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Monday, March 11, 2013

Make School Bond Promises Binding

Last week's Oakland Tribune Editorial raises an interesting solution to the much maligned capital appreciation school bond problem and its proposed fix (Assembly Bill 182).  The Trib notes that school districts that use CABs to finance their school construction projects, like Emery Unified, will likely break their tax rate promises if property values fail to increase as advertised.  The solution?  Make the promises binding.  It's an idea that would reshuffle the politics surrounding the school bond/Wall Street nexus.  Such a change is too late to save Emeryville taxpayers, but it would radically shake up the status quo across the State.  Look to the construction and trades lobbies, Wall Street sycophants and bond writers (hello Turner Construction hello Caldwell, Flores & Winter) to provide the push back.
The following is from the editorial:

Oakland Tribune editorial: End use of school bonds with costly balloon payments

School districts don't know how they'll pay off bondholders decades from now. Indeed, that's true for most school construction bonds, but especially CABs. AB182 doesn't address this problem.
The deals presume payments will come from property tax revenues -- and that those taxes will steadily rise. Many school bond deals assume 4 percent or more annual property tax growth for decades into the future.
But when property values fall, the districts scramble to refinance their debts, thereby pushing payments further into the future, or stick property owners with higher tax rates than they were promised. Unfortunately, the tax-rate limits suggested to voters when they approve school construction bond programs aren't binding.
The solution: Make them binding. Put bond-buyers on notice that there won't be more money in the kitty to pay off the debt, and send a message to school officials that they must keep their promises.
The bond market will probably react by charging slightly higher interest and, more significantly, requiring that school districts use more realistic forecasts. School officials, in turn, will have to finance construction more responsibly, with less long-term speculation.
Such fiscal checks will benefit all parties. Most significantly, property owners can sleep at night knowing their tax bills won't skyrocket and that their money is going toward school construction rather than unacceptably high interest payments.

The entire editorial can be read HERE

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