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.
Related posts:
- 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
Short URL: http://www.pomeradonews.com/?p=27674
Posted by Steve Dreyer
on Aug 15 2012. Filed under Editorial, Opinion.
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"Think of the Proposition C bonds as sort of a second mortgage."
Except I make payments NOW on a second mortgage, I don't capitalize the interest until I finish paying off the first mortgage. Perhaps CABs were the best available choice to provide completion funding. It doesn't change the fact that the board deceived us about the cost of this credit when they asked for our approval.
Both the current tax rate and a hypothetical raised rate are dirt cheap. If you could afford a $400K house, but an extra $15/month will now break the bank, you've created a mess of your own problems.
I'm not the least bit surprised that the Chieftain editorial board is going to try and softshoe this issue. We all took a deep breath when we started to read the numbers. I believe it was more of a sucking noise that comes when you can't catch your breath. CABs have been used in many districts but not with the terms of the CAB in question. They're illegal in the state of Michigan. Clearly Michigan knows something about this highly risky and questionable form of financing that maybe we should have known. The lack of disclosure by the Trustees is inexcusable. Don't sugarcoat this issue. Every reputable financial news disclosure has us looking like fools. How stupid do you think we are?
You sure did your homework. Nicely done.
Jason, there are 47,006 households in the Improvement District. Not excluding those with Mello Roos, the $50M per year debt averages out to be $1064 per year per household. Account for Mello Roos and it is even higher. I am unsure what a typical business obligation is, but doubt it would change things much.
Your $15 per month implies a tax rate of $45 per $100K per year. A million dollar home would pay an extra $450 per year. Who in the world is going to make up the difference. Are there enough $10M dollar homes in the district to balance it out ?
Now this is just for this one debt. Add that to operating budget of PUSD and our grand and great- grand kids will have a hefty bill.
Yes, MR. Editor, blame the financial analyst. And how about the slick Orange County consultant that suggested using CAB's. Are these the same people who predicted that short term bond interest rates would be near zero and 20 year Treasures would be less than 3%? The point is if you are looking for an easy way out of a dismal situation you can always find someone to guide you whether you accept their reasoning or not.
Of all the excuses you put forward did it ever occur to you that this project was possibly poorly managed from the get go? Have you actually verified the information you put forth or are you taking the word of someone who is intimately involved?
I believe the electorate was deceived and the School Board should be reprimanded, but that will not help solve the problem of high tax rates in the future, if it is solvable.
There is so much conjecture nobody is getting anywhere. I think a top notch analysts should be brought in to see if something can be done to restructure the loan even though the terms don't allow it. Sometimes a hard nosed negotiator can work miracles.
If the solution involves a tax increase I hope the electorate is given the opportunity to vote on it. No more back alley deals.
The bond issue was approved so the taxpayers are stuck.
What was unknown was the "Balloon Payment" portion, and those actually work (however poorly) in real estate because they are generally for five year periods, and can be refinanced.
People have greater confidence in five year predictions than 20-40 years.
This turkey can't be paid early to avoid 20 years of compound interest, or refinanced, because someone permitted the Board to paint themselves into a corner.
The Board is betting that home values will rise, and the current national deficit and long-term debt will inflate sufficiently to cover their bet. As John Maynard Keynes succinctly put it, "In the long run we are all dead," and politicians count on that.
Mostly they are counting on not being remembered by name in the 20-40 year period from now, and that is a better bet than predicting the housing market and inflation rate. After all, no one remembers whose pipe dream initially dreamt the Sprinter, or the California Center for the Arts in Escondido, or the San Diego Charger Ticket Guarantee, or the Big Dig in Boston…
When it comes to politicians, it is the evil that is "oft interred in their bones."
I'm not sure we're dead but definitely swimming in deep water. I'd like to see the math. This is obviously not a good situation. School Districts should stick to obvious financial instruments. The number of homes projected to sell x number of times at what projected values y may or may not add up. If you use the rule of 10 it doesn't work. If you use the rule of 7 it does. The Board should be reprimanded. The deeper problem is the lack of trust that will carry forward into the future. I've always supported the school district and will continue to. I'm not voting for any incumbents though.
Kevin — right! We do not know the outcome of the tax/bond issue, and will not for many years — what we know, as the Editorial pointed out, is that the voters were not given the facts from which to make a reasonable and rational decision.
