Tag Archive for California League of Bond Oversight Committees (CalBOC)

News Coverage: California Voters Must Be Wary of More Borrowing Via Bond Sales for School and Community College Construction

In July 2015, the California Policy Center released a 361-page report For the Kids: California Voters Must Become Wary of Borrowing Billions More from Wealthy Investors for Educational Construction. (Links to individual sections are below.)

For the Kids - California Voters Must Become Wary of Borrowing Billions More from Wealthy Investors for Educational ConstructionAs of August 26, 2015, the report has received the following news media coverage:

Six California School Districts Will Ask Voters on November 3 to Borrow $1.2 Billion From Bond Investors – commentary by Kevin Dayton – Flash Report – August 17, 2015

Unions Seek Control of Recent California School Bond Measures – commentary by Kevin Dayton – Union Watch – August 11, 2015

School Bonds May Equal Taxpayer BondageVictorville Daily Press – August 8, 2015

California Schools Stick Taxpayers with $149 Billion in Bond Debt – Breitbart News – August 5, 2015

California is in Huge Debt Hole Because of School Bonds – KFBK News Radio 1530 AM/93.1 FM in Sacramento – August 4, 2015

“For the Kids” Borrowing Will Saddle Kids with Debt – opinion piece by Gloria Romero in Orange County Register – August 4, 2015

Tough Education Reform, not More Borrowing and Spending, is What Students Need – commentary by Ed Ring – Union Watch – August 4, 2015

Specter of School Bonds Is Haunting Californians – opinion piece by Ed Ring in Sacramento Bee – August 2, 2015

Statewide Report Criticizes Passage of School Bonds – lead story in California League of Bond Oversight Committees Review – July 29, 2015

Doing the Math, Bond Debt for California Schools May Not Pencil OutModesto Bee – July 28, 2015

First look: Poll finds support for testing — Pell grants for prisoners — Washington state chief: Put more dollars into education – Politico (Morning Education) – July 28, 2015

School Bond Proposal Stirs California DebateThe Bond Buyer – July 27, 2015

Report: Voters Better Start Learning How Construction Bonds WorkLA School Report – July 27, 2015

Deceptive Ballot Language for Solano College Bond Measure Not Unusual – opinion piece by Kevin Dayton in Vacaville Reporter – July 25, 2015

Statewide Report Criticizes Passage of School BondsFresno Bee – July 24, 2015 (reprinted as Report Criticizes Passage of School Bonds in California in Education Week – July 27, 2015)

Here are links to each section of the report:

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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.

Foolishness That Won’t Be Stopped: California’s K-12 School Districts Use Borrowed Money from Bond Sales to Buy iPads and Other Technological Gadgets

The web site www.EdSource.org (“Engaging Californians on Key Education Challenges”) has an article today (December 18, 2012) entitled Districts Face Questions in Spending Long-Term Bonds for Short-Lived Technology. It’s a good summary of how some K-12 school districts in California are using language in Proposition 39 to justify spending borrowed money from bond sales to “equip” schools with computers and other technological products.

Money borrowed through bond sales is typically paid back with interest over a long period of time – much longer than the useful life of computers. Aren’t you glad you didn’t take out a 30-year bank loan to pay for your Radio Shack TRS-80?

Chris Reed had a short piece posted in the December 9, 2012 www.CalWatchdog.com entitled Will School Finance Scams Be Addressed? One of Two at Best. He predicts the California state legislature will restrict the ability of educational districts to sell Capital Appreciation Bonds (CABs), but will not prevent educational districts from using bond proceeds to buy technological products.

Proposition Z was and still is the Zombie Tax.

Proposition Z was and still is the Zombie Tax.

The most prominent recent controversy about California school districts using borrowed money from bond sales to buy technology occurred during the fall 2012 campaign to pass the $2.4 billion Proposition Z bond measure for the San Diego Unified School District. The San Diego County Taxpayers Association led the charge in pointing out how the school district was spending bond proceeds on iPads. In the October 9, 2012 article Is School Bond Money Going to iPads Over Repairs? Fact Check, Voice of San Diego reported the following:

As of mid-September, the district says it had spent more than $379 million of its Prop. S funds. About 11 percent of that has been used to buy iPads, computers and other technologies, according to figures released by school officials.

While the article never actually stated the amount, 11 percent of $379 million is $42 million.

