New PUSD bond report critical of district, underwriter

By Steve Dreyer

A private committee’s report on the controversial bonds used by the Poway Unified School District to finance school improvements is highly critical of the district, elected school board and the bond underwriters used by the district.

Released Monday morning, the report concludes that no one connected with the district had a clear understanding of capital appreciation bonds (CABs). The report criticizes the district not having its own experts to review the proposed bonds, for not fully disclosing details of the proposed bonds and for “out-of-control” spending on school upgrades.

(Download the report here .)

The nine-page report by the six-member Bond Committee, assembled last fall by former board member Jeff Mangum, was presented to the school board during a special meeting held at the district office. See related story about the meeting.

The $105 million in non-callable CABs, issued in 2011, will end up costing district taxpayers nearly $1 billion after they are paid off in 40 years. Payments and interest on the bonds, which ranges between 7.11 and 7.4 percent, will be deferred for 20 years, until other earlier construction bonds are paid off.

The Bond Committee report notes that while the district relied on the advise of private bond underwriters and attorneys, “neither the District nor the Board was independently represented, and the Board was not fully advised of the potential risks or costs.” The panel recommends that on “future material transactions, the District retain consultants who are compensated on a fee-for-service basis and not from the sale of the bonds. Consultants who will be compensated from bond funds only if the bonds are issued have an inherent conflict of interest in assuring the issuance of bonds. In view of what the committee views as the inadequacy of the advice presented to the Board and the community, the committee also recommends that the District not retain the same advisors for future transactions.”

Regarding disclosing its bond plans to the public, the committee wrote “we believe that the community should have been better informed of the issue prior to the Board’s May 2011 vote. If the District had issued press releases informing the community what the Board was considering the issuance of bonds that would cost $1 billion and would be repaid at a 9:1 ratio, we believe the community would have been significantly more involved in the decision-making process … The community might have chosen to increase taxes now by issuing bonds that would be repaid more quickly and cheaply in lieu of the high cost of the 40-year bonds.”

Commenting on the district and its relationship with the community following media reports on the $1 billion bond cost, the Bond Committee wrote that “the District and Board could and should have been more forthcoming and transparent in the disclosure of information about the bonds… Even when it is facing harsh (and arguable unfair) criticism, the District does itself no favors by circling the wagons and failing to communicate candidly and openly with the community.”

The overall cost of the district’s “Building For Success” school improvement program was criticized by the committee. The report says the overall program costs increased from an original estimate of $198 million to $377 million (not including $200 million from other sources). “We also believe that construction costs financed by Props. U and C got out of control and that the District should have cut back or delayed completion of the work,” the report says.

Looking ahead, the report said “No one knows exactly what the CABs will cost in the future, because no one knows what will happen to the AVs (assessed valuations) of the properties with the SFID (School Facilities Improvement District). If AVs increase at a sufficient rate, the cost to homeowners will remain at $55 per $100,000 of AV. If AVs do not increase at a sufficient rate to produce needed tax revenues, homeowners will pay more … perhaps significantly more.”

Among the panel’s other recommendations:

• Taking legal action against those who provided bond-related advice to the district would result in “a legal morass” that would “potentially cost millions of dollars” with consequences to the district likely outweighing any potential benefit.

• District officials and board members should be thoroughly trained before taking actions on future bonds.

•The board should adopt a policy limiting future bonds to 30 years along with one that “assures that the term of any bond must not exceed the useful life of the improvements financed by the bond proceeds.

• The district should limit the terms of non-callable bonds to a maximum of 10 years.

• Maintaining the new school facilities constructed with proceeds from the bond should be a high priority “to protect the tax payer’s investment.”

In addition to Mangum, the Bond Committee’s membership included Jim Abbott, a former (long prior to the bonds) PUSD assistant superintendent of business support services: Craig Brown, founder of a mortgage lending business and financial expert; John Mullin, a Poway City Council member and business owner; Phil Schneider, who has served as a senior vice president and CFO of a publicly traded company and on the board of directors of other entities; and Barbara Warden, a business owner and former member of the San Diego City Council.

The report notes that the committee met five times, including sessions with PUSD Supt. John Collins and municipal bond expert Timothy Schaefer of Magis Advisors.

“Committee members were not apologists for the PUSD, and some committee members were (and remain) openly critical of the bonds at issue,” the report says.

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Posted by Steve Dreyer on Feb 4 2013. Filed under Local News, Poway. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.

16 Comments for “New PUSD bond report critical of district, underwriter”

  1. GoodOlBoysRule

    There are so many things wrong with this particular committee I don't know where to start. Not one of them is qualified to comment on bonds from a true public financing position. Period. Second, how convenient for Mangum, an attorney and potential defendant, to say suing the district would cause a legal morass. This group's report is as pointless as the one created by the District. They are not a committee in any legal sense of the word as they have no legal standing. Not only that but two members of the "committee" are conflicted out in that they were District employees (time frame doesn't matter). The only satisfaction that will ever come from this financial mess is when the attorney general steps up and investigates.