Alan – Please explain. Exactly what facts were withheld from the voters in this "scam" (as you call it elsewhere)?
You have repeatedly made this charge, using strong language, against hard-working, well-respected and so far as I know well-intentioned members of this community who have given much and taken little. I think it is only fair that you back up your charge with details rather than generalizations.
What material "facts" were not included or stated falsely in the text of Proposition C? Or are you just claiming, as you did in 2008, that Prop. C was a bad deal and you simply disagree with the will of the voters for the same reasons now as you did 4 years ago (something all of us experience every election) – a sort of "I told you so"?
EducatedThinker: There was, as the initial report in VOSD, the Editorial in this newspaper and the report by the San Diego County Taxpayers Association (which endorsed the bond) acknowledge, not a single word about the use of Capital Asset Bonds, balloon payments, or a 40 year period during which interest accrues.
The SDCTA president, Lani Lutar, recently said, '“If we had known what we know now, we would have been able to prevent that by helping them shed light and by encouraging them to take a different path,' said Lani Lutar, SDCTA president.";
Source: Were Poway Taxpayers Left in the Dark? | NBC 7 San Diego, http://www.nbcsandiego.com/news/local/Were-Poway-...
The SDCTA has an entire committee of professionals who study these issues before they make an endorsement, and if THEY have been fooled, you can bet they were kept in the dark as to the details. They are now examining the material they were provided as backup to the public 2,200 word explanation.
If you had known the details, I wish you had shared them!
This is a very simple issue to approach – not from a legal standpoint, but rather “has the PUSD school board upheld their duty as trustee?” Wikipedia says “the broadest sense of the term trustee applies to someone held to a fiduciary duty similar in some respects to that of a trustee proper.” The PUSD’s Board Policy (Sec. 1.3) addresses the “Concept Of Trusteeship” by stating “Board members are individually and collectively trustees in fact as well as in name.” Further, it says “The responsibility of this trusteeship is more far-reaching than that involved in the management of a more material type of estate.” Thus the District infers the basic assumption of prudent financial management.
Current board member Collins said we should’ve known what we were voting for, pointing out 2008 ballot language that said “actual tax rates and years in which they apply may vary.” That’s a lot different than giving us worst/best case scenarios from which to make our decision back then. That’s why it all goes back to the word “Trustee” – we trusted them to make a prudent and informed choice.
Who were the “advisors” the board used? The kind Wall Street uses for large bond offerings? A Registered Investment Advisor who is familiar with the concept of fiduciary?
This bond issue counts in large part on consistently escalating home values and inflation. Neither of those were present in 2008 and certainly not several years later when the bond structure finally became known. What kind of a Trustee acts in such a careless manner? One who is over their head when several zeros are added to financial plans?
What does it also say about a board that would propose a bond issue in 2003 that would require going to the well again for about the same amount 5 years later?
According to Collins, “Nobody knew in 2009 the stock market would crash. … We did not know that. You did not know that.” Again, it wasn’t the Dow Jones that was going to determine the bonds’ price, it was home prices and inflation.
In the end, we will probably find out the main culprit is ego among the board members and pride for the schools in our system. But as trustees, it was their job to tell us voters that they ran out of money (“why” is for another day) and until the financial situation overall improved, there would be no further construction. A true trustee would easily have arrived at that conclusion; a trustee who is also a politician might not have.
Would any of the board approach their personal finances this way?
Sure, capital appreciation bonds, have been used before, but possibly never to the extent that Poway’s are being used. Of the handful of local schools with bond issues on November’s ballot, all of them are using the traditional and accepted we took back in 2003.
I know nothing of the legal issue here. This is all about judging our Trustees in their capacity to truly look out for our welfare and their ability to apply common sense while exercising care, skill and caution, without regard for their personal and professional interests.
The Trustees have done a tremendous job in providing an excellent educational system on many levels. But all that can be for naught when they fall to see the broad side of the barn.
Gary – Um, John Collins is not a "current board member," has never been a member of the Board of Trustees, and thus is not and has never been a "trustee." Mr. Collins is the Superintendent, having replaced the late Don Phillips the Spring of 2010, some two years after Proposition C was passed (at which time Mr. Collins was the Deputy Superintendent).
EducatedThinker – It's Dr. Collins not Mr. if you're going to be nit picky. And Gary's points are correct. They Trustees failed their fiduciary duty to the District.