In a subsequent October 25, 2012 article $2,500 iPads? Fact Check, Voice of San Diego reported these findings:

A display case at San Diego Unified School District administrative headquarters highlighting the Proposition S bond measure. The school board has not yet directed district personnel to enhance the display with the original signed Project Labor Agreement negotiated with union officials.

A display case at San Diego Unified School District administrative headquarters highlights the Proposition S bond measure.

The school district used some money collected under Proposition S, the bond approved in 2008, to invest in classroom technology upgrades, including more than 21,500 iPads and nearly 77,800 laptops. More purchases are planned next year…

The iPad purchases came in two phases. First, the district used a series of highly controversial 40-year bonds to buy 10,729 iPads. The district says each iPad cost $420 plus another $116.50 for three-year warranties and accessories. After reviewing bond documents, we calculated that the district will pay an average of about 7.6 times that amount once the final bill comes due. That means a single iPad will cost $4,077.

The district’s second purchase of nearly 10,800 iPads will be less burdensome. The next set of bonds came with a bill that’s an average of about 5.1 times the original cost. Our math shows the district can expect to pay about $2,731 per device for iPads purchased in the second wave.

San Diego voters didn’t care: 61.80% of them voted for Proposition Z on November 6, 2012 and guaranteed that the San Diego Unified School District will have the authority from the 2008 Proposition S and the 2012 Proposition Z to borrow millions of dollars more to spend on iPads.

Besides the bond investors, the people making money on this activity are investors in Apple, Inc. I tweeted the following about the www.EdSource.org article:

California school districts using borrowed $ from construction bond sales to buy computers. (What’s Apple’s position?)

Finally, Jack Weir, a member of the Pleasant Hill City Council and an activist in several community and taxpayer groups in Contra Costa County, emailed a provocative response to the leadership of the Contra Costa Taxpayers Association in response to the www.EdSource.org article:

From:Jack Weir
Sent:Tuesday, December 18, 2012 9:26 AM
To: xxxx
Subject: Re: Should schools be using bond money for technology which is so short lived?

As Alicia Minyen, Anton Jungherr and other CalBOC board members have amply demonstrated, school bond programs are largely out of control – literally.  Mt. Diablo and West County districts have abused Prop 39 on a major scale, although there are far more egregious examples elsewhere in the state.  The new Mt. Diablo board is committed to address their Measure C issues, but will have little corrective latitude.  Dismantling the massive damned solar canopy won’t unring the bell.

There is a whole industry of bond counsels and consultants that work this field, operating in tandem with teachers unions and Democrat politicians that advocate milking the school construction programs to wring additional operational (compensation) funding from local property-owning taxpayers.

After ten years of wrestling with the problem of bringing public (government) education into the 21st century, it is clear to me that nothing short of a whole new paradigm is needed.  And, to get there, we should be asking broad future-focused questions, such as:

> Do we really need brick and mortar facilities dedicated exclusively to classroom teaching?  (Ditto brick and mortar “libraries.”)
> Does it make sense to continue to load ten year-olds with 50 back-breaking pounds of paper books*, when most have (or should have) access to digital devices and the internet?  Within five years, every bit of data and information needed for a good education will be available on the “cloud,” accessible only via digital devices.  Other countries (and states) will leap-frog traditional educational models and kick our economic asses.  Take a look at what India did to bring education into its remote rural villages 25 years ago, and now their kids are coming here to work on H-1B programs.
> Who should pay for K-12 education?  “Free” education ain’t; certainly not to taxpayers, who currently gain a pathetic return on their “investment.”
> What’s the right role for taxpayer advocates in the political forum going forward?

It’s time to start over.
Jack

Based on the results of the November 6, 2012 elections, Californians don’t want to start over. They like the current paradigm, in which the kids get to use “free” iPads.


* Note from Kevin Dayton: regarding the weight of paper textbooks, Assembly Bill 2532, signed into law by Governor Gray Davis in 2002, required the California Board of Education, on or before July 1, 2004, to adopt maximum weight standards for elementary and secondary school textbooks. The California Board of Education subsequently adopted regulations concerning textbook weight standards.

Michigan Reporter Joel Thurtell Provides Background on How Michigan Banned Capital Appreciation Bonds

UPDATE: Joel Thurtell has now posted (on his web site Joel on the Road) the “big graphic” – a table associated with his 1993 exposé of Michigan school districts selling Capital Appreciation Bonds (CABs). The table lists the Michigan school districts that sold Capital Appreciation Bonds, the amount of bonds sold, the amount of interest to be paid to investors, the length of time from sale to maturity, and the interest as a percentage of the principal (the amount borrowed).

