ON CAMPUS: School bonds that bind
05/11/2013 2:32 PM
06/26/2013 2:32 PM
Anyone whose hand has cramped while signing real estate documents knows the sticker shock of those huge numbers. Spending school bond money, on the other hand, usually happens with an “Aye” and a community cheer.
The disconnect of paying and spending isn’t lost on California League of Bond Oversight Committees co-founder Michael Day, who calls it one of two central problems with the school bonds process.
First, he said, “The districts that make the spending decisions are not the ones paying the bill."
He uses an example of a district paying for a $200,000 energy upgrade that results in $5,000 annual savings. “What rational organization would ever do that – where annual savings is less than the debt service? Cost-benefit (analysis) doesn't work if you’re not paying for the bond.”
His second beef: Project designers – architects and contractors – are paid a percentage of the contract, meaning the larger the contract, the larger the fee.
This doesn't mean board members ignore costs or architects lard the contract, just that the system rewards those who do. Citizen oversight in theory keeps everything in line, but the complexities of bonds and contracts can befuddle volunteers.
Day and friends formed the league to help train and support bond oversight panels, equipping members to see past community pride and a good sales job. "We want people to be informed. We want the process to be transparent,” Day said.
Speakers at Friday’s CaLBOC conference in Sacramento hammered home a theme of public awareness, especially of often high-cost capital appreciation bonds.
“What is a reasonable interest rate on these types of issues? Two to one? Four to one? When it starts to get to be 24 to one you know something’s wrong,” said state Treasurer Bill Lockyer. Citing an example of a billion-dollar payback on a $100 million bond, Lockyer said, “To me there is no reasonable explanation of that. I’ve heard the excuses. It doesn’t matter. It’s stupid.”
About 20 percent of school districts in the state have issued CABs, Lockyer said, many having long terms, balloon payments, little transparency and no way to refinance.
“I understand their desire to make the community better,” he said. “Let’s just do it smarter.”
A bill by Assemblywoman Joan Buchanan (D-Danville), would limit school districts’ ability to issue high cost bonds. It would limit CABs to 25 years . Property owners could only be put on the hook for four times the amount of bond principal, and after 10 years districts would have to be able to refinance them.
“We believe school boards have a fiduciary responsibility to run the school district budget well, but they also have a fiduciary responsibility to the taxpayer,” Buchanan told conference-goers.
More than $74 billion in school bonds have been sold since the passage of Proposition 39 in 2000, which lowered the passing threshold to pass a school bond from 67 percent to 55 percent but also insisted on community oversight with bond oversight committees.
The initiative also had a provision that the bond’s cost stay under $60 tax per $100,000 of a property’s assessed value, which led to the proliferation of pay-later capital appreciation bonds. Districts often take out a two-pack of loans, one with payments starting now, like a standard mortgage, and a CAB, where the money comes now but the bill comes later, typically after paying off the first bonds.
The added property tax marches on at a steady pace, but putting off payments while the interest ticks up makes those later bonds far more expensive.
Day said he understands the desire to provide great places for children, but financial common sense still applies.
"Just saying it’s for the kids – well yeah, it’s for the kids. But at what price? It’s not to say we don’t need schools, we do. But saying we need schools at any price, and ignoring the price, is equally asinine.”
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