Tag Archive for Bond Oversight Committees

Nine Fall 2015 Commentaries on California School and College Bond Measures

2013 Annual Conference of California League of Bond Oversight Committees Highlights Current Controversies on Municipal Bond Sales for Schools (and High-Speed Rail)

I’m on the Advisory Board of the California League of Bond Oversight Committees (CalBOC), which held its annual conference today (May 10, 2013) in Sacramento. To improve public accountability for California K-12 and community college construction programs funded by money borrowed through bond sales, this non-partisan organization improves the training and resources available to bond oversight committees; educates the state legislature, local school boards, and the public about the oversight and reporting authority of bond oversight committees; and advocates on a state level, where appropriate, on issues of common concern to bond oversight committees.

California League of Bond Oversight Committees Logo 2013

Citizens’ Bond Oversight Committees were established through a section of Proposition 39 in 2000 that became California Education Code Sections 15278-15282Michael Day, president and co-founder of the California League of Bond Oversight Committees, said that attendees should “go with the knowledge that you’re doing good things” as ordinary California citizens. Day kicked off the 2013 conference by asserting that “spending wisely shouldn’t be a partisan issue.” (I would have added that spending foolishly doesn’t seem to be a partisan issue.)

Presenting first at the conference were two finance and business administrators from the Santa Ana Unified School District, which is getting criticized for borrowing $35 million in 2009 by selling Capital Appreciation Bonds at an almost 10:1 debt-service-to-principal ratio. In addition to suggesting that Capital Appreciation Bond sales can be a valid business decision under certain conditions, they insinuated that school districts know best how to sell their bonds, and perhaps the state legislature is needlessly interfering in their own local affairs. To boost their case, they asked two rhetorical questions to show the arbitrary nature of the provisions in Assembly Bill 182 that would restrict school district sales of Capital Appreciation Bonds:

1. What’s the proper maximum maturity period for school bonds?

(AB 182 proposes 25 years)

2. What’s the proper maximum ratio of debt-service-to-principal on school bonds?

(AB 182 proposes 4:1)

Following their presentation was Assemblywoman Joan Buchanan (D-San Ramon), who introduced Assembly Bill 182 to restrict the sale of Capital Appreciation Bonds. (The bill passed the Assembly on April 8, 2013 with a 75-0 vote.) Catching my attention during her speech was her assertion that the legislature should expand state-mandated performance reviews for school bond measures to include such items as an examination of the school district’s labor compliance program. Knowing how the old labor compliance program laws and regulations had changed starting in 2009, I asked what she meant. Assemblywoman Buchanan said that the State Allocation Board had discovered that some school districts had applied for and received state reimbursement for labor compliance program expenses but weren’t actually following the state requirements and didn’t deserve the reimbursement.

California State Treasurer Bill Lockyer Speaks at 2013 California League of Bond Oversight Committees Conference

California State Treasurer Bill Lockyer speaks at the 2013 California League of Bond Oversight Committees annual conference.

California State Treasurer Bill Lockyer was the keynote speaker. He declared that the Poway Unified School District officials who engineered its notorious 2009 Capital Appreciation Bond sales were “stupid” and should be fired or recalled. Many people in the meeting room clapped in response, although I don’t know what the representatives from the Poway Unified School District did.

Lockyer sees “a whole industry that lives off of this” scheme for Capital Appreciation Bonds and detects “an odor” of underwriters and other financial management firms engaged in “corrupt practices” and taking advantage of school districts through bond sales. He said he heard a story about how an underwriting firm turned down a school district’s request for handling a ill-advised, foolish Capital Appreciation Bond sale, and then the school district asked another firm with fewer scruples, which was pleased to do it for a fee.

Lockyer noted that the 4:1 debt service to principal ratio for school bonds indicated in Assembly Bill 182 was a political compromise among various parties, including some special interests that demanded either absurd ratios (such as 9:1) or no ratio at all. He actually supports an outright ban on Capital Appreciation Bond sales by school districts. (Michigan enacted such a ban in 1994.)

At the March 18, 2013 meeting of the board of the California High-Speed Rail Authority, chairman Dan Richard told me to ask the State Treasurer about the details of the bond sales for the California High-Speed Passenger Train for the 21st Century. So I was ready with the first question for Bill Lockyer: when will the authorized High-Speed Rail bonds be sold, what will be the rate, will they be 35-year bonds as authorized, and will some of them be sold as Capital Appreciation Bonds?

