Sunday, August 12, 2012

Where Borrowing $105 Million Will Cost $1 Billion: Poway Schools

"The bond...had considerable cachet, thanks to a coveted endorsement from the San Diego County Taxpayers Association. Indeed, association President Lani Lutar’s name was first on a list of five local dignitaries named on the ballot as supporting the bond. Lutar said had she known the full implications of the bond, she would not have recommended the association support it."

[Maura Larkins comment: Why didn't Lutar figure out the implications before she recommended it? The taxpayers association has a habit of giving awards and endorsements without investigating. A few years ago they gave Chula Vista Schools an award without looking at CVESD's budget! One might suspect that the association's decisions are political.]

Where Borrowing $105 Million Will Cost $1 Billion: Poway Schools
August 6, 2012
Voice of San Diego

“This is way worse than loan sharking.
...What they have done is absolutely insane.”
—Michael Turnipseed, executive director
of the Kern County Taxpayers Association...

“This is a perfect example of how something
that’s done today can adversely affect
the next generation and the generation after that.”
—Dan McAllister, San Diego County
treasurer and tax collector.

Last year the Poway Unified School District made a deal: It borrowed $105 million from investors to fund a final push in its decade-long effort to revamp aging schools.

In many ways, the deal was unspectacular. Some of the money was used to pay off previous debts from delayed and over-budget construction projects. The rest went towards finishing upgrades that Poway taxpayers had been promised as far back as 2002. To a casual observer, it was just another school bond.

But Poway Unified’s deal was far from normal.

In 2008, voters had given the district permission to borrow more money to finish its modernization, and they had received a big promise from the elected school board in return: No tax increases.

Without increasing taxes, the district couldn’t afford to borrow money in the conventional way. So, instead of borrowing from investors over 20 or 30 years and paying the debt down each year, like a mortgage, the district got creative.

With advice from an Orange County financial consultant, the district borrowed the money over 40 years in a controversial loan called a capital appreciation bond. The key point for the district: It won’t make any payments on the debt for 20 years.

And that means the district’s debt will keep getting bigger and bigger as interest on the loan piles up.

The bottom line: For borrowing $105 million in 2011, taxpayers will end up paying investors more than $981 million by 2051, or almost 10 times what the district borrowed. That’s wildly more expensive than a typical school bond, in which a district pays back two or maybe three times what it borrowed.

As well as being expensive, capital appreciation bonds work by tapping future growth in property values to pay today’s debts, a concept considered by many in the school bond business to be both risky and inequitable. In 1994, the state of Michigan banned school districts from issuing bonds like this, deeming them too toxic to taxpayers. Nevertheless, California’s ever-strapped districts have increasingly looked to capital appreciation bonds to raise money for improvements without increasing taxes on current residents. Across the state, districts have borrowed billions this way, using exotic financing to shift the burden for paying for today’s school construction to future generations of Californians.

Poway Unified, a district more accustomed to praise for its fiscal austerity, has found itself at the center of the debate over these bonds. For a year now, it’s come under fire from taxpayer groups and concerned elected officials around the state, for whom Poway’s bond has reached legendary status.

...Officials at the district and two members of the school board who approved it acknowledge that the deal is expensive. But they say Poway’s overall construction program has been a roaring success and a boon to local students and homeowners alike. District taxpayers should have understood that borrowing money over a longer period of time, without raising taxes, would be pricey, the officials said...

"We could have authorized more taxes, it would just have been breaking the promises we made to the community," said school board member Todd Gutschow.

But last year’s bond doesn’t just affect the taxpayers who voted on it. It also saddles their children and grandchildren with hundreds of millions of dollars in debt, and raises the risk that property taxes could spike once the district finally starts making payments on its loan.

In short: In order to keep its promises to current residents, the district entered into a deal that places a billion-dollar burden on future residents...

A Hard Sell

In 2008, Poway Unified’s school modernization plans were way off schedule. Construction costs had spiraled upwards, fueled by the region’s real estate boom. This, combined with other construction delays and cost overruns, meant the district needed more money to complete its ambitious renovation program.

Voters had agreed back in 2002 to allow the district to borrow $198 million to bring state-of-the art facilities to 24 schools. But by 2008, the district was asking for $179 million more to finish the job.

Traditionally, school districts in California fund renovation programs by borrowing money from investors and paying back those loans with small increases in local property taxes.

