PUSD not alone in high-interest financing

By Will Carless, Voice of San Diego

The Poway Unified School District may be California’s poster child for exotic school bond financing, but it is by no means alone in San Diego County.

As I detailed in my story Aug. 6, Poway Unified borrowed $105 million last year using a form of financing called a capital appreciation bond. The district won’t start making payments on the loan until 2033, and by the time it’s paid off in 2051, taxpayers will have paid back almost $1 billion, or almost 10 times the original loan.

As I point out in my story, capital appreciation bonds have become increasingly popular across the state, since they allow school districts to borrow money now without raising taxes on current residents. Instead, the burden for paying for the bonds is pushed to future generations, who are left on the hook for loans that are wildly more expensive than conventional bonds.

I’ve been digging through public records to try and find some other examples of these bonds in San Diego County. I haven’t come across anything quite as extreme as Poway’s deal, but I have found some bonds with very similar rates of interest and repayment schedules.

The deals elsewhere in the county mirror Poway’s deal in other ways, too. All three districts had recently passed bond measures to complete previous renovation and modernization efforts that were behind because of cost overruns and delays.

The three bond measures, passed in 2008, all made the same promise to voters: Tax rates would stay the same.

San Diego Unified — Borrowed: $164 Million. On the Hook For: $1.25 Billion

In 2010, the county’s largest school district borrowed almost $164 million from investors using capital appreciation bonds.

The loan was part of 2008’s Proposition S, in which voters approved the district to borrow more than $2 billion to complete district-wide renovations and modernization.

Just like Poway, San Diego unified won’t start paying back those bonds for 20 years. The first payment is due in 2030. By the time the loan is fully paid back, in 2050, San Diego taxpayers will have paid back $1.25 billion, or about 7.6 times what the district borrowed in the first place.

That’s much more expensive than a typical school bond which, like a home mortgage, is paid back every year of the loan. In a more typical bond, a district would pay back two or maybe three times the total amount of the initial loan.

Oceanside Unified — Borrowed: $30 Million. On the Hook For: $280 Million

Further north, in Oceanside, the payback ratio for taxpayers is even bigger, though the district’s loan is significantly smaller.

Oceanside Unified borrowed $30 million in 2008. By 2049, the district’s taxpayers will have paid back almost $280 million. That’s more than nine times what they originally borrowed.

Escondido Union — Borrowed: $27 Million. On the Hook For: $247 Million

Escondido Union School District has a similar deal.

The district borrowed almost $27 million in 2009 using capital appreciation bonds. Taxpayers in the district will pay back almost $247 million by the time that debt is paid. Again, that’s more than nine times the initial debt.

Making the Same Deal

Apart from their sheer cost, there are other stark similarities between these three deals and Poway Unified’s 2011 bond.

All three districts passed bond measures that paved the way for their capital appreciation bonds in 2008.

And, all three of those bond measures were floated for the same reason: To finish off previous bond programs that had been started in the districts years before but hadn’t yet finished because of cost overruns and delays.

All three districts also promised voters their tax rates wouldn’t increase to pay for the new swath of borrowing. As I explain in detail in the Aug. 6 story, the same promise of steady tax rates led Poway Unified to seek out this creative form of financing.

There’s one more similarity between two of the three deals and Poway’s deal: The San Diego County Taxpayers Association gave its backing to the bond measures that paved the way for both San Diego Unified and Escondido Union’s sales of capital appreciation bonds.

The association didn’t back Oceanside’s bond, saying the ballot language for the bond was too vague.

Will Carless is an investigative reporter at Voice of San Diego currently focused on local education. You can reach him at will.carless@voiceofsandiego.org or 619-550-5670.