Lockyer answered by revealing that California High-Speed Rail bonds will not be issued separately but will be “mixed in” with general state bond sales (such as the state bond sales in mid-April 2013). Then to my surprise, he said that a small amount of the high-speed rail bonds had already been sold! I sent out a tweet that’s now getting some attention:

California Treasurer Bill Lockyer says small amount of bonds for California High-Speed Rail have been sold already. Did anyone know this?

He also told me that the market sets the rates – a clever answer from an experienced politician who knows how to evade the tough questions.

Regarding state K-12 school bonds, Lockyer said about $2 billion was left from the state school bond measures approved in the 2000s and that it was likely that the state legislature would put another school construction bond measure on the November 2014 ballot. (Three school bond measures approved by California voters in 2002, 2004, and 2006 authorized the state to borrow $35.8 billion by selling bonds. The State Allocation Board disperses the grants.)

Finally, in response to an excellent question from Kern County Taxpayers Association executive director Mike Turnipseed, Lockyer said that perhaps some of very old voter authorizations for bond sales that never happened in the end could be “erased” or cancelled, thus eliminating the state’s liability for repaying the principal on those bonds.

Kevin Carlin of the Carlin Law Group in San Diego made a presentation about single-source alternative construction procurement methods, including design-build and lease-leaseback. The presentation was routine until he began advancing his view that there’s a “proliferation of illegal lease-leaseback school contracting” in California and cited the Sweetwater Unified School District in Chula Vista as an example. A vocal faction in the audience – primarily school district officials and an attorney for school districts – disputed these claims. During the question-and-answer session, I told Carlin that his only ally in the state legislature was the self-interested Professional Engineers in California Government union and that his best chance for addressing the problem was to add provisions to law that ensure better public access to bidding and contract documents on design-build and lease-leaseback projects. (See California Public Contract Code Section 20133 (g).) Supporters of lease-leaseback complained that I wasn’t asking a question.

Joel Thurtell Speaks on Capital Appreciation Bonds at 2013 California League of Bond Oversight Committees Conference

Joel Thurtell speaks on Capital Appreciation Bonds at the 2013 California League of Bond Oversight Committees annual conference.

Retired Detroit Free Press reporter Joel Thurtell, now a blogger at www.JoelontheRoad.com, was the last speaker at the conference. His investigative report “Michigan Schools Load the Future with Debt” was the headline story in the April 5, 1993 Detroit Free Press, and it led to a 1994 state law banning Michigan school districts from selling Capital Appreciation Bonds.

One of the reasons why the article was effective in changing public policy was the directive of a Detroit Free Press editor to Thurtell to produce a “Big Graphic” showing the extent of Capital Appreciation Bond sales by Michigan school districts. Thurtell had to perform many days of tedious paper-based research at the state treasurer’s office in Lansing, but the result was stunning. (Likewise, I believe that the graphic elements of the www.VoiceofSanDiego.org articles on Capital Appreciation Bond sales by California school districts was a major factor in finally bringing state and national attention to the issue.)

In January 2009, Thurtell posted the text of his old Detroit Free Press articles on his web site. Nothing more happened with them until March 2012, when Alicia Minyen, a member of the Board of Directors of the California League of Bond Oversight Committees (CalBOC), found his articles with a web search using the terms “Capital Appreciation Bonds” and “ban.” At this time the word was beginning to spread about the astonishing 10:1 debt service to principal ratio for bonds sold in 2009 by the Poway Unified School District, and the Los Angeles County Treasurer was publicly warning against Capital Appreciation Bond sales.

Joel Thurtell and Alicia Minyen

Champions of fiscal responsibility: Joel Thurtell from Michigan and Alicia Minyen from California.

Minyen contacted Thurtell and then reported on what she learned at the 2012 California League of Bond Oversight Committees. I heard Minyen’s presentation on Capital Appreciation Bonds and then reported it on my blog on May 11, 2012 as Please Read This, Even If You Think Municipal Bonds Are Really BORING: We’re Setting Up the Next Generation of Californians to Pay Staggering Property Taxes, apparently being the first Californian to post a journalistic report on the web about this practice in California.

Thurtell noted today that the worst abuse of Capital Appreciation Bonds in Michigan was at a school district that even used bond proceeds to buy personal computers. I immediate thought about how California school districts are using bond proceeds to buy electronic tablets, with Los Angeles Unified School District and San Diego Unified School District being two prominent examples.

