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."

School District Trots Out New (Unchanged) Bond Financing Scheme

Meet The New Bond, Same As The Old Bond:

Both New & Old Bond Requires Taxpayers Pay $107 Million For $20 Million Borrowed

The new school bond has been
proposed to replace the
discredited CAB.
But if it looks like a duck and
walks like a duck
and quacks like a duck....

In response to angry parents recently chastising the School Board, the Emery School District distanced itself last week from its previous consideration to float a Capital Appreciation Bond (CAB) to fund the last $20 million to help build a new school on San Pablo Avenue and instead embraced a new General Obligation bond that the District admitted would end up costing taxpayers the same as the CAB.
The criticisms caused the District to change the 'Series D' bond, the final proposed bond for the new school from a CAB, considered a risky financing scheme that defers payments for many years to a General Obligation Bond, generally considered safe.  The new Series D bond would begin repayment in 2014 and finish in 2053 as opposed to the former proposed CAB that would have deferred payments until 2032 and finally be paid off in 2049.  Both bond schemes would cost taxpayers $107 million for the same $20 million borrowed.  Both bonds assume a 4% Emeryville Assessed Valuation growth every year for the duration of the bonds and both bonds assume no greater than the promised $60 per $100,000 of property valuation.  The General Obligation bond requires payment every year starting in 2014 but each payment is less than $100,000 until 2032 when the large balloon payments begin.

Capital Appreciation Bonds have been much in the news of late since cash strapped school districts from cities with low property value appreciation across the State have turned to them and reporters have shown the fiscal impropriety of this type of high interest borrowing.  The media has depicted CAB financing as a sort of bellwether for irresponsible financial chicanery in school districts up and down California.
Emery, too has been revealed to be entertaining the idea of CAB financing to fund the move of the existing Anna Yates Elementary School to co-locate with the proposed new high school.  The District has claimed it needs an extra $20 million to close down the elementary school on top of the already raised $48 million to rebuild the high school.

It's a duck.

School Board members last week called for an explanation for the CAB previously presented by District staff in the wake of a Tattler story and the Board heard that a CAB would not be necessary to finance the final $20 million after all.  The staff then introduced the new General Obligation Bond.  Staff members did not volunteer that the new bond would cost taxpayers the same as the discredited CAB bond nor that it would actually take four years longer to pay off than the CAB.

One parent at the meeting commented that the new bond is a CAB in all but name and that the replacement General Obligation Bond is a cynical ploy meant to deceive Emeryville residents.  The parent expressed frustration at the lack of transparency by the staff. "Show us your work" the parent challenged the staff, noting how math teachers require students to reveal how they arrived at an equation.

School District Is Bullish On Emeryville

Happy Days Are

Here Again!

Blue Days, All Of Them Gone
 Nothing But Blue Skies From Now On

Opinion
Most Americans have come to the awful realization that the longstanding congressional gridlock in Washington DC is the new normal.  Gridlock helped tank the economy and it has frozen law makers, keeping the nation in the fiscal doldrums.  But this intractable political and economic problem is a trifling blip if you believe the Emery Unified School District.  The real story they say is Emeryville is coming back baby, stronger than ever regardless of outside forces!

And they're betting our money on it.

Onward and upward:
after a big drop in 2011, for Emeryville
it's nothing but up!

Emeryville is on the cusp of an unprecedented period of robust sustained and consistent growth the School District says.  After losing almost 7% of our value last year, we're looking forward to growth, lots of growth, at least 4% growth every year as far as the eye can see.
This is what we've learned from the Series D school bond document prepared by the District for the School Board.  They're considering raising the final $20 million to top out at $68 million, for building a new school on San Pablo Avenue.  The money is being raised against the assessed valuation of Emeryville.  The problem is Emeryville has lost value and the last $20 million, piled on top of the already raised $48 million, takes us over the fiscal cliff.
Law dictates school bonds can only be sold in proportion to the assessed valuation of the town.  The assessed valuation means the total value of all real estate in the town, public and private it should be noted.
The rosy growth picture painted by the bond debt service requirement document, released by the District last week, makes some pretty outlandish predictions in order to keep the tax rate at the promised $60 per $100,000 of property.  If the town grows at a rate lower than 4% per year for the next 37 years, property taxes will have to be increased, you understand.

How could we have another down turn?
Altogether shout it now, who could
ever doubt it now?

After what we've been through the last few years, this prediction made by the School District boggles the mind.  The District's $48 million in hand is plenty to build a new high school.  They need to realize we can't afford the final $20 million to close the existing (newly remodeled) elementary school and rebuild it at the San Pablo site. This town doesn't have enough assessed value to support it without relying on voo-doo economics.
But there are powerful forces pushing this bond sale.   bond financier Caldwell Flores, and the Center of Community Life contractor Turner Construction are among these special interests trying to lard us up with debt.  The School Board itself has made it clear they will close the existing elementary school, Anna Yates; come hell or high water.

