Long-term payment bonds dig big hole for schools

January 31, 2013 9:08:17 PM PST
California taxpayers are on the hook for billions dollars more than expected because of new school construction. An investigation by our media partner, California Watch, found that some school districts desperate for cash have used a form of creative financing that carries a very high cost for future generations.

The Napa Valley Unified School District promised to keep taxes low when it built a new high school in American Canyon.

"Our promise to the voters of Napa was to keep their tax bill at or below $39 or $36 and we were able to accomplish that," said Jose Hurtado from the Napa Valley Unified School District.

However, there wasn't enough money to finish the project, so the district resorted to capital appreciation bonds, or CABs. Traditional school bonds require borrowers start making payments within six months. Taxpayers usually pay two to three times the original amount borrowed. CABs allow those payments to be stretched over a longer period, sometimes decades. But there's a price. In at least one district, a loan cost 23 times more than was first borrowed.

A California Watch investigation found the state has some of the loosest rules governing capital appreciation bonds in the nation. It found 321 school districts have used CABs to finance projects. Combined, those districts have borrowed over $5.5 billion that will end up costing taxpayers nearly $22 billion.

In Southern California, the Alvord Unified School District used $53 million in bond money to pay for construction of a high school. That included an air conditioned gym and a rubberized track surrounding an artificial turf football field. But when the district ran out of money, officials turned to CABs to complete the job.

"Alvord sold about $57 million worth of CABs and over a 40-year period, that $57 million is going to cost the people of Alvord a total of about $375 million," said Herb Calderon, the assistant superintendent for business services from the Alvord Unified School District.

Calderon became the assistant superintendent in July 2012. By then the CAB money had run out and he noticed some of the school's planned features were still missing.

"When I got to the top of the stairs, immediately it caught my attention -- it's like, 'Where are the bleachers?' and of course, that's when I was told that, 'Well, it was one of those decisions that we had to cut because we ran out of money,'" said Calderon.

California State Treasurer Bill Lockyer believes these long-term payment bonds are just a bad deal. He said, "It really boils down to a simple matter which is should school districts be making these deals where there's a huge balloon payment on their debt someday and they are not paying for it as they use the new facility."

Not all districts will have huge balloon payments. Still, some taxpayers worry the burden of carrying huge debt will ultimately catch up.

"If you don't have the money to pay for it, then we maybe should have toned it down a bit," said Scott Andrews, an Alvord district resident.

Andrews ran for the Alvord School Board in 2009 because he was worried about the way the district was borrowing money.

"In my eyes, the district is bankrupt already. They just don't know it because they haven't had to default on a payment yet," said Andrews.

Districts that use this kind of financing argue new schools are an investment in the future.

"The truth is I don't see any fault here. The community agreed with us and they approved the bond, and then we went around funding those bonds," said Hurtado.

"As long as the state of California does not fully fund education, does not fully fund our educational needs and our educational requirements, you know, guys like me are forced to look and be creative in our financing," said Calderon.

Lawmakers are looking for ways to "limit" the use of capital appreciation bonds. Lockyer and State Schools Chief Tom Torlakson have called for a moratorium on these kinds of bonds.

Written and produced by Ken Miguel.


Load Comments