The Poway Unified School District in Southern California became the poster child for oversized spending earlier in the year when it was revealed that it had borrowed $105 million over 40 years using capital investment bonds (CABs), obligating it to pay back around $1 billion down the road.
Data compiled by Bloomberg News last year indicated that 55 school districts had used the controversial investment vehicle in 2011 to raise money for big-ticket infrastructure projects. Now, the Los Angeles Times says that 200 districts, one fifth all school systems in the state, have used CABs to borrow $2.8 billion since 2007. It has compiled its information in a database that is accessible online.
CABs have a maturity of at least 25 years and the Times discovered that 70% of the money borrowed by California schools involves 30- to 40-year notes. The newspaper calculated that the districts will have to pay $16.3 billion to retire the debt, nearly six times what they borrowed. Debt payments that are triple the original loan are considered prudent in the finance world and four times principle is considered the outer limits.
“It’s not so much kicking the can down the road as it is burying a drum of toxic waste in the back of the school,” Jonathan Fiebach, a partner at Grant Williams LP, a Philadelphia investment advisory firm, told Bloomberg in describing the widespread practice.
In the case of Poway, the school district of 33,000 students in San Diego County will not have to begin paying back its loan until 2033, but will have to pony up $300 million, its biggest payment, in 2046 and again in 2051. Poway turned to the long-term bonds after it was caught in the middle of a large school rebuilding program a few years back, just as the collapsing economy dried up its property tax revenues.
Lining up behind Poway on the list of school districts with the largest total debt service is:
San Diego Unified School District: $630.4 million owed on $88.9 million borrowed
Newport-Mesa Unified School District: $547.6 million owed on $83.1 million
San Bernardino Community College District: $492.5 million owed on $56.5 million
Desert Community College District: $430 million owed on $95.8 million
San Marcos Unified School District: $403 million owed on $65 million
Michigan outlawed capital improvement bonds in 1994 and California State Treasurer Bill Lockyer is no fan of them. He told the Times, “They are terrible deals. The school boards and staffs that approved of these bonds should be voted out of office and fired.”
–Ken Broder
To Learn More:
California School Districts Face Huge Debt on Risky Bonds (by Dan Weikel, Los Angeles Times)
California Lawmakers Take Aim at Capital Appreciation Bonds (by Jim Christie, Reuters)
School District Uses Popular Financial Tool to Turn $105 Million Loan into a $1 Billion Debt (by Ken Broder, AllGov California)
California Schools Barring Taxes Push Bills to 2051: Muni Credit (by James Nash, Bloomberg News)