Long-term bonds leave school districts, taxpayers with enormous debt

January 31, 2013 12:00:00 AM PST
Many cash-strapped California school districts have found a way to fund new multi-million-dollar projects. But when those bills come due, generations of taxpayers could be saddled with a much bigger tab. A California Watch investigation examined why some Southland school districts will owe more than 10 times what they borrowed.

Alvord Unified School District's newest high school in Riverside County is Hillcrest High School, a state-of-the-art facility built to serve 1,600 students.

Classrooms are equipped with digital blackboards. There's an air-conditioned gymnasium and a rubberized track surrounding an artificial-turf football field.

Alvord Unified School District's newest high school in Riverside County is Hillcrest High School, a state-of-the-art facility built to serve 1,600 students.

Classrooms are equipped with digital blackboards. There's an air-conditioned gymnasium and a rubberized track surrounding an artificial-turf football field.

"As I was walking to the football field, I mean, I looked at the whole location. And I said, 'Wow, this is really nice," said Herb Calderon, assistant superintendent, Alvord Unified School District.

But when Calderon became the assistant superintendent for Business Services for the Alvord Unified School District in July 2012, he noticed that some of the school's planned features were missing.

"When I got to the top of the stairs, immediately it caught my attention, it's like, 'Where's 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.

The school was initially financed by $53 million in traditional bonds. But there were budget shortages. To help finance the rest of the $110 million school, the district turned to a creative -- and controversial -- method of financing.

"Alvord sold about $57 million worth of 'CABs'," said Calderon. "And over a 40-year period, that $57 million is going to cost the people of Alvord a total of about $375 million."

Those costly CABs are "Capital Appreciation Bonds," a way of postponing debt payments far into the future. Traditional school bonds require borrowers to start making payments within six months. In the end, the borrower pays about two to three times the amount borrowed.

Payments on CABs can be delayed for decades. In California those delays have meant paying up to 23 times more than the amount borrowed.

"I don't think that's a wise thing," said California State Treasurer Bill Lockyer. Lockyer believes these long-term payment bonds are fiscally unsound.

"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 some day and they are not paying for it as they use the new facility?" said Lockyer.

"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 Scott Andrews, who lives in the Alvord district.

Andrews ran for the school board in 2009 because he was worried about the way the school district was borrowing money.

"Once they start having to make payments of $19- and $20- and $25-million a year toward those bonds, the tax base doesn't support it," said Andrews. "So nobody's been able to tell me how they're going to pay these off."

The Alvord Unified School District is hardly an isolated case. A California Watch investigation found that California has some of the loosest rules governing capital appreciation bonds: 321 school districts have borrowed $5.5 billion that will end up costing taxpayers almost $22 billion.

In Alvord, school district officials say they had no choice but to turn to the controversial CAB bonds to finance their high school. The district was short of money and there was a great demand for a new school.

"I know the state treasurer is upset with these and of course he indicated that guys like me that put these deals together, we should be fired, but people need to realize that yeah, your kids are going to be saddled with this debt, and their kids, and so forth," said Calderon. "But look what they're getting: They're still getting a quality educational building."

But Scott Andrews questions why such high-tech schools need to be built now during a time of financial distress.

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

"I hope the exposure of these deals to the public will result in kind of a moratorium for a while," said Lockyer. "Ultimately, I think the law needs to get changed."

Meanwhile, local school districts say they have no choice but to fund schools any way they can.

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

State leaders have been meeting to discuss legislation that would limit the use of capital appreciation bonds. In the meantime, some leaders are calling for a moratorium on those bonds until new legislation is in place.


Load Comments