We're already going to have to pay until 2035 for the $48 million borrowed from Series A, B and C bond sales. But the people who led us down this Series D Bond path will be long gone in 2032 when its punishing debt will start to come due.  Seventeen years and $107 million later, it will finally be paid off...in 2049, if there's anything left of the Emery Unified School District.

There's an adage about the survivors of the Great Depression; they emerged from that calamity fundamentally changed, a new respect for thrift having been permanently etched into their DNA.  We too have changed and we're starting to question our old days of profligate spending.  The Emery School District may be bullish on Emeryville's economic future but we'd rather be smarter about how we invest in the necessary business of tending to our children's education. The sunny prediction for Emeryville is deluded.  We see some clouds in that blue sky.

Bull

Emery To Join Ranks Of "Worst Offender" Districts?

Emery-Style Bond Financing Called 
"Too Risky" 

Capital Appreciation Bonds: "Significantly Higher 

Debt Burden"

The following article from the San Francisco Chronicle highlights the latest school bond budgeting tactic being used in California: the infamous Capital Appreciation Bond (CAB).  The story centers on San Diego County's Poway Unified School District and the looming debt disaster brought on by its CAB financing but the story could just as easily be about Emery Unified.  As the Tattler recently reported, our local school district is considering using precisely the same financing as Poway.  Emery's fiscally ruinous CAB, called the 'Series D bond', is the final bond issuance proposed by the School District as part of Measure J, passed by Emeryville voters in 2010.

.                    .                    .                    .         

California School Bonds for $105 Million to Cost $1 Billion

James Nash, ©2012 Bloomberg News

Published 5:31 a.m., Wednesday, August 8, 2012

Aug. 7 (Bloomberg) -- A California school district is shouldering $1 billion in interest on a $105 million bond in a deal intended to defer most of the payments for 35 to 40 years.

The Poway Unified School District, in San Diego County, structured its 2011 sale of capital-appreciation bonds to avoid debt service until 2033, with the largest sums -- more than $300 million each -- due in 2046 and in 2051, according to data compiled by Bloomberg.

Other issuers in California may pursue similar deals to raise money for construction at a time when revenue from property taxes is stagnant, said Marilyn Cohen, founder of Envision Capital Management Inc. in Los Angeles.

“I’m sure California is the worst offender,” Cohen said in a telephone interview. “Property taxes have gone to hell in a handbasket in California.”

Last year, Los Angeles County Treasurer Mark Saladino advised school business officials there against long-term capital-appreciation bonds, saying they would result in a “significantly higher debt burden.”

Poway, a district of 33,000 students about 20 miles (35 kilometers) northeast of San Diego, issued the debt to modernize schools in July 2011. It was part of as much as $179 million in borrowing approved in a 2008 referendum that passed with 64 percent of the vote. The San Diego County Taxpayers Association now regrets that it endorsed the proposal.

“There’s too much risk involved with issuing long-term capital-appreciation bonds,” said Chris Cate, vice president of the association. “They’re not callable bonds so you can’t pay them off early. It’s too risky for taxpayers.”

Tax Promise

School officials promised at the time that the measure wouldn’t raise taxes. There was no mention of how the deal would be structured or what the interest payments would be.

The bond sale was managed by Stone & Youngberg LLC, which was acquired by Stifel Financial Corp. after the Poway deal. A Stifel spokeswoman, Linda Olszewski, wasn’t available for comment yesterday.

Sharon Raffer, a spokeswoman for the district, said she had no immediate comment on the ultimate cost of the borrowing yesterday. Penny Ranftle, the school board president last year, and Linda Vanderveen, the current president, didn’t respond to telephone calls seeking comment.

Zero-Coupon

Tax-exempt capital-appreciation debt is similar to so- called zero-coupon bonds, except that the investment return on the principal is reinvested at a compound rate until maturity. The securities usually yield more than coupon bonds to compensate investors for the longer holding period before they receive any income.

California school districts are increasingly deferring debt payments because of declines in property values, which provide the tax revenue to repay bonds, and because of statutory limits on how much property tax may go toward debt service per year, Cate said. A 2000 law limits taxes for debt service to $30 per year per $100,000 in property value.

The Poway measure was reported earlier by the Voice of San Diego.

The Oceanside Unified School District, west of Poway in San Diego County, financed a $32.4 million sale in 2010 with capital-appreciation bonds. District officials used the tool because the eroding tax base left them short of revenue needed to replace roofs, upgrade power supplies and make other improvements to 20 schools, Assistant Superintendent Luis Ibarra said. The total cost to taxpayers for payments starting in 2034 and ending in 2049 will be about $300 million, according to data compiled by Bloomberg.

