
"Almost any type of bond is OK, provided there is a dedicated source of funds to repay the bond when it becomes due," said Rob Ball, associate superintendent of business support services at Twin Rivers Unified, which has shied away from capital appreciation bonds. "But that dedicated source must be certain."

Call The Bee's Phillip Reese, (916) 321-1137. Bee staff writer Melody Gutierrez contributed to this report.

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  1. How we got in this mess:

    1. Virtually the entirety of Emeryville was placed in a redevelopment district. This meant the City (in its guise as the Redevelopment Agency) was entitled to ALL the increases in property taxes from redevelopment.

    2. No increases in property taxes could therefore feed the School District.

    3. Policy decisions at the most fundamental level were made to favor transient (bridge & tunnel) commuter housing during the housing boom - lofts and one bedroom apartments - instead of family friendly 3 bedroom units. Tons of new housing, none of it populated by residentes committed to Emeryville - or willing to commit their children as students.

    4. Declining school enrollments, disappeared tax base. Doesn't take a genius to figure out where that's heading.

    5. Ikea, Bay Street nicely serve stick-in-the-mud Berkeley and I-80 corridor residents.

    6. Mix in a scandal or two - embezzlement from a crooked Superintendent (hired on ND's watch), then another Superintendent with a cooked resume.

    7. Finally, search for solutions that are ass-backwards - try to raise the "standing" in the public's eye of Emery Secondary (failing) by moving the crown jewel in the Emeryville School District, Anna Yates, to the Emery Secondary campus.

    Where do they keep coming up with these ideas?

    Meanwhile the bond salesmen (investment bankers) and bond counsel (lawyers) act like crack-cocaine salesmen who can't afford to drive their pimped out rides anymore unless they do another deal - so we get CAB's and "imitations crab meat" CAB's as a "solution?"

    But wait, who's doing the complaining anyway - let's marginalize people who care by calling them "late arrivers" (weren't here 10 years ago to speak up then!) or "gadflies."

    Long live a public who cares.


    P.S. Want to know where the tax increment went? It went to give developers discounts on their development costs, subsidize developers - ignoring the fact that Emeryville was very attractive to those same developers WITHOUT giving away the store for the school children and residents of Emeryville.

  2. What ever happened to "Pay as you go"? Our City Council should do two honorable things:
    1. Butt out of School District Affairs.
    2. Resign immediately.
    Our elected Officials are completely misguided.

  3. So let me get this straight. The school board is going to strap future generations of Emeryville taxpayers to furnish a school primarily for Oakland's kids. Just so all you Emeryville property owners know this.
    When the board and ECCL staff were asked by the city what they could build for the $48 million they do have the answer was nothing. No plan B. This is how it's done. Just so all you Emeryville property owners know this.

    1. Tony Smith must be laughing at us. He gets to close down all the surrounding schools and take our money while we build a beautiful new school for his West Oakland constituents. All on Emeryville's dime. Aren't we great?