Don’t Be Fooled! Meet Some Sneaky Fake Taxpayer Groups In California

In November 2000, California voters approved Proposition 39, which allows school districts to seek voter approval for school construction bonds at a 55% threshold instead of a two-thirds threshold. One of the conditions in Proposition 39 required of school districts seeking the 55% threshold for passage is to establish a Citizens Bond Oversight Committee, with the requirement that “One member shall be active in a bona fide taxpayers’ organization.” (See California Education Code Section 15282.)

I scoffed at that provision and figured it wouldn’t be long before the California Labor Federation, AFL-CIO and its regional affiliates created their own “bona fide taxpayers’ organizations” to undermine bond oversight committees and make sure taxpayers remain a generous source of revenue for the government and the people who live off of it.

That has surely happened with the case of the Middle Class Taxpayers Association in San Diego, one of two obviously phony taxpayer organizations that float about nowadays to provide cover for the union tax-and-spend agenda.

The Middle Class Taxpayers Association in San Diego – FAKE!

The Middle Class Taxpayers Association, formed in 2011 in San Diego, betrays its true agenda with the code words in its mission, as reported in the leftist Ocean Beach Rag: “MCTA will focus on pocket-books issues such as healthcare coverage, housing affordability, quality of life, small business development, asset building, moral public budgeting, employment self-sufficiency, lifetime education, retirement security, and consumer safety.” (They forgot to include “investment” in this list.) In other words, more taxes, more programs, more spending.

A post on the web site of the San Diego County Republican Party claims that “the ‘Middle Class Taxpayers Association’ isn’t a new voice for responsible stewardship of our tax dollars. It’s a front group shilling for the San Diego (Central) Labor Council. The Labor Council doesn’t even try to hide its involvement.” No surprise, the Middle Class Taxpayers Association opposes Proposition A (Fair and Open Competition) and Proposition B (City Employee Pension Reform) on the June 5 ballot in the City of San Diego.

In the summer of 2011, the Governing Board of the Southwestern Community College District in Chula Vista declined to reappoint Rebecca Kelley, the representative of the San Diego County Taxpayers Association, to its Citizens’ Bond Oversight Committee for the $389 million Proposition R bond measure, instead placing a representative of the Middle Class Taxpayers Association on the oversight committee.

That so-called taxpayers’ representative is Matt Kriz, political director of International Union of Painters and Allied Trades, District Council 36 and Local 831. As reported earlier by the Dayton Public Policy Institute, the board of directors of the Southwestern Community College District is about to vote on a policy to require contractors to sign a Project Labor Agreement with construction unions to work on projects funded by Proposition R. Even the college newspaper was able to make the connection:

Builder Decries Loss of Oversight Members: SWC Board Replaced Two on Prop. R Committee over the Summer – Southwestern College Sun newspaper – October 7, 2011

Also, see Breaking: Labor Corruption…SD Labor Council Seeks to Oust Taxpayer Advocate from Oversight Committee – posted on San Diego Rostra by Ryan Purdy – July 12, 2011

The real taxpayers’ organization in San Diego County is the San Diego County Taxpayers Association. In addition, Richard Rider’s San Diego Tax Fighters is a reliable source of information on local fiscal responsibility.

The Contra Costa County Senior Taxpayers Group – FAKE!

I only checked the existence of this phony organization when construction union officials handed me a letter from the Richmond-based “Contra Costa County Senior Taxpayers Group” on May 18 outside an event hosted by the Contra Costa Taxpayers Association. The letter reiterated union-backed attacks on a study showing that school construction in California is 13%-15% more expensive when a school district requires contractors to sign a Project Labor Agreement with unions.

Using web searches, I only find one example of the Contra Costa County Senior Taxpayers Group involved in policy issues: on June 18, 2009, Susan Swift – the executive director of the Contra Costa County Senior Taxpayers Group – spoke to the Brentwood City Council in support of a requirement for contractors to sign a Project Labor Agreement to work on the Brentwood Civic Center. (The union requirement was approved on a 3-2 vote.) Swift is a former staffer to two San Francisco Bay Area Democrat state legislators and received the endorsements of numerous Democrat politicians and unions when she ran unsuccessfully for Director of the West Contra Costa Healthcare District in 2004.

The real taxpayers’ organization in Contra Costa County is the Contra Costa Taxpayers Association. There is also a small group called the Alliance of Contra Costa Taxpayers, which still seems to pop up occasionally to oppose new taxes but whose web site has been neglected for several years.

The Mother Lode Taxpayers Association – BONA FIDE or a POLITICAL FRONT?

