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Mt. Diablo and Poway districts provide cautionary tales for school districts seeking to issue Capital Appreciation Bonds

By Theresa Harrington
Friday, November 30th, 2012 at 7:44 pm in Education, Mt. Diablo school district, West Contra Costa school district.

Alarm bells are ringing throughout the state over the shockingly high costs taxpayers in the Poway district in Southern California are paying to finance $105 million in school construction bonds: $1 billion through 2051.

A recent Los Angeles Times analysis highlighted a growing controversy over the use of capital appreciation bonds, known as CABs, to finance school construction. In contrast to more traditional current interest bonds, CABs delay repayment for years or even decades, resulting in much higher interest and total costs to homeowners.

These concerns are not new in Contra Costa County, where many Mt. Diablo district residents have been alarmed about the potentially high costs trustees set them up for when they placed a $348 million bond measure on the June, 2010 ballot.

Poway provides a cautionary tale for trustees and district officials who may place a higher value on immediate school upgrades than on taxpayers’ pocketbooks.

The Mt. Diablo district provides a similar cautionary tale for district officials and boards who may be inclined to rely so heavily on bond campaign consultants, underwriters, financial advisers and their legal counsel that they forget to include the public in their decision-making.

Like Poway, Mt. Diablo officials promised voters that their tax rates wouldn’t increase over what they were already paying on a previous bond. But, in Mt. Diablo’s case, district officials failed to inform voters in a campaign poll — and at the board meeting where trustees voted to place their $348 million bond measure on the ballot — that the trade off for keeping the tax rate low could cost taxpayers as much as $1.8 billion over 40 years.

In fact, the board didn’t publicly discuss its financing plan at all. Instead, the superintendent and a few trustees met with campaign consultants, a financial adviser and bond underwriters (who contributed to the campaign) to hatch a plan they apparently figured no one would question.

It wasn’t until the Contra Costa Times’ editorial board asked to see a spreadsheet outlining the repayment plan that the potential exorbitant costs came to light. By that time, it was too late to change the way the bond was structured.

In 2010, the district issued nearly $3 million in CABs, with a repayment cost of about $9.7 million over 11.9 years, or about 3.2 times the amount issued. Then in 2010, the district issued $943,582 worth of CABs with better repayment terms — about twice the amount issued, or $1.8 million over 7.3 years.

Residents who had been watching closely — including members of local taxpayer groups — rose up to put the brakes on future CABs, which they feared could have much worse terms. So, they asked the board to reverse itself, increase tax rates and agree to issue only current interest bonds in the future.

This board was in a tough spot — essentially damned if it did and damned if it didn’t. If it broke its promise to voters, it would lower taxpayers costs. But, it could suffer political backlash from breaching the public’s trust regarding the tax rate.

Trustees could have avoided this dilemma if they had openly discussed the bond financing in the first place.

In a split vote, the board agreed to go back on its word, saying the tax rate extension had been a political promise, which wasn’t legally binding.

When the November board elections rolled around, one longtime incumbent decided to step down. The other incumbent, Board President Sherry Whitmarsh, was soundly defeated by two challengers.

Charles Ramsey, board president in the West Contra Costa district, said it’s possible the Mt. Diablo board’s flip-flop cost Whitmarsh the election. Although West Contra Costa has also issued two CABs, Ramsey distinguishes his district from Mt. Diablo and Poway, saying his board never promised to not to increase tax rates when they went out for new bond measures.

Instead, he said, West Contra Costa voters have been willing to pay higher tax rates, which will enable the district not to issue any more CABs in the future. He also pointed out that the district’s most recent bond campaign didn’t accept any money from bond underwriters or financial advisers.

“How many districts can say that?” he asked.

Here’s a Contra Costa Times editorial about the need for transparency in these types of deals: http://www.contracostatimes.com/twitter/ci_22099900/contra-costa-times-editorial-expensive-school-bond-maneuver

Here’s a link to our searchable database, which shows the seven Contra Costa County districts that have outstanding CABs: http://bit.ly/QxYx1b

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