To give readers an understandable comparison, the table also provides the numbers for a conventional mortgage at 7% for various time periods. (Try it at 4% today.)

These amounts and percentages are peanuts compared to what California K-12 and community college districts are selling as Capital Appreciation Bonds. Notice the highest percentages of interest to principal in Michigan school districts were 575% and 406%. In California, the Poway Unified School District’s 2011 bond sales were at 935%.

The next step in the process to ban California educational districts from selling Capital Appreciation Bonds is for someone to re-create this chart for California and circulate it widely.


Joel Thurtell (web site Joel on the Road) is the now-retired Detroit Free Press reporter whose intensively-researched 1993 articles about Michigan school districts borrowing money by selling Capital Appreciation Bonds were the catalyst for a 1994 Michigan ban on Capital Appreciation Bonds. Now he is working to make sure California citizens aren’t victimized by the same scam.

Through his blog, Joel Thurtell was the first reporter to publicly expose how California’s K-12 school districts and community college districts have been selling Capital Appreciation Bonds as a way to borrow money for school construction. His attention to this obscure but extremely costly and disingenuous method of borrowing money has been acknowledged by various news stories throughout California (Community College Districts’ Bonds Inflate Taxpayers’ Repayments– Sacramento Bee – August 22, 2012; High Cost of School Bond Shocks Poway – San Diego Union-Tribune – August 17, 2012; Kudos to Michigan Journalist on the Poway Bond Story– Voice of San Diego – August 8, 2012; Joel Thurtell Shames Poway, CA Financing– Daily Markets – August 10, 2012; School Bonds Could Trigger Fiscal Shock – Financial Times via CNBC – August 9, 2012)

The Voice of San Diego web newspaper finally managed to grab the attention of the state’s political leaders and news media with an article on August 8, 2012: Where Borrowing $105 Million Will Cost $1 Billion: Poway Schools – Voice of San Diego – August 6, 2012. I continue to believe that it was the Voice of San Diego’s simple pie chart of the Poway Unified School District’s bond repayments (designed by Keegan Kyle) that allowed this story to fly – give Mr. Kyle a Pulitzer.

I found out about Mr. Thurtell’s crusade to alert Californians to the Capital Appreciation Bond racket when his 1993 Detroit Free Press articles were referenced by Mt. Diablo Unified School District 2010 Measure C Citizens Bond Oversight Committee member Alicia Minyen at the California League of Bond Oversight Committees annual conference on May 9. I wrote about the presentation about Capital Appreciation Bonds at this conference in a couple of mid-May blog posts, which have received a consistent trickle of attention since then.

Now, with San Diego County Treasurer Dan McAllister promoting an outline of possible legislation to restrict the sale of Capital Appreciation Bonds in California, Joel Thurtell has posted Public Act 278, the 1994 law that banned Michigan school districts from selling Capital Appreciation Bonds. He indicates that the relevant sections are 380.1352a (Borrowing money and issuing bonds); 380.1351b (Appreciation or sale at discount); and 380.1352 (Borrowing or issuing bonds; contract for legal representation).

Joel Thurtell has also posted the text of most of his 1993 Detroit Free Press articles about Capital Appreciation Bond sales by Michigan school districts, although as of August 26, 2012 he was still preparing additional unpublished text from the first article, dated April 5, 1993, and related charts published in the newspaper.

This Michigan law banning the sale of Capital Appreciation Bonds was enacted shortly before major newspapers and most state legislative web sites began posting content electronically on the web. (For example, the Michigan and California legislative web sites post bills starting with the 1995 sessions.) Try to research any state or local public policy activity before 1995, and everything is a lot more difficult! Thank you to Joel Thurtell for taking the time to provide public access to how the people of Michigan handled the Capital Appreciation Bond sales in their school districts in the early 1990s.

San Diego County Treasurer Drafts Outline of Legislative Proposal to Restrict and Expose How California School Districts Sell Capital Appreciation Bonds

UPDATE:

Now posted on the County of San Diego Treasurer’s web site:

Information about San Diego County Treasurer Dan McAllister’s August 21, 2012 press conference and presentation materials about Capital Appreciation Bonds.