Short URL: http://www.pomeradonews.com/?p=27435

Posted by Steve Dreyer on Aug 8 2012. Filed under 4S Ranch, Local News, PQ, CMR, Sabre Springs, Poway, Rancho Bernardo. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

34 Comments for “PUSD not alone in high-interest financing”

  1. Repairing and construction of buildings that will be largely replaced by Distant Learning in the 20-40 year time frame during which the taxpayers will be paying for mostly empty buildings. Great plan for all of the mentioned school districts.

    Can you predict the advancement in computers in 20 years, the price of homes, the fuel price? Neither can I, but these school boards predict with confidence the income from taxes, and the inflation between now and then.

    Hmmmm…with our national deficit and rising debt, perhaps they have something….

    • Poway resident

      What were you thinking?
      I think going back to college fof a Finance 101 class would a a good thing for you!
      People of Poway did not elect these retards at PUSD and City Council so they can make wild guess about where home prices will go, how much taxes will be collected or if fewer students will be going to schools.
      What they decided to do in their financing scheme amount to camels burying their heads in the sand.
      These public servants learned well from dubyia bush : "we started this mess but we'll let someone else clean it up"!

  2. Poway Resident

    I have always believed and spoken so highly of Poway and to be given the privilege of being able to volunteer my services on a daily basis.

    When I heard this story for the first time today, it made me sick to my stomach. How could Poway be on the verge of financial armageddon?

    This is a complete affront to the future of our children. How anyone, in good conscience, would sign away the dreams of our next generations? The first question I have is, "How much did the Mayor and Councilmen know when they promoted and decided to present this as your solution to the taxpayers several years ago?"

    I was struck by at least one statement you made namely "And there’s no chance of the district refinancing the deal. The loan contains a provision strictly barring the district from refinancing its debt." For a City or anyone for that matter, to realize that they've been duped, I can't accept that a provision such as this can be legally binding. This is the venue of organized crime?

    I have no idea where to begin but, for our children, I know it starts here and tonight!

    For our children.

    A resident of Poway

    Resident of Poway

    • Poway resident

      Poway residents should sign petition requesting the U.S. Attorney to investigate the PUSD board members involved, and city council members who approved the deal, for possible criminal charges, conflict of interests and dereliction of duties!

      • Poway Resident 13

        Where do we get the petition to sign? PUSD board members involved should be relieved from duty. This is a total fraud!

    • Poway resident 13

      I agree, this is a venue of "organized crime". This PUSD board members may not know how to balance their own check books.

  3. PowayResident2

    Resident of Poway – this wasn't a city council issue but a school district issue. The city council I imagine is just as stunned as the rest of us as they would not have been anywhere in the loop on this.

    What your question should be is when Prop C was first written and pushed out the door did the school board know that they would be using a capital appreciation bond? That would be back in 2007 and 2008 (Mangum was Board president). While the financing went through in 2011 it doesn't happen overnight. In addition, the district is now saying that by using the bond they were able to get nearly $100 million in grants – as if that somehow makes the whole thing justifiable.

  4. Sandiego92064

    There are 1000 CAB issuances in the State since 2000 according to Mr. Carless’s blog. Why did this reporter select Poway to report on if other districts have done the same and it has been done since 2000?

    Does he live in the District? Do his kids attend schools in the District? Is he a home owner and does he pay property taxes in the District? Has anyone checked that out? If he is a community member, that is one thing. If he is just another lazy reporter sitting in his house blogging and trying to make a name for himself then I think we should let the District tell their side of the story and then make a decision!

    • Guest

      He is not a lazy reporter. He did his homework. Poway is the only one that will owe nearly a billion dollars at the end of the day. You can't spin this anyway other than when this was put before the voters the ballot said general bond and when executed it became a capital appreciation bond. Think sub prime bad loans

      • Guest

        According to emails sent by Marc Davis, current school board trustee, who joined the board after this was approved by voters in 2008, 40 year Capital Appreciation Bonds were planned from the beginning.

    • Tom Yarnall

      Sandiego92064, by all means, blame the messenger.

