Gov. Jerry Brown signed legislation Wednesday to prevent school districts from entering costly bond deals such as a 2009 Folsom Cordova Unified agreement that requires about $18 in payments for every $1 borrowed.
Assemblywoman Joan Buchanan, D-Alamo, said her Assembly Bill 182 responded to reports that some California school districts were paying huge amounts of interest on capital appreciation bonds. The controversial borrowing tool allowed districts to postpone repayment for decades to fund current campus construction, all the while accumulating large amounts of owed interest that future taxpayers must retire.
Among the most notorious was a bond to raise $105 million for Poway Unified School District that will cost the San Diego County district 10 times that amount in payments, or about $1 billion over 40 years.
Locally, Folsom Cordova Unified turned to capital appreciation bonds to finance new facilities and school improvements, including a two-story science building at Cordova High School. In return, the district saddled future taxpayers with $9.1 million of interest to retire just $514,000 in principal. The bond allowed the district to delay bond payments for more than two decades and keep local tax bills within the legal limit of $60 per $100,000 of a property’s value.
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Capital appreciation bonds are unlike conventional bonds that require governments to pay down principal and interest almost immediately. The bonds became particular popular after the housing market plummeted in 2007. Districts found they couldn’t raise as much from conventional bonds as they could during the boom years because borrowing limits are tied to property values.
The Yuba Community College District, which operates schools in Woodland and Marysville, will pay $59 million to retire $4.6 million in bonds that trustees approved in 2011. The district won’t make bond payments until 2038 and won’t finish paying off its debt until 2050.
The Dry Creek Joint Elementary School District in Roseville will pay $66 million to pay off $8.2 million in bonds from 2008. It won’t start making payments until 2032 and won’t finish until 2048.
“Taxpayers are on the hook to repay it,” Buchanan said of the bond debt. “They are asking taxpayers in the future to pay significant debt service for improvements that will benefit taxpayers today.”
AB 182 limits the total debt payments a district can agree to make to four times the principal of the loan. It also limits the life of capital appreciation bonds to 25 years. Financial institutions also must give districts the option of refinancing capital appreciation bonds after 10 years, something they have been reluctant to allow, Buchanan said.
The bill requires that school board members be given specific information about the interest rate and term of the loan before approving bonds with compounding interest or traditional bonds with terms longer than 30 years. Some board members at local school districts that issued capital appreciation bonds have told The Bee they were unaware of the high interest rates or that they were misled about the terms. The new law requires that bonds be on the agenda of at least two separate board meetings – the first to provide information to the public and the second for a vote.
Districts that use more traditional bonds with repayment beyond 30 years will be required to show that facilities being constructed will last at least the life of the bonds.
“Most superintendents aren’t financial people – they are educators,” Buchanan said.
She added that “no one knows what they are really signing up for. Now, they can see the cost of a capital appreciation bond and make a decision with their eyes wide open.”
It will be many years before the state sees the full impact of capital appreciation bonds. Buchanan said bonds with terms longer than 25 years would leave districts paying off facilities at the same time they would likely need to find new money to update the buildings.
“It’s not good fiscal planning,” she said.