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16 Feb 2013

Generations of Valley Taxpayers on the Hook for Hundreds of Millions After School Districts Issue 'Irresponsible' Bonds

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College of the Desert issued $96 million in bonds, but will have to pay back more than $430 million over almost four decades. College of the Desert issued $96 million in bonds, but will have to pay back more than $430 million over almost four decades. wikipedia.com

When it comes to government these days, maybe, to quote an old Cole Porter song, "anything goes."

Two area school districts, Coachella Valley Unified (the east valley district that runs public schools in Indio, Coachella and points east) and Desert Community College (aka College of the Desert), are among the hundreds in California that have used financing known as capital appreciation bonds, or CABs, to fund construction projects.

These bonds differ from more-traditional cousins in that payments can be put off for years—sometimes decades—allowing districts to save face by not raising property taxes, at least in the short term.

However, interest compounds during those years, and when the bill comes due, many districts—and, therefore, taxpayers within those districts—will be socked with explosive costs.

Repayment of traditional bonds typically runs about $2 to $3 for every dollar borrowed. In contrast, districts using CABs will frequently shell out four to five times what they borrowed in repayment costs, with rare cases extending into the stratosphere at a ratio of 20-to-1.

Warning bells were raised last year when the Voice of San Diego website, assisted by retired journalist Joel Thurtell, reported that Poway Unified School District would be shelling out a cool billion over 40 years for $105 million in borrowing to renovate buildings. This set off a flurry of coverage from The New York Times, the Los Angeles Times (which published a database of the state treasurer's figures on CABs) and other news outlets.

The fact that things aren't quite Poway bad for our local cases might come as cold comfort. In 2010 and 2012, Coachella Valley Unified School District issued CABs worth slightly more than $35 million. Repayment will set the district back $186.3 million over more than 30 years.

CVUSD officials in Thermal, Calif., didn't respond to multiple requests for comment over the phone. An Independent reporter even made an in-person visit to the district offices, and was told that superintendent Darryl Adams was in meetings and could not speak.

The Desert Community College District, which serves the College of the Desert, issued nearly $96 million in CABs in 2007, with repayment totaling just north of $430 million over 38.6 years.

At first, college spokeswoman Pamela Hunter said it was difficult to find someone who could speak authoritatively about CABs, because the person who would normally do so had quit. A week later, she furnished the Independent with the number for the college's director of fiscal services, Wade Ellis, who has proved almost as elusive; we could not reach him after making several calls. (The Independent did miss the one return phone call Ellis made; follow-up efforts to reach him were unsuccessful. We're sure he has a full plate running fiscal services for an institution with a $45 million annual budget and 15,000 students.)

Hunter also emailed a list of two ways in which the district's use of capital appreciation bonds helped achieve "good government public policy objectives"—justifications for why CABs were such a great idea, the first of which noted how the bonds will help pay for "long-lived assets that will benefit multiple generations of local residents and taxpayers."

These bonds "spread out the tax burden," the email read, "more fairly over those multiple generations of local residents than the alternative, commonly known as Current Interest Bonds."

That’s not necessarily accurate. The more-traditional current interest bonds go into repayment, with periodic servicing, almost immediately, functioning much like a mortgage. Given how CABs work, it's difficult to see how they're fairer. On the contrary, they don't seem to ask much of current taxpayers, instead focusing the pain into something potent for future generations.

The Independent isn't alone in that assessment:

  • On Jan. 17, State Superintendent of Public Instruction Tom Torlakson and State Treasurer Bill Lockyer, both Democrats, sent out a non-binding letter asking districts not to issue these bonds: "The transactions have been structured with 40-year terms that delay interest and principal payments for decades, resulting in huge balloon payments and burdens on future taxpayers that cannot be justified. Too frequently, board members and the public have not been fully informed about the costs and risks associated with CABs. In some cases, board members have reported they were not even aware they approved the sale of CABs." Lockyer, who has been especially vocal in his opposition to CABs, has called them "irresponsible" and "bad deals," and has even likened them to "payday loans."
  • California Assemblyman Ben Hueso, a San Diego Democrat who has co-sponsored a bill in the State Assembly that would prevent districts from issuing many of these bonds, told The New York Times, "Right now, if they don't have the revenue, school boards can say, ‘Let's just kick the can down the road 20 years and let them deal with it.’”
  • "This generation will not pay for what it needs, so some of its leaders have decided to saddle future generations with the bills," wrote Floyd Norris, a commentator on economic issues, also in The New York Times.

After hearing these quotes, Hunter said she didn't have the expertise to explain how, exactly, CABs are a fairer way to borrow, adding that Ellis would be the one to talk to on that front. You already know how that turned out.

Hunter provided one final tidbit of information worth noting: When asked where this bogus CAB justification came from—if it was official, etc.—she said it was written by the "bond adviser."

The Independent has been met with silence in trying to confirm if Hunter was referring to the bond counsel for College of the Desert: Stradling, Yocca, Carlson and Rauth, a San Francisco corporation that gets paid for facilitating these deals, and is involved with districts up and down the state.

We've also been unable to determine if these points were made available to district trustees when they agreed to issue the bonds in 2007; the three board members from that time who still have their seats would not return calls from the Independent.

Lockyer told The New York Times that the real beneficiaries of these schemes are the financial advisers, who, according to the state treasurer's office, have received millions in compensation.

5 comments

  • Comment Link Mike Gully Monday, 18 February 2013 18:10 posted by Mike Gully

    If they had asked for the money via prop taxes, I'm guessing they would still be wiping the spit from their eyes...I love fiscal conservatives! Short term - you don't have to pay for services. Long term - everyone else pays AND they get to criticize the people who had to either cut education or raise money via bonds. Rock, meet hard place. Hard place, this is Rock...

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  • Comment Link Dean M Gray Monday, 18 February 2013 03:02 posted by Dean M Gray

    It is vital to the community to know these facts. It is irresponsible to criticize good investigative reporting. Citizens and voters need to be armed with good info to make good decisions at the voting booth. Give us good info to judge if we want to go this path or not. This is the story we need. Good facts. Deep connections. And the TRUTH. Give us more Mr. Burns. We are hungry for more. And silence the nincompoops who want to know nothing.

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  • Comment Link Krystal Herrera Saturday, 16 February 2013 18:49 posted by Krystal Herrera

    So, the poorest school district in the desert and our only community college found ways to educate the most underserved in the desert...and your point is? Students at CVUSD need help. COD? Guess what, it's the only way a lot of locals can get training and education while staying in the desert. I don't see your point. Biased reporting, too. After all, isn't there another side to these bonds? As in, what are they being used for? Oh, that's right. Construction of new campuses, offering more opportunities for locals. But I can see why you'd leave that out - after all, it wouldn't fit your sensational agenda here.

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  • Comment Link Jimmy Boegle Friday, 15 February 2013 18:26 posted by Jimmy Boegle

    Karl, I don't understand your criticism. This story is about the nature of the bonds COD issued (i.e. "irresponsible"), not what COD is spending the money on.

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  • Comment Link Karl Farmer Friday, 15 February 2013 18:11 posted by Karl Farmer

    And yet? No mention of the (real, current, and in-your-face expense of) the new COD campus planned for Indian Canyon @ I-10. What kind of reporting is this?

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