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
.)
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.