    • Gary Vineyard

      Joe, thanks for the comment. I was being more specific and do agree with you on most of your statements i.e I do pay my property taxes so am in the barrel with the rest of the tax payers and I have kids who will inherit my property when I croak…I'm not planning on dying in the next twenty years but I imagine I'll be getting closer and as to moving I really can't say as that is 20 years down the road. I may and I may not who of us can tell what they're gonna do in 20? Again thanks for the comment.

    • Gary Vineyard

      What does it matter where he lives, if he has kids, if he owns a home or where he pays taxes. He is a reporter and reporters report. Ask the same questions of a reporter in Afghanistan…it doesn't matter.

    • Guest

      Because our CAB is the only one with a 9 to 1 payback ratio. And if you think the district is going to answer these questions honestly I've got a bridge to sell you. They intentionally deceived us in 2008 with by stating it was going to be a "general" bond, they began actually doing the work on the CAB in 2009 and 2010. Board president Jeff Mangum, Patapow, Rantfl and Gutchow all knew what was happening and they made sure the details were kept from the rest of us. They have leveraged us to the hilt. What's going to happen when we need to look to a bond issue for storm drains and other infrastructure?

      • Guest of guests

        The term "General Obligation Bond" is a broad term, like "car". Some cars are Chevys, some are Fords but they are all cars. In the same way, some General Obligation Bonds are Capital Appreciation Bonds. But the board clearly knew the only way to make Prop C work was to finance it with a CAB because the tax we were all paying was already set aside, for years into the future, to fulfill the Prop U promises. So they HAD to do a negative amortization Capital Appreciation Bond to make it all work. The problem was the Trustees never felt the need to explain it to the public.

  5. Tom Yarnall

    Anyone who approved of this scam are cowards. They delayed the responsibility for meeting the debt obligation to someone in the future when they will be long gone. Remember that on election day.

  6. Guest

    For anyone who doubts PUSD knew what they were doing from the outset in 2007, the following text is from the bond prospectus. It is clear Capital Appreciation Bonds, which are one type of General Obligation Bond, were the plan from the beginning:

    "The General Obligation Bonds of School Facilities Improvement District No. 2007-1 of the Poway Unified School District, 2008 Election, Series B (the “Series B Bonds”), in the aggregate principal amount of $105,000,149.70, are being issued by the Poway Unified School District (the “School District”) on behalf of the School Facilities Improvement District No. 2007-1 of the Poway Unified School District (the “Improvement District”). The Series B Bonds will be issued as capital appreciation Series B Bonds. The Series B Bonds were authorized at a special election of the registered voters of the School District held on February 5, 2008"

    Propostion C, the bond issue, would not have come before the voters unless the then Trustees of PUSD, Mangum, Vanderveen, Patapow, Gutschow and Rantfle had approved it for the ballot. And clearly, if we the people knew then what the Trustees knew then, the outcome of the vote would likely have been vastly different.

    • guest

      And those same bums are now running the city council! what a pile of crocks.
      The newspaper should also list name of those people who made decision hiring that orange county consultant to dream up the sickening financing arrangement, and the PUSD people who went for it.
      Stupidity has no limit, and in this case, it's raised to even higher limit!

  7. Sandiego92064 — Why Poway? Because few of the school districts, and certainly none known to date, carry the more than nine to one repayment burden of Poway — hence it is known now nationally as The Poway Problem as shorthand for the many similar "creative funding" contrivances.

    I was called by Reuters for a half-hour interview a few days ago, simply because I was a signatory to the Opposition to Prop C in 2008. Poway is the National Poster Boy for this sort of balloon payment financing.

    Some states have outlawed these balloon payments by school districts, exactly because of the problem our children and grandchildren will face. We bought a Ferrari, signed our children and grand-children's name to the loan and precluded them from pre-payment or re-financing.