A YouTube video of San Diego County Treasurer Dan McAllister‘s August 21, 2012 press conference: SD County Treasurer Dan McAllister Calls for School Bond Reform

UPDATE 2: The San Diego Union-Tribune reports on Senator Mark Wyland‘s Senate Bill 1205, which was amended on March 28, 2012 to impose restrictions on the sale of Capital Appreciation Bonds by K-12 school and community college districts. Howard Jarvis Taxpayers Association official David Wolfe, who also serves on the Board of Directors of the California League of Bond Oversight Committees, is quoted in support of the bill. Senate Bill 1205 never had a hearing and never had a legislative analysis.

Lawmaker Sought to Stop Controversial Bond Financing – San Diego Union-Tribune – August 23, 2012


A little more than three months after the California League of Bond Oversight Committees (CalBOC) annual conference brought my attention to school districts and community college districts selling Capital Improvement Bonds (CABs) to borrow money for school construction, a prominent public official has proposed legislation to increase public awareness of the practice and rein it in.

Yesterday (August 21, 2012), San Diego County Treasurer Dan McAllister held a press conference to announce the outline of a legislative proposal to deal with Capital Appreciation Bonds. At the time of this writing, his office inexplicably does not have any information about the press conference or the proposal on its County of San Diego Treasurer web site, but the San Diego Union-Tribune posted his letter and proposal on its own web site. See them here:

Outline of the Proposed Capital Appreciation Bond Reform from the San Diego County Treasurer

Letter from the San Diego County Treasurer Explaining the Need for Capital Appreciation Bond Reform

As I wrote in my August 11, 2012 blog post (News Media Beginning to Pick Up on Story about California School Districts Selling Insidious “Capital Appreciation Bonds” – Dayton Public Policy Institute an Early Informant to California Taxpayers), the attraction of Capital Appreciation Bonds for California school districts and community college districts has been referenced in various specialty publications, including the CalBOC Newsletter, my own Dayton Public Policy Institute blog posts on Capital Appreciation Bonds, and originally in Joel Thurtell’s blog www.JoelontheRoad.com.

It was a set of articles earlier this month in the Voice of San Diego about the Poway Unified School District sale of Capital Appreciation Bonds that really brought the story to mainstream public attention. People get motivated when they are the direct victims! For proof that the school district borrowed $105,000,150 by selling Capital Appreciation Bonds and will need to pay investors $981,562,329 by 2052, see page 12 of the Poway Unified School District’s Proposition C Bond Building Fund Annual Audit Report, January 31, 2012.

I hope the California Association of County Treasurers and Tax Collectors can align with the California League of Bond Oversight Committees (CalBOC) and various state and regional taxpayers organizations such as the Howard Jarvis Taxpayers Association to enact bipartisan legislation in 2012 to restrict or ban the sale of Capital Appreciation Bonds by school districts and community college districts. My statement about Capital Appreciation Bonds:

School board members don’t care how much these Capital Appreciation Bonds cost after 30 or 40 years. By the time property owners are assessed with the staggering tax burden, the elected board members will be out of office and probably dead. They won’t be accountable for the consequences, but they’ll still have their names on rusty plaques next to the front doors of deteriorating schools.

Latest News Media Coverage of CAB Reform

School Bond Reform Gaining Support – San Diego Union-Tribune – August 22, 2012

Tax Collector Blasts Poway Unified Bonds, Calls for Reform – North County Times – August 22, 2012

County Treasurer Calls for Widespread School Bonds Reform – Voice of San Diego – August 22, 2012

Poway Unified Residents Fume Over Expensive Bond: School District Officials Explain, Defend Decision Behind $1 Billion Debt – San Diego Union-Tribune – August 21, 2012

Poway Bond is a Billion-Dollar Box-Office Bomb – San Diego Union-Tribune (columnist Logan Jenkins) – August 21, 2012

County Treasurer Calls for Widespread School Bonds Reform – Voice of San Diego – August 21, 2012

A Creative Borrowing Boom: VOSD Radio – Voice of San Diego – August 20, 2012

Tonight: Big School Board Meeting in Poway – Voice of San Diego – August 20, 2012

High Cost of School Bond Shocks Poway Unified: Repayment Under Financing Plan Will Be 9 Times the Principal – San Diego Union-Tribune – August 17, 2012

‘Wow, If True Then That Is Financial Suicide’: Comments on School Bonds – Voice of San Diego – August 10, 2012

Find High-Interest School Bonds in Your District: A Five-Step Guide – Voice of San Diego – August 8, 2012

A Creative Borrowing Boom: Poway Not Alone in High-Interest Financing – Voice of San Diego – August 7, 2012

Where Borrowing $105 Million Will Cost $1 Billion: Poway Schools – Voice of San Diego – August 6, 2012

News Media Beginning to Pick Up on Story about California School Districts Selling Insidious “Capital Appreciation Bonds” – Dayton Public Policy Institute an Early Informant to California Taxpayers

Finally, the news media is discovering and reporting on how many California school districts are selling “Capital Appreciation Bonds” to investors, thus committing future generations of California property owners to staggering tax payments.