  2. GCW

    @ GoodOlBoysRule: You need to reread the article more carefully. 1. The committee consulted with an independent public bond consultant who IS an expert, and 2. the article says suing the district's ADVISORS (not suing the district) would cost millions and would outweigh any of the potential benefits of engaging in a lawsuit against those who poorly advised the district about the bonds.

    Moreover, as I understand it, the citizen committee wanted to make recommendations to the district to help prevent something like this from happening again, and they made some very good suggestions.

    And last of all, your negative comments remind me of the saying "No good deed goes unpunished."

  3. Tom Yarnall

    Mr. Dryer, "Taking legal action against those who provided bond-related advice to the district would result in “a legal morass” that would “potentially cost millions of dollars with consequences to the district likely outweighing any potential benefit."
    What would be the essence of the charge if legal action was taken? Did anything in the report imply an illegal action or presence by the bond advisers? If so, why has the District Attorney not filed charges?
    Is there actual data in the report or is it just seat of the pants opinions that the majority agreed on?

  4. GoodOlBoysRule

    What good deed did they do? Seriously? They accomplished absolutely nothing and simply restated what most of us had already figured out – that the District was poorly advised and that they were irresponsible as Trustees. The fact that Mangum grabs a group of people who merely echo this advice leaves us still in the hole with no remedies available at this point. The trustees had a fiduciary duty to protect the district and they failed miserably. Punting to a mystery advisor and a kitchen cabinet really just wasted everyone's time. What good deed is being punished here? Because I'm still waiting.

  5. Babs

    GCW has valid points, but what is missed is the undercurrent of this "report" that should be a concern to the voters: the desire by Magnum to be appointed to the City Council and or having his name cleared for the next running for office.

    Remember what Mangum wrote, "I understand the public’s anger, but propose that we focus this energy in a positive way and work together to find solutions."

    And …

    “First and foremost, I want to sustain Poway’s excellence – to avoid fixing what’s not broken. I have been impressed – particularly in these difficult financial times – with the foresight with which the city has been managed.”

    The only thing this “report” does is a self-aggrandizing whitewash in hopes of someday gaining political office.

    No “solutions” have been presented and what is broken has not been fixed.

    Thanks a Billion.

  6. JohnN

    Hey Babs, the Pomerado News editor read the committee report in its entirety (which I suspect you have not) and described it as being "critical" of the district and advisors. That description does not sound like a whitewash.

    And after the way Mangum was viciously attacked, defamed and lied about during the election campaign, why on earth would he have any desire whatsoever to run for office or serve in a politcal capacity ever again?

    Mangum made a promise to form a committee to review the bond issue and make suggestions to the school board. He kept that promise. End of discussion.

  7. ChrisCruse

    Although there are no solutions proposed by these "financial experts", there are some good suggestions. But the report fails to identify the risks of using bridge loans. The bridge loans were drawn on PUSD's general fund, that is, money for salaries and operations. When bridge loans come due, they must be paid by issuing the bonds approved by the voters. When the bridge loans for Prop U came due, the market was good and everyone congratulated themselves on a job well done.

    The district knew from the get go that they were going to have to use CAB bonds to pay off the Prop C bridge loan because the Prop U loans would not be paid off for many years. In addition, the district failed to anticipate that AV growth in the SFID would slow due to being built out. Throw in the collapse of the housing bubble and the recession, and the banks not
    wanting to lend money and that resulted in a bridge loan that had to be paid off by issuing bonds at the worst possible time. Bridge loans are inherently risky. They can turn out well, but they can also go very, very badly. I'm no financial expert, but I think the district failed to properly assess the risks involved with the second bridge loan.

    • Tom Yarnall

      I, too, am not a financial wizard, but I do wonder about the time when the humongous tax becomes due starting in 2031. I wonder if the PUSD Board, or the esteemed committees, evaluated the effect Prop. 13 has on the ability to pay the debt in addition to the cost to operate PUSD. Over the last couple of years the inflation rate has been about 2.7%. The maximum inflation rate allowed by Prop 13 is 2%. Could someone please tell me how that works? Maybe they were betting on a lower inflation rate.
      I don't know what the average turn over rate is for homes in the district , when they can be reappraised , but if it is 10 years that means taxes will increase 20% while expenses will rise by 27%. If this is correct that means it may be necessary to have addition bond issues to balance out the difference or cut back on budgets to the detriment of the educational process and the students.
      After this fiasco how do you think the voters will feel about another bond issue?
      It seems the well has been poisoned.

