Central Valley High School, completed in 2005, has been applauded as an attractive, utilitarian campus that cost the Ceres Unified School District only $53 million, about half of what the Modesto City Schools spent on Enochs High School, which opened a year later.
Central Valley was financed by state construction money and local bonds, which are paid for through higher property taxes. In 2001, nearly three-quarters of Ceres voters approved Measure J, a $25 million bond authorization to help pay for Central Valley, the town's second comprehensive high school.
Residents were satisfied enough with the results that in 2008, almost 70 percent voted for Measure U, a $60 million bond proposal to build the district's third junior high and to expand and upgrade other campuses. Through the years, there was a sense that Ceres was being prudent and showing foresight.
Here's what didn't wasn't widely known: To help finish these projects, the district used some of the expensive, very-long-term bond issues that some state leaders want outlawed.
Ceres sold three capital appreciation bonds, which typically defer interest and principal payments to a later date, resulting in higher costs.
The most problematic of Ceres' three capital appreciation bonds is the $15 million issue sold in late 2010. There's little doubt the money was needed to complete projects under way and to avoid defaulting on construction contracts. Ceres will start paying off this bond in 2015 but the heavy payments don't hit until 2030 and they climb to a whopping $10 million in 2050.
The total cost to pay back the principal and accumulated interest will be $124 million more than eight times what was originally borrowed. The only good thing about this bad apple is that it can be refinanced in 2028 if district leaders at that time make that decision.
Ceres is far from alone. Two hundred or more school districts in California have sold these kind of bonds, according to a Los Angeles Times investigation completed in late November. The Times' review of funds from 2007 to present showed about two dozen of our area school districts have issued capital appreciation bonds. Some have reasonable payback periods and amounts; some are scary.
In some cases around the state, taxpayers will pay more than 10 times the principal to retire the bonds. That outlook is what prompted the state superintendent of public instruction and state treasurer in mid-January to call for a moratorium on any more capital appreciation bonds until after the Legislature and governor enact some reforms.
When residents are asked to vote for a school bond measure, they are usually told what the district wants to build and that the tax rate will a certain amount per $100,000 assessed valuation of their property. Bonds that limit the tax rate to $60 (per $100,000 assessed valuation) require approval from only 55 percent of those casting ballots.
Bond campaigns are often based on emotion. This is what we need to do for our children.
What is usually left out of the discussion how long those higher property taxes will be in effect.
School board members are often as uninformed as the voters on this issue. District administrators may or may not understand the long-term costs of these bonds; often they rely too heavily on out-of-town financial advisors who are less than forthcoming about the overall cost.
The housing crisis also has been a factor. School districts have collected less property taxes for their bonds because assessed values are down. Individual homeowners get a good deal because they're paying less. School districts don't. Because the $60 rate cannot be changed, the only way for the district to finance current projects is to issue long-term bonds and pay them off in the distant future, when assessed values are up again. Most people aren't worried about what their property taxes will be in 2030, 2040 or later.
The result: The burden will fall to future generations, whose children won't benefit from the new schools and other improvements made in the early part of this century. Future school board members will inherit this obligation and it will limit their ability to build or renovate facilities during their terms.
Ceres as a dual example
We used Ceres as an example of a local district that used capital appreciation bonds, but Ceres is not the local district with the biggest capital appreciation bond debt. In fact, Ceres became a useful example because its leaders have taken a good look at their use of these bonds.
Earlier this month, Superintendent Scott Siegel organized a special board workshop to explain the district's debt, focusing on the troublesome capital appreciation bonds. The meeting was open to the public, but no residents attended. Unions usually have representatives at board meetings, but bonds aren't a high-interest topic for them. Bond money is not available for annual operating expenses, such as salaries and benefits.
Although Ceres voters approved the sale of $60 million in bonds as part of Measure U in 2008, the district has sold only $45 million and has reached its tax rate limit. Board members are equipped to explain to parents why the district cannot afford to make all of the promised improvements at Carrol Fowler Elementary and other older campuses.
Siegel also proposes that Ceres refinance one of its 2001 capital appreciation bonds, which will reduce the cost by $10 million to $11 million over two decades. That recommendation is on Tuesday's board agenda.
The bigger picture
The Legislature needs to put in place requirements that will prevent future use of bonds with exorbitant payoff costs. Any reform also must demand strategies to fully inform voters and local school board members of the long-term ramifications of bond financing.
Locally, we would like to see every school district, including the community colleges districts, devote a public board workshop to fully explain its overall debt for facilities. Even districts that have not used capital appreciation bonds should make it clear what is owed, for what and for how long. We doubt that most school board members know the true picture for their district.
The Bee will be asking every district to provide a snapshot of their debt. We plan to publish those later this year. The intent is not to incite anger at current or past school boards but to make us better informed for future bond decisions.
Finally, districts that can refinance their high-cost capital appreciation bonds should consider doing so. It is not fair to burden families 30 years from now with the cost of schools our children are enjoying today.
THE LOCAL LIST
Merced Union High School
Tracy Joint Unified
Big Oak Flat-Groveland
Bret Harte Union High School
San Joaquin Delta Community College District
Yosemite Community College District
Source: Los Angeles Times, Nov. 29 http://spreadsheets.latimes.com/capital-appreciation-bonds
CERES' PROBLEM BONDS
FROM MEASURE J IN 2001
Series A capital appreciation bond
Amount borrowed: $1.96 million
Total pay-back cost, with interest: $8.74 million
Debt ratio: 4.5
Problem: medium high debt ratio and cannot be refinanced
Series B capital appreciation bond
Amount borrowed: $5.12 million
Total pay-back cost, with interest: $28.19 million
Debt ratio: 5.5
Problem: high debt ratio
Plus: It can be refinanced and staff proposes to do that this year, reducing the total cost to about $17.15 million.
FROM MEASURE U IN 2008
Series 2010A capital appreciation bond
Amount borrowed: $15 million
Total pay-back cost, with interest: $124.04 million
Debt ratio: 8.3
Problem: High debt ratio and long term. Payments run through 2050. It can be refinanced, but not until 2028.
Source of numbers: Ceres Unified School District