I was reminded last week of my old 2000 prediction about fake taxpayer groups when I read about the controversy concerning the legitimacy of the Mother Lode Taxpayers Association, a group founded in 2010 that established a Political Action Committee on April 12, 2012 for independent campaign expenditures in support of Frank Bigelow, a Republican candidate for the 5th Assembly District facing off in the June 5 primary against former Assemblyman Rico Oller.

Now, I’m guessing that Frank Bigelow (just like Rico Oller) would be a solid vote for fiscal responsibility in the California State Assembly. But I wouldn’t regard the three donors to the Mother Lode Taxpayers Association’s Political Action Committee to be special interest groups known for their philosophical resistance to relentless tax increases and government expansion. It received $150,000 from the California Real Estate Independent Expenditure Committee, $75,000 from the California Dental Association Independent Expenditure PAC, and $10,000 from the California Cattlemen’s Association PAC (CATTLE PAC).

The Howard Jarvis Taxpayers Association (which endorsed Rico Oller) issued a press release noting “fake taxpayer groups like this undermine legitimate taxpayer organizations…” Yet, I notice that the web site for the Mother Lode Taxpayers Association has been active in other local campaigns in the past three years: see here. The executive director, Heidi Morton, is active in Republican and conservative causes in Tuolumne County.

So is the Mother Lode Taxpayers Association bona fide or not? I hope so, and I hope it will join the other legitimate taxpayer associations in California in the lonely fight for fiscal responsibility.

A Fairly Trustworthy List of Taxpayer Organizations in California

I don’t know every listed group, but I believe the National Taxpayers Union (based in Washington, D.C.) has posted a fairly accurate list of bona fide taxpayer groups in California: California is the Best Example of How to Run a State’s Economy into the Ground.

Please Read This, Even If You Think Municipal Bonds Are Really BORING: We’re Setting Up the Next Generation of Californians to Pay Staggering Property Taxes

Today I attended the first annual conference of the California League of Bond Oversight Committees (CalBOC) in Sacramento.

Several speakers provided guidance on how to be an effective oversight committee for a school district and provided case studies of dysfunctional oversight committees. But for me, the most valuable part of the conference was learning that foolish bond sales to finance school construction today are leaving our children and grandchildren with a tremendous tax burden in 20 to 40 years.

Walking into the conference, I knew little about municipal bonds. Unlike many Californians, I had understood that taxpayers must pay back the principal on these bonds, must pay back significant interest payments to the investors who buy the bonds, and must pay fees for various professional services associated with selling the bonds. Bonds are not “free money.”

I will guess that even Californians who know that a bond creates a debt that needs to be paid back usually don’t consider that voters who approve a $100 million bond are usually assessing property owners with taxes of about $180 million (amount not adjusted for inflation) over the term of the bond, when interest payments and fees are included in the total debt.

Traditionally, school districts have sold typical “General Obligation Bonds,” in which investors buy bonds, receive regular interest payments, and then receive the principal at the end of the term of the bond. But the growing problem for future generations of Californians is that they will need to pay off more than 1200 “Capital Appreciation Bonds” (CABs) to fund school construction (or to fund the funding of school construction, in a few cases).

Capital Appreciation Bonds are sold at a price substantially less than the principal amount of the bond. Investors don’t receive interest payments regularly over the life of the bond, but instead get a single huge payment of the principal plus the accumulated compounded interest at the end of the term of the bond.

People tend to underestimate the power of compounded interest, in which interest is earned on the principal AND on the accumulated interest. One speaker claimed that Poway Unified School District (in San Diego County) sold 40-year Capital Appreciation Bonds that will cost taxpayers 2200% of the principal because of the compounded interest.

Elected school boards like Capital Appreciation Bonds because they defer payments on the principal and backload interest payments to the final years before maturity, therefore keeping the present tax rate for property owners under the maximum rate set in Proposition 39 as a condition to seek 55% voter approval for the bond (rather than two-thirds approval).

Evading higher property taxes helps school board members to stay in public office, of course. And the huge debt service payments resulting from the compounded interest in Capital Appreciation Bonds will start for taxpayers 30 to 40 years after the bonds are issued, at which time many of the voters who approved the bond measures will be dead, as well as the school board members who authorized the sale of Capital Appreciation Bonds so many years earlier.

Does this story seem far-fetched because you’ve never heard of it? I think ordinary citizens rarely hear about municipal bonds because the topic can be complicated and dry. It doesn’t sell newspapers and it doesn’t attract TV viewers. Perhaps my layman status will allow me in occasional blog posts over the next few weeks to clearly and effectively explain the long-term dangers of these Capital Appreciation Bonds.