    The children and grandchildren may be too young, too inexperienced or too busy to realize it until the bills come due. By the time they do, our Ferrari will be in the scrapyard. I doubt they will fondly remember the folly of Prop C — but then perhaps inflation and enormous home prices will make the payments inconsequential. That is what the school board bet.

    I doubt it.

  8. Gary Vineyard

    I think I'd like to see the Grand Jury or DA start looking into this mess…if they already haven't…and if THEY already haven't…why not? ONE BILLION DOLLARS down the road is a lot of money and I wonder if any of it got lost along the way.

    • Clariece

      In order for the grand jury to investigate a citizen or group of citizens completes a form and submits what evidence they have. The grand jury doesn't just wake up and convene itself. To find out more about how to complete a formal grand jury submission you can go to http://www.sandiego.ca.gov/grandjury. The application form along with the instructions and explanation of the process is all there.

  9. Joe St. Lucas

    Fun. The San Diego County Taxpayers Association "Targeting Waste, Promoting Efficiency", endorsement at http://www.sdcta.org/Uploads/Documents/PropC.Powa...

    • Guest

      The San Diego County Taxpayers were deceived with the same misinformation as the rest of us. Lani Lutar stated that they never would have an endorsed a Capital Appreciation Bond that extended beyond 25 years. They were never presented with any information other than it was a general bond which they took to mean the typical serial bond. As a side note a typical serial bond has a ratio of no more than 3 or 4 to 1. The Prop C bond has a ratio of 9 to 1. You can't blame SDCTA for intentional misrepresentation by the Board Trustees Mangum, Papatow, Rantfle and Gutshow.

  10. Guest

    Good idea from a different Poway media discussion board: "PROTEST at the next School Board meeting on 8/20. Let them feel your wrath: Monday, August 20, 2012, 6:00 p.m. PUSD District Office 15250 Avenue of Science San Diego, CA 92128-3406 (Carmel Mountain area)"

    There may not be a way to "fix" this disaster. But at the very least the Trustees' feet must be held to the fire. If everyone takes the time to tell everyone they know in email and Facebook it might turn out huge.

  11. Mom of 4

    Two members of the Poway school board are up for re-election in Nov. After this poor fiscal decision I can't imagine how they can possibly win the election.

    • Guest

      There is only one challenger going up against the two incumbents. Therein lies part of the problem. With Mangum, since he's running for city council – it will be easy to NOT elect him. But one of the school board incumbents will unfortunately be reelected just because there aren't enough challengers and the filing period has closed.

  12. Becky P

    I would like to know who is funding this? Who are these mystery investors? Also is this bond tax free to them (like many muni bonds)?

  13. Poway taxpayer

    I hope Pomerado News/Chieftain reprints the Bond scam article the next time PUSD asks for a bond measure for more money, which will be in a very few years.

  14. Jenny

    You know that old saying that "Americans love a deal"? Well, in 2008 we thought that we were getting a really good deal when it was said that PUSD could raise a bond and not raise our taxes at the same time. Maybe we only heard the "no raising of taxes" part and chose to ignore the fact that if you raise a bond you need to repay it.

    I, for one, did not approve of Prop C in 2008. While the "no raising of taxes" was tempting, I would have liked to reduce the 800 dollars a year I was paying on my property taxes to pay for already existing School and Community College bonds. If they had been allowed to lapse I would have made those savings – but no luck there.

    Prop C passed because, God forbid, our children would have to attend schools that were over 20 years old – and if the bonds were not "going to cost us anything more", lets go for it.

    As a 65 year old Poway resident, I should really not worry about this looming debt.

    I probably won't be living here in 20 odd years time when this debt becomes payable(or anywhere else for that matter)

    As one poster says, maybe its right that today's taxpayers are not paying for this debt but that the children, who are attending these new schools and getting their first class education because of them, should pay for them when they enter the job market.

    One amusing thing that has come out of this? Poway is now known to the global financial world, since Gillian Tett wrote about its "creative even exotic financing" in the Financial Times.

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