      • ChrisCruse

        The operating costs for PUSD are no longer an issue (with regard to Prop U or Prop C) because the bridge loans have been paid back when the CABs were issued.
        Prop 13 limits increases in AV to 2%, and the bond payments grow at a percent greater than that. I have heard the 2.7% number, but haven't verified. PUSD expected to make up the difference with new growth and resale prices that increased by 5-8% in the first 5 or so years after Prop C was passed and 3% every year after that. currently, the AV for the SFID is about 25% less than what PUSD
        projected. So, yeah, you can expect that we're are going to end up paying a higher rate on the bonds than what was promised.

        As for PUSD's operating budget, things are looking up. They will get more money from the dissolution of redevelopment agencies and also because Prop 30 passed. The state owes them money and they might just get it. However, it has long been a goal of PUSD to pass a parcel tax to increase their general fund. The CA legislature is likely to pass new laws making this easier for school districts to do. I think the fallout from the CAB bonds is going to hurt PUSD's chances of getting a parcel tax passed, even if the percent needed to pass it is lowered.

  8. Babs

    Dear JohnN,

    Apparently, what Mangum wrote and did is to be forgotten. Only time will tell whether this is really the, "End of discussion."

    • GoodOlBoysRule

      Exactly Babs! Let's really go back to the beginning of all of this unraveling of the bonds when Mangum said HE WASN'T EVEN THERE FOR THIS. Turns out not only was he there, he helped push it along. I believe he hopes this report which paints a district as a troop of morons was going to make him look better. It doesn't. It just confirms what we already know. The Board pushed through financing just because they could. Because remember "it's all about the kids." Which is true – because it's the kids who are going to paying for this.

  9. Dan Marc

    With this whole fiasco on my mind a few weeks ago I went to my 6 year old grandson and asked: "Hey, you wanna dollar?". He said "Sure!". I said "O.K…but in a year you have to pay me back 9 dollars". He said " What!? – 9 dollars for just 1 dollar?" I said " Yes, it's a loan". He said "Grandpa! – that's not fair! That's a lot of dollars for just a dollar. I don't want it. I don't have 9 dollars!"

    So I went to another grandson, who is 15. I offered him $20 if he would pay me back $180 in 3 years. He didn't hesitate to say ; "Sure Grandpa" and he readily took the $20.
    I'm hoping that he thinks I may not live another 3 years instead of maybe he thinks I have dementia. Unfortunately, I think the 6 year old will likely take the $20 deal too in 9 or so years.

    Either way, they'll both be paying through the teeth for what the grandpa's in government are doing to today.

  10. Gary

    Who are these panel members?
    Phil Schneider "…A senior vice president and CFO of a publicly traded company and on the board of directors of other entities." Well that explains it! Wait wasn't Enron publicly traded? I Googled 'other entities' and found that you are supposed to disclose them…well? CFO of WHAT Company? Board member of WHAT other entities?
    Craig Brown? Never heard of him either but he is; "…a founder of a mortgage lending business and financial expert." Looked him up and couldn't find him either. Which business? What makes HIM an expert? Didn't the mortgage industry just put our national economy in the tank?
    And Jeff Mangum; Wasn't THIS committee put together by him? Isn't this the same Jeff Mangum that was at the heart of this debacle? I believe so. As usual, I must be missing something. WAIT! STOP THE PRESSES! How about I get my own committee together and review THEIR committee and its findings…now THAT would be a hoot.

  11. Dan Marc


    Phillip Schneider was a Sr. VP and CFO at Biogen IDEC Inc (formerly IDEC Pharmaceuticals ) for 15 years. He is currently a member of the board of directors of Gen-Probe. He also was on the board of directors of Micromet, Inc. and CancerVax Corp.

    Craig Brown owns Rancho Financial, a mortgage company in RB. He's also the vice chair of the Palomar Health Foundation Board.

    Barbara Warden owns Downtown San Diego Partnership.

    John Mullin is president and a shareholder of Pacific M Painting, Inc

  12. GoodOlBoysRule

    The mistrust is not a personal mistrust of the individual committee members but the fact that the fox that help raid the henhouse created this committee and there is just an inherent conflict.

  13. ChrisCruse

    For financial experts, they sure didn't do a very good job on Part E – Cost of Bonds on Individual Homeowners. Here is one inaccuracy: "Over the 40 year life of the bonds, the 2% annual increases in AV would cause the amount homeowners currently pay on the bonds to double." That is false. It would only be true if the tax rate for repaying the bonds was a fixed rate, and it isn't.

    It is true that the AV on a home that is not sold or remodeled would double in 40 yrs, but the rate on repaying the bonds is calculated by dividing the $55 million bond payment (5 times greater than the current payment) by the total AV of the SFID. Each homeowner's individual share is calculated on their proportionate share of AV. In the unlikely scenario where every homeowner's AV is doubled in 40 yrs and there are no remodels or resales to increase or decrease total AV in the SFID, and the and the annual payment for the bond increases from the current $11 million to $55 million (in 40 yrs), homeowners are going to be paying 5 times what they are paying now.

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