To summarize this obscure issue in two paragraphs, when California voters approve “bond measures” so that school districts or other government entities can borrow money for construction projects, voters are directing local governments to sell “General Obligation Bonds” to investors such as individuals, commercial banks, insurance companies, and money market funds. Investors make money through the interest paid by the municipal government during the time it borrows the money. “General Obligation Bonds” are backed by the “full faith and credit” of the government entities, meaning the investors are guaranteed to get the principal and interest on the investment.

Traditionally, school districts and other government entities have sold General Obligation Bonds that provide investors with a semi-annual interest payment throughout the term of the bond, with the principal returned to the investors when the bond matures. But a recent trend for California school districts is selling a different type of General Obligation Bond. These are called “Capital Appreciation Bonds” (CABs), also known as Zero-Coupon Bonds, in which interest is compounded over the life of the bond and then paid all at once with the principal to the investors when the bond matures. This means that the government entity can delay collecting property taxes and backload the tax burden to the later years of the term of the bond, which can be as long as 40 years. Compound interest (paying interest on the principal AND interest) can accumulate huge financial obligations over such a long time period.

A reporter for the Detroit Free Press newspaper named Joel Thurtell found this same racket going on at Michigan school districts in the early 1990s and wrote some comprehensive articles exposing it, starting with the April 5, 1993 story “Michigan Schools Load the Future With Debt.” His reporting was one of the catalysts leading to a provision in Michigan law prohibiting the sale of Capital Appreciation Bonds. It was added to a school finance bill on June 22, 1994 as an amendment offered by State Senator Joanne Emmons, and Governor John Engler subsequently signed the bill into law.

Now retired from the Detroit Free Press but continuing his journalism with a blog (Joel on the Road: Words Shot With a Loose Cannon), Mr. Thurtell discovered earlier this year that California school districts were now playing this game. The giveaway was an outrageous 2011 sale of Capital Appreciation Bonds by the Poway Unified School District (just north of San Diego) that allegedly will cost taxpayers a total of $981 million by 2051. That’s the price of borrowing $105 million in 2011!

As I say to Californians whenever I try to explain this:

School board members don’t care how much these Capital Appreciation Bonds cost after 30 or 40 years. By the time property owners are assessed with the staggering tax burden, the elected board members will be out of office and probably dead. They won’t be accountable for the consequences, but they’ll still have their names on rusty plaques next to the front doors of deteriorating schools.

I learned about Capital Appeciation Bonds at the California League of Bond Oversight Committees (CalBOC) annual conference on May 11, 2012. (I’m on the Board of Advisors for this group.) I was astonished at the lack of news coverage about this potentially disasterous practice for the state and posted an article about it that evening.

I was still thinking about the issue a few days later and wondering why so few Californians knew or cared. Looking through my notes from the conference, I saw that the feisty and determined Mt. Diablo Unified School District Measure C 2010 Citizens’ Bond Oversight Committee member Alicia Minyen (an unsung hero for fiscal responsibility in California) mentioned that a reporter in Michigan has exposed the racket there, which led to a state ban on school districts selling Capital Appreciation Bonds. Researching on the web, I identified the reporter and then found his blog. I discovered he had posted several articles in the previous two weeks on the threat of Capital Appreciation Bonds in California, starting on April 27, 2012:

Muni bomb ticks in California

Posted on April 27, 2012 by Joel

By Joel Thurtell I was sipping coffee and reflecting on the ignorance displayed for all the world to read in a New York Times article. It was January 9, 2009. The Times story claimed to offer “a rare glimpse into … Continue reading →

I posted a comment on his blog to let him know that a fiscally conservative policy consultant in California had noticed the issue and planned to spread the news. He then mentioned me in his blog:

See no evil: CABS and media

Posted on May 16, 2012 by Joel

By Joel Thurtell Thanks to Kevin Dayton of the Dayton Public Policy Institute for noticing my recent columns about the evils of Capital Appreciation Bonds. He covered the May 11, 2012 meeting of California’s League of Bond Oversight Committees annual … Continue reading →

Fast forward to August 2012, and people are giving as much attention to my May 2012 articles about Capital Appreciation Bonds (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 and Reporter Behind Michigan’s 1994 Prohibition of Capital Appreciation Bonds (CABs) Watches and Writes about the CAB Frenzy at California School Districts) as they are to my posted photo of the closest Chick-fil-A to San Francisco. The issue is now getting attention, perhaps in part because big urban school districts such as the Sacramento City Unified School District, the West Contra Costa Unified School District, and the San Diego Unified School District are asking voters on November 6, 2012 for approval to borrow hundreds of millions and even billions of dollars through bond sales to investors.