That’s what Poway Unified’s first bond did in 2002. With California’s economy starting to warm up from the boom-and-bust of the late-1990s, voters approved the district bumping local property taxes up by $55 for every $100,000 of home value. That revenue was then tapped to pay off the district’s construction loans.

By 2008, however, the economy was in trouble. The real estate market had already been tanking for a couple of years. Stocks were sliding downwards and unemployment was on the rise.

It was a tough time to sell a tax increase to voters.

But with some Poway Unified residents still waiting for the renovations they had been promised back in 2002, the district decided to approach voters once more.

"We knew the voters wanted these projects, and we knew they wanted them sooner rather than later," said Poway Superintendent John Collins.

This time, Poway Unified didn’t try to push a tax increase. Instead, it came up with a different way to pay for its new bond program, Proposition C.

Rather than increasing the tax rate, the district asked voters if they’d be willing to extend the life of the existing property taxes for an estimated additional 11 to 14 years.

That passed muster. Despite some vocal opposition, on Feb. 5, 2008, district residents voted 63.9 percent in favor of Poway Unified borrowing another $179 million.

But the bond’s supporters hadn’t made clear to the public just how they planned to borrow money without raising taxes, or how much that would end up costing taxpayers. In 2008, there wasn’t enough money coming in from the district’s $55 property tax levy to pay for all the new borrowing it wanted to do. All the cash being generated by the existing taxes was eaten up paying off old loans that had already been used for upgrading schools.

The district’s plan, then, was to borrow money against the future tax revenues it would receive by extending the life of the taxes. In other words, it would get the money now, but wouldn’t start paying it back for a long time.

Borrowing money in this way is possible for school districts, but it’s much more expensive than paying a loan back year-by-year.

Last year, the district put together its deal to borrow $105 million, without paying anything towards the debt for 20 years.

In two decades’ time, taxpayers will start paying about $50 million a year towards the loan. They’ll make those payments for the next 20 years or so. It’s a bit like a massive version of one of those exotic loans that got homeowners into so much trouble.

With one key difference: For the next 20 years, Poway Unified isn’t even paying the interest.

...But a voter reading the ballot statement for Proposition C in 2008 would have learned nothing about the overall cost of the deal the district was setting itself up for. The full 2,200 word statement makes no mention of capital appreciation bonds, and says little about how the borrowing would be paid back. The ballot arguments against the bond don’t mention the unusually high costs involved in borrowing money that won’t begin to be paid back for 20 years. The bond also had considerable cachet, thanks to a coveted endorsement from the San Diego County Taxpayers Association. Indeed, association President Lani Lutar’s name was first on a list of five local dignitaries named on the ballot as supporting the bond.

Lutar said had she known the full implications of the bond, she would not have recommended the association support it.

...Last month, the association changed its criteria for endorsing school bonds. In the future, it will ask districts how, exactly, they will finance their bonds. ...Glenn Byers, Los Angeles’ assistant treasurer and tax collector, said districts like Poway have been dishonest by issuing bonds without laying out the consequences and costs of the loans for taxpayers.

Find High-Interest School Bonds in Your District: A Five-Step Guide
August 8, 2012

Since publishing the story on the Poway Unified School District’s billion-dollar bond, we’ve had a bunch of inquiries from all around the state asking one question: Is this going on in my local school district?...

Step One: Find your district in our capital appreciation bond database...

[Maura Larkins comment: Here are some of the districts I found:

2006-0201 Bonsall Union School District 2/23/2006 8,920,243.00 General obligation bond
2007-1030 Bonsall Union School District 7/26/2007 4,698,309.00 General obligation bond
2006-1353 Bonsall Union School District 1/25/2007 3,381,128.00 General obligation bond

2001-0148 Capistrano Unified School District 2/28/2001 29,999,930.00 General obligation bond

2000-1370 Cardiff School District 7/19/2000 10,999,035.00 General obligation bond

2011-0482 Carlsbad Unified School District 6/7/2011 52,998,238.00 General obligation bond
2009-0237 Carlsbad Unified School District 5/12/2009 79,998,017.00 General obligation bond

