Governor Brown Signs Law Making Emery School Financing Illegal

Governor Brown signed a bill Wednesday, now law, that forbids school districts across California from abusing taxpayers via capital appreciation school construction bonds (CABs), the same type of bond financing Emery Unified School District recently approved for the Center of Community Life.  The School Board at Emery worked feverishly to get its CAB financing locked in before the new law took effect.  
The Board wished to close the popular Anna Yates Elementary School and move the children over to the new school site on San Pablo Avenue but because Emeryville's Assessed Valuation had sunk during the recession, it was only possible for the School District to borrow $48 million (not including interest) by normal bond financing.  That amount was enough to build a new high school but not a new elementary school as well.  Emery turned to Capital Appreciation financing to build a new elementary school for an extra $70 million paid over 32 years.  
The School Board's CAB financing, if attempted today, would be illegal.  Since the School Board got its CAB sold just under the wire, two generations of Emeryville taxpayers will be paying back this debt at onerous interest.  Emeryville as it turns out, has the dubious distinction of being among the last taxpayers statewide saddled with CAB financing.
From the Oakland Tribune:

Brown signs law prevents schools from incurring huge bond debt

By Sharon Noguchi snoguchi@mercurynews.com

POSTED:   10/02/2013 01:01:46 PM PDT | UPDATED:   ABOUT 4 HOURS AGO

A law signed Wednesday by Gov. Jerry Brown will prevent school districts from issuing ultra-long-term bonds that saddle taxpayers with huge repayment debt.

AB 182 restricts schools and community college districts in issuing capital appreciation bonds, which can delay repayment for decades and can require huge balloon payments 30 or 40 years later.

The new law, authored by Assemblywoman Joan Buchanan, D-Alamo, limits total debt service to four times the principal, limits the duration to 25 years and requires that deals permit early repayment on bonds that mature after 10 years.

The law also requires schools to disclose terms and costs of capital appreciation bonds, known as CABs; how costs compare to the cost of regular bonds and the repayment ratio.

The Santa Clara County Civil Grand Jury has criticized districts for burdening taxpayers with those bonds. The Luther Burbank School District in San Jose, for example, raised $7.5 million through four capital appreciation bonds that will cost more than $40 million to pay off.

Attorney General Bill Lockyer said the new law "ensures school districts no longer can heap outrageous debt burdens on the backs of future generations of taxpayers."

-- Sharon Noguchi, staff

More on Emery's Expensive Capital Appreciation Bond

More on the abusive Capital Appreciation Bond (CAB), the same bond sold by Emery Unified School District this year.  Here at Emery, the School District had plenty of money, $48 million, to build a new high school via normal bonds known as General Obligation Bonds.  However the School Board wanted to close the existing elementary school here and build a new one on the high school site.  That decision required the use of a CAB and added $70 million to the price tag and 33 years of payments.

From the San Francisco Chronicle:

School bonds are a Wall Street scam

Nanci E. Nishimura

Updated 8:05 pm, Friday, September 6, 2013

Our children and grandchildren are the unwitting hostages of massive future debt from an exotic bond scheme promoted by Wall Street as a way to build schools that is really a financial scam.

These "capital appreciation bonds" will have a devastating impact on our children's financial future. They were part of AB1388, signed by then-Gov. Arnold Schwarzenegger in 2009, giving banks the green light to lure California school boards into issuing bonds to raise quick money to build schools.

Unlike conventional bonds that have to be paid off on a regular basis, the bonds approved in AB1388 relaxed regulatory safeguards and allowed them to be paid back 25 to 40 years in the future. The problem is that from the time the bonds are issued until payment is due, interest accrues and compounds at exorbitant rates, requiring a balloon payment in the millions of dollars. According to state Treasurer Bill Lockyer, these bonds represent "debt for the next generation."

This kind of bond has been outlawed by a number of states, including Michigan and Ohio, but California was identified by Wall Street banks as a source of potential profits in the millions. Several grand jury investigations warned school officials against these scams.

According to a recent San Mateo County grand jury report, the bonds have been issued in California to raise more than $500 billion - but the estimated future repayment of that debt will total more than $2 trillion.

School and community college districts issued 98 percent of all capital appreciation bonds. For example, San Mateo Union High School District raised $190 million, which will result in approximately $1 billion in debt. In San Diego County, Poway Unified School District raised $105 million which will result in approximately $1 billion in debt.

The Los Angeles Times reported that more that 200 California school and community college districts issuing these bonds will end up paying 10 to 20 times more than they borrowed.