“The district expects that tax-base growth will allow for annual tax rates to continue within historical ranges,” Ibarra said by e-mail.

--Editors: Pete Young, Ted Bunker

To contact the reporters on this story: James Nash in Los Angeles at jnash24@bloomberg.net

Emery Unified's Dangerous Bond Strategy

School District Considering 

Paying $107 Million

To Borrow $20 Million 

Bond Interest To Principle Ratio Is A Whopping 5:1

Emery School District has released a bond financing document that details how punishingly expensive money for the District has become in the wake of Emeryville's economic slide.  The document, an algorithm depicting debt service requirements for the sale of the last school bond meant to fund the building of the proposed Kindergarten through 12th grade school on San Pablo Avenue, is being used to calculate how much money it's going to cost to borrow the last $20 million the District wants to spend.

It's going to cost a lot.

  

The District has issued three Measure J school construction bonds so far (called Series A, B, and C) for a total of $48.5 million, an amount the District now says is sufficient to complete the Kindergarten through 12th grade school, albeit a less then desirable one than they envision.  It should be noted that earlier before the economic slide, much higher minimum amounts were reported by the School Board as necessary.  However, at the last School Board meeting, officials stated at least $20 million more would be needed to add to the $48.5 million already borrowed to "build for excellence" as School Board member Josh Simon puts it.  

While over 70 concerned parents, guardians and residents have recently urged the District to work with the money we have by keeping the elementary students at Anna Yates Elementary School and building a less-costly middle and high school on the San Pablo Ave site, the District has instead indicated its intention to forge ahead with its more costly "co-location" vision. District officials admit the $48.5 million already in the bank would be plenty for a new high school without closing the existing elementary school.   
So, how might the District fill this $20 million financial gap?

Dangerous Strategy
The answer is a dangerous strategy known as a Capital Appreciation Bond (CAB) or a zero coupon bond, which is a type of bond that accrues interest until maturity at which time both interest and principal become due.  As the schedule shows (viewable here: http://bit.ly/seriesd), the District is considering issuing a Series D bond that would provide the District with $20 million now, in exchange for payments that don't begin until 2032 and that would end in 2049.

Like a mortgage with a balloon payment, the schedule also shows just how costly this strategy can be, as it indicates that Emeryville tax payers would end up paying over $107 million for that $20 million loan.

"This type of financing is not preferred 

but if that's what you need to do to 

bring the money sooner, it's done"

Emeryville City Manager Pat O'Keeffe

Last year the Los Angeles County Treasurer and Tax Collector, Mark Saladino, wrote a letter to school finance professionals in which he explained that CABs result in a significantly higher debt burden and explained that his office would not support transactions relying on such bond structures. http://www.bondbuyer.com/pdfs/0523LA.pdf

But unlike credit default swaps, CABs are not some new financial wizardry that confuse even seasoned financial professionals.  On the contrary, their risky and costly nature has been long-recognized and in 1994 the State of Michigan even banned the use of CABs for school construction financing. http://www.bondbuyer.com/news/-37281-1.html

These are the lengths that this School Board is willing to go to in an attempt to maintain their vision.  They would risk bankrupting future Emeryville residents with soaring property tax bills for a K-12 school site, which by 2049 when the bond is finally paid off, may itself be in need of replacement, as it will have been in use for nearly 35 years.

The schedule also shows the assumptions one has to make to believe that the District will be able to keep its promise to voters that their property tax bills for Measure J would not exceed $60 per $100,000 of assessed valuation. (See the far right column of the schedule.)  The only way the District can keep that promise is if Emeryville's assessed valuation grows at a steady 4% annually (second column from left in the series D document).
Some are saying given the 2011 decrease in assessed valuation of over 6%, and with the Redevelopment Agency gone, this 4% claim seems highly unlikely. Thus, the reality is that even if the District stops now and issues no more school construction bonds, the Emeryville taxpayers are likely to see bills in excess of $60/$100k because it's unlikely that assessed valuation will continually increase by 4% for roughly the next 20 years.  

In 2010, Oakland Tribune reporter Daniel Borenstein warned Emeryville residents about Measure J, the school bond financing scheme they were about to vote on, then pegged at $95 million.  He made a wild prediction: Emeryville taxpayers would have to pay back the bonds with almost three times that amount in interest.  It was bad financing based on overly rosy predictions of Emeryville's assessed valuation growth, he said.  City and School District officials pounced: Mr Borenstein was a lout they said, he didn't know what he was talking about and moreover he is from Oakland, what can he know about Emeryville?  
Some may now ask, what indeed.