Karen D. Adams: Weaver school district's expensive bond measure

October 18, 2012 

The Weaver Union School District superintendent and trustees, like all school district officials, rely on Wall Street underwriters and bond counsels to advise them on how best to obtain financing to build their school facilities.

A Merced Sun-Star article on Saturday was how I became aware that Weaver, like many other school districts, intends to sell expensive school bonds that the taxpayer will repay. Weaver officials had not disclosed their intent to either my office or to the Merced County Board of Supervisors. School officials need to consider the impact on taxpayers before issuing these bonds.

School bonds are not bad, but some of the bond structures are not in the best interest of the taxpayers. Capital appreciation bonds are the expensive culprits used in some school bond structures. High-wealth investors love purchasing these bonds because many times they earn up to 12 percent interest, even in today's low interest rate environment, and they are guaranteed the taxpayers will pay in their annual tax bills.

To best define a capital appreciation bond, think of the district as a homeowner building a home. The bonds as the homeowner's mortgage and the taxpayer is the lender. The homeowner (district) cannot afford to make a mortgage payment, but wants to build the house anyway.

The homeowner's (district's) salary is projected to increase 4 percent annually and he or she can begin to make payments on year 15 of the 40- year loan. The lender (taxpayer) grants the homeowner (district) a 15-year no-payment mortgage. Thus the name "capital appreciation bond," because the interest not paid in the first 15 years is capitalized, accruing interest on interest. These deals evolve into repayments that amount to nine to 26 times the initial principal borrowed, where a typical mortgage repayment runs two to three times the principal.

So now, you ask, what lender would loan money and receive no payment for 15 years? In this case, the district can "guarantee" to repay the bonds because the voters passed a bond measure securing the payment through taxpayers' secured taxes. Poway Unified School District in San Diego, recently in the news under the headline: "Where borrowing $105 million will cost $1 billion: Poway schools," is a perfect example of this expensive bond structure.

I could get on my soap box and tell you as past president of the California Association of County Treasurer-Tax Collectors (www.cacttc.org) and member of its legislation and school finance committees, we have struggled for the past five years as our proposed legislation providing regulation over these structures has been defeated by the Public Securities Association, the largest lobbyist group in Sacramento representing dealers, brokers and bankers.

I voice my personal frustration as county treasurer dealing with underwriters who have cut my office out of the review process until these bonds are priced for the market.

There is good news! Deals like Poway's may now provide my state association the ability to garner support to cure these deals through government code regulation. As treasurer-tax collector, I've alerted districts about these structures and provided access to the school finance committee's best practices located on my Web page at www.mercedtaxcollector.org.

In addition, my office and the Merced County Office of Education want to provide assistance in structuring these complex bond deals to achieve the districts' financing needs and protect the taxpayer. I have no doubt Weaver district officials are passionate about education, but they need to consider the impact of issuing these capital appreciation bonds.

Karen D. Adams is Merced County's treasurer-tax collector.

Merced Sun-Star is pleased to provide this opportunity to share information, experiences and observations about what's in the news. Some of the comments may be reprinted elsewhere in the site or in the newspaper. We encourage lively, open debate on the issues of the day, and ask that you refrain from profanity, hate speech, personal comments and remarks that are off point. Thank you for taking the time to offer your thoughts.

Commenting FAQs | Terms of Service