Worse, because 70 percent of the bonds have terms of 30 to 40 years, payment will not be due until after the useful life of the school facilities built with the bond funds. Moreover, the property taxes that will be needed to pay off the debt is based on wild assumptions that property values will increase exponentially.

According to many reports, property owners who never voted for these bonds will have to pay for them.

The legality of this kind of bond was questioned in January 2009, when Attorney General (now Gov.) Jerry Brown declared that financing methods that result in taxpayers being charged higher interest rates than the actual market rate for the financing method, such as bonds, violates state law.

Brown was referring to the cash-out refunding method, similar to this bond scheme, used to raise construction funds beyond the amount approved by voters. In May 2011, relying on the attorney general's opinion, the Los Angeles city treasurer warned Los Angeles County school districts against these Wall Street scams. By January 2012, Lockyer and state schools chief Tom Torlakson had warned school districts and called for a moratorium on using the bonds.

In May of this year, a San Diego County grand jury found that by using the bonds, the Poway School District was "not acting consistent with statutory law, and incurring debt beyond what the voters authorized in violation of the California Constitution."

Many California school administrators were not even aware they approved these bonds, nor did they know the cost. California Watch quoted Lockyer noting incredulously that when school administrators authorized the original issuance of the bonds, "there were blanks where the interest rate amount was to be determined someday."

Wall Street exploited the school boards' lack of business acumen and proposed the bonds as blank checks written against taxpayers' pocketbooks. One school administrator described a Wall Street meeting to discuss the system as like "swimming with the big sharks."

Wall Street has preyed on these school boards because of the millions of dollars in commissions. Banks, financial advisers and credit rating firms have billed California public entities almost $400 million since 2007. Lockyer described this as "part of the 'new' Wall Street," which "has done this kind of thing on the private investor side for years, then the housing market and now its public entities."

State records show that Piper Jaffray has brokered 165 of such bonds since 2008, earning $31.4 million, and that Goldman Sachs earned $1.6 million on a single deal with the San Diego Unified School District. Lockyer told the Los Angeles Times that "the only people these deals benefit are the financial advisers, who have collected millions of dollars helping school districts sell capital appreciation bonds."

In response to the crisis created by these bonds, Sacramento is seeking to limit their abuse with bills to cap the debt service ratio at 4-1; to allow school districts to begin paying down the principal after 10 years; to notify the public and analyze the proposed bond; and to limit the length of repayment at 25 years. The lobbying by Wall Street against these regulations is very aggressive.

Holding our children and grandchildren hostage to mountains of debt to offset present financial needs is irresponsible and reprehensible. Sacramento has to enact laws to stop school administrators from falling prey to Wall Street. Elected officials must show up, stand up and stop the perpetuation of financial scams. If not, our children will be looking at bankrupt cities like Detroit in every county in California.

Nanci Nishimura is a partner at Cotchett, Pitre & McCarthy law firm in San Mateo. She specializes in public financial frauds. Stewart Pollock provided research and assistance. 

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."

Sacramento Outlaws Emery Type School Bonds

After months of wrangling, California lawmakers have outlawed the worst of a particularly expensive and usurious kind of school construction bond financing called Capital Appreciation Bonds (CAB), the same bond issued by Emery School District last fall.  CAB critics and citizen detractors in Emeryville were quashed by the School Board as they moved quickly to get their CAB sold before Sacramento lawmakers could outlaw the notorious financing scheme.  With Emery's nimble moves, mindful of and keeping one step ahead of lawmakers, Emeryville taxpayers will now be on the hook for more than 30 years of high interest pay back.

Emery's CAB was issued in order to abandon the existing elementary school on 41st Street and rebuild at the Center of Community Life site on San Pablo Avenue.  The new high school there is being financed with cheaper traditional 'general obligation' bonds.

Our neighbors to the north, Berkeley Unified School District has so far avoided any ruinous CAB financing and any possible CAB issued in the future there will be made after the new Sacramento mandated taxpayer-protecting regulations are the law of the land.   Berkeley school board president Karen Hemphill, also coincidentally Emeryville's City Clerk, proudly proclaimed at Berkeley Unified, fiscal responsibility is a "hallmark".

Berkeley is portrayed as the fiscally prudent counterweight to Emery's reckless profligacy in this week's Daily Californian:

State Assembly passes bill aimed to curtail school district debt burden

Tuesday, April 9, 2013

The California State Assembly unanimously passed a bill Monday restricting the use of high-debt-accumulating bonds in school districts and community colleges.

