Wednesday, August 22, 2012

Community college districts' bonds inflate cost to taxpayers

Community college districts' bonds inflate cost to taxpayers Erica Perez
California Watch
Aug. 22, 2012

Several California community college districts have sold bonds that allow them to put off payments for up to 40 years, causing the total repayment to cost taxpayers from five to nine times the principal.

Poway Unified School District, while not a community college district, made headlines this month for issuing a bond for $108 million that will end up costing taxpayers nearly $1 billion over 40 years.

Poway Unified has become the poster child for long-term capital appreciation bonds, increasingly common but controversial tools that enable districts to get cash now for voter-approved construction programs, while delaying the payments and tax levy for decades.

A retired Detroit Free Press reporter, Joel Thurtell, reported on Poway Unified's bond sale on his blog. After Voice of San Diego reported in-depth on the deal Aug. 6, the story garnered national attention.

The Los Angeles treasurer and tax collector's office has taken an aggressive stance against long-term versions of these bonds.

"Once you see a repayment obligation that materially exceeds the principal amount, by that I mean four, five or 10 times more, you have to question why they did it," said Douglas Baron, director of public finance at the Los Angeles County treasurer and tax collector's office.

More standard bond sales cost closer to $3 per dollar borrowed.

California Watch reviewed bond sales at several community college districts in search of similar deals. Although few appear to match the size of the Poway Unified example, several districts financed construction programs using long-term capital appreciation bonds that will end up costing much more than traditional financing because of compounded interest.

San Bernardino Community College District issued $56 million in bonds that will cost $493 million by the time they're paid back in 2048 ---- nine times the principal.

Victor Valley Community College District borrowed $34 million in bonds that will end up costing $271 million to pay back by 2049 ---- eight times the principal.

Yosemite Community College District's $78 million bond issue will cost $453 million by 2042 ---- six times the principal.

Chabot-Las Positas Community College District will pay $850 million by 2046 on $169 million in bonds ---- totaling five times the principal.

District officials chose the more expensive bonds for a number of reasons. Some said they saw the bonds as the best way to maximize buying power without exceeding legal or promised limits on tax rates.

Here's the difference between capital appreciation bonds and the standard variety: With traditional current interest bonds, districts borrow money and start paying interest right away. The money for the debt payments comes from taxes on residents.

They can only borrow so much this way because state law says community college districts can't levy more than $25 per $100,000 of property value.

With capital appreciation bonds, districts get the cash up front, but don't have to pay interest or levy taxes right away. The interest on these bonds compounds over time, without being paid out, until the bond comes due. The further out the bonds come due, or mature, the bigger the payoff for investors and the higher the price tag for districts and future taxpayers.

State law prohibits districts from selling bonds that come due more than 40 years out. The Los Angeles County treasurer and tax collector's office published a white paper stating it would not support capital appreciation bonds in that county with maturities greater than 25 years.

And Baron said the office would advocate changes in the law that would set a cap at 25 to 30 years.

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