Editorial: Road to success, or Armageddon?
Poway Unified School District leaders are coming under criticism, some of it justified, for the way they obtained financing to complete its “Building for Success” school renovation project.
A story appearing last week on the Voice of San Diego website accurately reported that the district board voted in May 2011 to use capital appreciation bonds (CABs) to secure $179 million to complete work that began following voter approval in 2002 of Proposition U. The amount of the bonded indebtedness was authorized by district voters (those not living in Mello-Roos districts) with the 2008 passage of Proposition C. That proposition was needed because the district burned through the $198 million approved in 2002 and needed the additional money to finish improving two-dozen schools.
What makes all this newsworthy is that the Voice of San Diego story disclosed that the capital appreciation bonds will ultimately cost the district nearly $1 billion as no payments, not even on the roughly 7 percent annual interest, will be made for 20 years.
The story spread like wildfire across the Internet, attracting the interest of regional and national media outlets. In some circles, the PUSD is being held up as a poster child for financial irresponsibility. Critics are saying that the district has saddled the next generation with bond payments that may cripple our local school district. Property taxes will soar, the critics say, as the district struggles to pay off school upgrades that will be 20-plus years old before the first penny is applied to the balance owned.
It’s time, we think, for everyone to take a deep breath. Yes, the district appears to have put itself and its taxpayers in an uncomfortable position. But before burning PUSD district leaders at the stake, we think two questions should be addressed: Why use CABs and will the impact of their use be as bad as the critics predict?
In late 2007 it became clear that early school renovation cost estimates were way off the mark. Construction costs were going up 20 percent annually and crews were uncovering unexpected renovation problems, such as substandard original construction at Mt. Carmel High. The district also accelerated some of the work so not to be further impacted by the rising costs.
The tax rate to pay off the Proposition U bonds was set at $55 per $100,000 of assessed valuation. In discussing how to proceed for new funding, the elected school board members focused on not raising that $55 cap, although legally they could have by obtaining voter approval for a new rate for a second bond issue.
Here is a key point: The PUSD is obligated to pay off the Proposition U bonds before paying a penny toward the Proposition C bonds. Think of the Proposition C bonds as sort of a second mortgage.
So when time came to decide how to proceed (late 2007 or early 2008) the school board faced three options: Stop all construction and wait until enough of the Proposition U bonds were paid off before proceeding with market rate bonds, raise the $55 tax ceiling, or finance the new bonds through capital appreciation bonds.
In our opinion, the school board made a mistake by not asking voters in 2008 to raise the $55 cap. Yes, doing so might have been seen as “breaking a promise to the voters,” but hiking the rate, to say $100 per $100,000 of valuation, would increase the tax bill on a $400,000 home by $180 per year. Most importantly it would have permitted the district to use traditional bonds to finance the rest of the work.
Instead, the board, its collective mind stuck on $55, proceeded with the campaign to pass Proposition C on the notion that voters would simply pay the $55 for a couple of extra decades. Let us borrow for 40 years at no more than 12 percent, the board said, and we’ll keep the tax rate the same.
When it came time to borrow the money, the board proceeded with the CABs, a long-termed bonding method that has been used in more than 200 California school districts. The district’s financial advisers assured the board that 20-30 years down the road, property values will quadruple, providing sufficient revenues to pay off the CABs without harming the district’s financial position.
Who will be proven right in 20 years, the critics who predict fiscal Armageddon for the district or the PUSD’s financial advisers? The truth is, no one knows for sure. Perhaps the Voice of San Diego story, and this editorial, should be placed in a time capsule for comparison in 2032.
- PUSD releases statement on school bonds
- PUSD not alone in high-interest financing
- Letters to the editor: Aug. 16, 2012
- Borrowing $105 million will cost PUSD nearly $1 billion
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