Introduced by Assemblymember Joan Buchanan, D-Alamo, Assembly Bill 182 attempts to reduce the future debt burden by limiting the length of capital appreciation bonds to 25 years and restricting money owed to a maximum of four times the borrowed amount. The bill would also let districts refinance these bonds at a lower interest rate and require increased disclosure to the school districts’ governing boards.
“They shove debt on the next generation of taxpayers who won’t benefit directly from the facilities the bonds finance, which means (the next generation will) have less ability to finance what their kids need,” said Tom Dresslar, spokesperson for California State Treasurer Bill Lockyer, who has been a strong advocate for the bill.

Emeryville City Clerk & Berkeley School Board

President Karen Hemphill

Unlike Emery, Berkeley School District hasn't 

issued a CAB because of a culture of 

"Fiscal responsibility" &"Accountability"

Capital appreciation bonds have been used by public schools throughout the nation to fund large-scale projects like school construction. Unlike traditional bonds, however, for which the funds are repaid in gradual, short-term increments, capital appreciation bonds are paid back in one total amount at a set date, often decades after the bond is issued.
However, during the period between the bond’s issue date and its maturity date, interest is continuously compounded, which often results in high levels of accumulated interest. In some cases, debt payments have accrued to even 10 times the original amount borrowed, according to Dresslar.
Several groups, such as the California Association of School Business Officials and the Association of California School Administrators, believe that capital appreciation bonds should be limited but that AB 182 should be revised.
“If passed in its current form,” said Molly McGee Hewitt, executive director of CASBO, “we are concerned that many school districts will have to delay their facilities’ construction programs, resulting in substandard facilities for students, teachers and staff that are in the greatest need of them — particularly in districts that serve a high percentage of economically disadvantaged families.”
The Berkeley Unified School District is not using any capital-appreciation bonds at the moment, though the use of such bonds is “likely to happen in the future,” according to Mark Coplan, BUSD public information officer.

Karen Hemphill, president of the BUSD Board of Education, mentioned that the board has weighed the pros and cons of capital-appreciation bonds and would consider them only in the context of saving taxpayers money.
“Fiscal responsibility has been the hallmark (of the district),” Hemphill said. “We have a lot of checks and balances and accountability.”
The state Senate will vote on AB 182 in the following months. If passed and signed by the governor, the bill will be implemented beginning Jan. 1 of next year.

Contact Alison Fu at afu@dailycal.org.

State Treasurer Expands Legal Opinions About CABs

In an ongoing investigation of possible fiscal improprieties surrounding school district construction Capital Appreciation Bonds, State Treasurer Bill Lockyer seeks more legal opinion. Emery School District and its bond underwriter Caldwell, Flores & Winters is among those being implicated in possible illegal behavior.
From the Los Angeles Times:

Lockyer widens request for legal opinion on school bond campaigns

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By Dan Weikel

March 25, 2013, 2:47 p.m.

California Treasurer Bill Lockyer on Monday expanded his request for a legal opinion to determine if some local education officials and the financial underwriters they hire are violating state law by campaigning for school bond measures.

In a second letter to California Atty. Gen. Kamala Harris, Lockyer asked her office to also consider financial advisors and bond counsel that are employed as consultants to help school districts prepare bond issues.

Lockyer first contacted Harris a week ago when he requested that she render a formal opinion on the conduct of school officials and underwriters as it relates to political campaigns for school bonds.  

The state treasurer said a legal opinion is needed because some arrangements between school districts and firms that sell bonds “raise substantive questions” about whether the officials are using public money to conduct campaigns advocating the passage of bond measures—an action banned by state law.

Under some agreements, Lockyer said, underwriters who stand to profit from selling bonds conduct voter opinion surveys or help prepare ballot arguments. Other agreements, he wrote, “specify [that] the underwriting fees paid in connection with any subsequent bond sale will reimburse the underwriter for pre-election campaign services provided.”

Lockyer noted that financial advisors and bond counsel may have entered similar agreements to provide campaign services.

In recent months, the treasurer has been examining the way schools issue bonds, in part because of possible abuses that arose from the issuance of risky and expensive instruments known as capital appreciation bonds. He is now supporting pending state legislation that would limit the use of the most onerous forms of such bonds.

Based on data developed by Lockyer’s staff, The Times reported last November that 200 school and community college systems — a fifth of all districts statewide — had issued billions of dollars in such debt, often when pressed for construction money during the recession.

Unlike conventional bonds that require repayment to start almost immediately, long-term capital appreciation notes allow districts to put off payments for decades. The delays, however, often result in staggeringly high compound interest charges that dramatically increase the total debt.