A big break for exposing the issue was a Voice of San Diego article on August 6, 2012:

Where Borrowing $105 Million Will Cost $1 Billion: Poway Schools

After putting together a bond that will cost taxpayers almost 10 times what they borrowed, the Poway Unified School District has become California’s poster child for a form of exotic financing.

I suspect that a key element in the successful spread of this article was the brightly-colored pie chart that put the astonishing news into graphic form for people to understand.

The Voice of San Diego then provided a nifty guide on August 8, 2012 to other school districts selling Capital Appreciation Bonds:

Find High-Interest School Bonds in Your District: A Five-Step Guide

Want to find out if your local school district has borrowed money using expensive capital appreciation bonds? Follow our guide.

Regrettably, as other news media outlets picked up on the story and circulated it nationwide, Mr. Thurtell and the Voice of San Diego received some attention for their dispute over proper attribution of sources and credit for the story. I’ll let them speak for themselves on their web sites, but I am pleased to see this issue brought to the attention of the public as more California local governments and the State of California itself careen toward bankruptcy. (For example, see The Right Way, the Wrong Way, and the Poway of School Bond Financingwww.CalWatchdog.com – August 9, 2012)

Something has to be done now to protect today’s California children from oppressive taxes in 20-40 years when they start families, buy a house or other residential property, and own small businesses with property. (I’m assuming there will still be private property in California in 2052 – am I being too optimistic?) I want to see someone in the California State Legislature introduce a bill banning the sale of Capital Appreciation Bonds and limiting all General Obligation Bonds to a maximum time period of 30 years. It can be modeled on the law in Michigan.

Will any California state legislator dare to challenge the many special interests that regard school bonds as “chasing after money…live for today and don’t worry ’bout tomorrow, hey, hey, hey” (Use the chorus of this song as the theme music for the effort.)

Also, I thank Joel Thurtell for mentioning my early attention to this story in his blog:

Credit

Posted on August 9, 2012 by Joel

By Joel Thurtell I appreciate the article by Andrew Donohue in the Voice of San Diego acknowledging my work in uncovering and reporting about the Capital Appreciation Bond scandal in California. Donohue responded to my complaint that reporter Will Carless of the … Continue reading →

I’m in Michigan. The first California reporter to write about California’s Cab scam was Kevin Dayton, on May 11 and May 14.

Reporter Behind Michigan’s 1994 Prohibition of Capital Appreciation Bonds (CABs) Watches and Writes about the CAB Frenzy at California School Districts

Here is a follow-up to my May 11 post entitled 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.

A speaker at the California League of Bond Oversight Committees annual conference on May 11 mentioned that the State of Michigan banned Capital Appreciation Bonds (CABs) in the 1990s after a reporter for the Detroit Free Press named Joel Thurtell exposed the extent of the scheme to the public in his April 5, 1993 investigative article “Michigan Schools Load the Future With Debt.”

It turns out Mr. Thurtell has a personal blog called Joel on the Road, in which he has been tracking and opining on the excessive use of CABs in California, including the mind-boggling one at the Poway Unified School District in San Diego County. He has posted four articles about CAB abuses at California school districts in the past five days.

I wrote the following comment on his blog in response to CABs and Consequences:

Mr. Thurtell:

On Friday, May 11, I attended the annual conference of the California League of Bond Oversight Committees in Sacramento. The increasing use of Capital Appreciation Bonds (CABs) to fund construction in California school districts (and fund the funding of school construction) was extensively discussed. Your articles were briefly mentioned by one speaker as influential in banning CABs in Michigan. You may be the catalyst to get CABs banned in California before the next generation of property owners in this state is saddled with a huge burden for construction completed 30-40 years earlier, when the political culture in this state revolved around the principle of “spend now/let someone else pay later.” You need to do a speaking tour in California. I recommend contacting the California Association of County Treasurers and Tax Collectors, the California League of Bond Oversight Committees, and the Howard Jarvis Taxpayers Association.

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.