2011-1278 Escondido Union High School District 10/6/2011 20,000,451.00 General obligation bond
2009-0981 Escondido Union High School District 8/18/2009 34,216,905.00 General obligation bond
2009-1391 Escondido Union High School District 12/1/2009 26,996,392.00 General obligation bond
2002-0430 Escondido Union School District 7/18/2002 46,299,622.00 General obligation bond

2008-0504 Grossmont Union High School District 7/22/2008 88,159,578.00 General obligation bond
2006-0779 Grossmont Union High School District 5/31/2006 124,999,225.00 General obligation bond
2004-0710 Grossmont Union High School District 6/3/2004 60,841,197.00 General obligation bond

2010-0902 Lakeside Union School District 9/22/2010 12,982,209.00 General obligation bond
2009-0034 Lakeside Union School District 4/23/2009 21,833,149.00 General obligation bond

2010-1239 Lemon Grove School District 9/23/2010 7,999,480.00 General obligation bond
2002-1813 Lemon Grove School District 10/18/2002 2,191,178.00 General obligation bond
2000-1769 Lemon Grove School District 11/30/2000 2,560,587.00 General obligation bond

2012-0447 Oceanside Unified School District 4/11/2012 14,999,282.00 General obligation bond
2010-0235 Oceanside Unified School District 5/5/2010 29,999,991.00 General obligation bond
2008-1062 Oceanside Unified School District 2/19/2009 49,995,054.00 General obligation bond

2010-0094 Poway Unified School District 3/10/2010 24,998,007.00 Bond anticipation note
2010-1369 Poway Unified School District 8/3/2011 105,000,150.00 General obligation bond
2008-1217 Poway Unified School District 1/9/2009 3,698,554.00 General obligation bond
2008-1216 Poway Unified School District 1/9/2009 73,998,936.00 General obligation bond
2006-1091 Poway Unified School District 10/19/2006 119,300,766.00 General obligation bond

2007-0692 Ramona Unified School District 6/13/2007 24,333,360.00 Certificates of participation/leases

2008-0412 Rancho Santa Fe School District 7/22/2008 1,959,042.00 General obligation bond
2008-0413 Rancho Santa Fe School District 7/22/2008 33,997,571.00 General obligation bond
2004-1209 Rancho Santa Fe School District 7/30/2004 2,836,419.00 General obligation bond

2012-0397 San Diego Unified School District 3/1/2012 65,434,442.00 General obligation bond
2012-0485 San Diego Unified School District 5/10/2012 149,998,824.00 General obligation bond
2010-0997 San Diego Unified School District 8/5/2010 163,869,783.00 General obligation bond
2009-0232 San Diego Unified School District 4/23/2009 131,157,581.00 General obligation bond
2004-1372 San Diego Unified School District 8/19/2004 199,996,373.00 General obligation bond
2005-1469 San Diego Unified School District 8/18/2005 195,024,802.00 General obligation bond
2002-1426 San Diego Unified School District 8/22/2002 274,995,346.00 General obligation bond
2003-1434 San Diego Unified School District 8/7/2003 349,993,599.00 General obligation bond
2001-1770 San Diego Unified School District 11/8/2001 199,995,712.00 General obligation bond
2000-1584 San Diego Unified School District 12/6/2000 149,999,084.00 General obligation bond

2012-0109 San Ysidro School District 1/31/2012 10,409,715.00 Certificates of participation/leases
2011-0496 San Ysidro School District 6/15/2011 17,599,623.00 General obligation bond
2007-1350 San Ysidro School District 11/15/2007 33,952,741.00 General obligation bond
2004-1729 San Ysidro School District 1/14/2005 24,619,363.00 General obligation bond

2004-1742 Sweetwater Union High School District 11/4/2004 96,999,415.00 General obligation bond]

Kudos to Michigan Journalist on the Poway Bond Story
August 8, 2012
Voice of San Diego

We've gotten more national attention on our Monday story about bonds at Poway Unified School District than we imagined. While it's been great, today a retired reporter and blogger in Michigan is upset with us for taking credit for breaking the story...

Joel Thurtell is a retired Detroit Free Press reporter who has a long history of great reporting on this type of borrowing. He now keeps his own blog called Joel on the Road and did important work on Poway’s expensive borrowing back in May, long before we wrote about it...

First, there’s no doubt Thurtell’s work deserves highlighting. Here are three tremendous stories he did on the Poway financing in May: CABs = Compound Trouble in California, Disaster Shadows Poway and CAB Scam in Poway...

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