Several California community college districts have sold bonds that allow them to put off payments for up to 40 years, causing the total repayment to cost taxpayers from five to nine times the principal.
Poway Unified School District made headlines this month for issuing a bond for $108 million that will end up costing taxpayers nearly $1 billion over 40 years.
Poway has become the poster child for long-term capital appreciation bonds, increasingly common but controversial tools that enable districts to get cash now for voter-approved construction programs, while delaying the payments and tax levy for decades.
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The Los Angeles treasurer and tax collector’s office has taken an aggressive stance against long-term versions of these bonds.
“Once you see a repayment obligation that materially exceeds the principal amount, by that I mean four, five or 10 times more, you have to question why they did it,” said Douglas Baron, director of public finance at the Los Angeles County treasurer and tax collector’s office.
More standard bond sales cost closer to $3 per dollar borrowed.
California Watch reviewed bond sales at several community college districts in search of similar deals. While few appear to match the size of the Poway example, several districts financed construction programs using long-term capital appreciation bonds that will end up costing much more than traditional financing because of compounded interest.
- San Bernardino Community College District issued $56 million in bonds that will cost $493 million by the time they’re paid back in 2048 – nine times the principal.
- Victor Valley Community College District borrowed $34 million in bonds that will end up costing $271 million to pay back by 2049 – eight times the principal.
- Yosemite Community College District's $78 million bond issue will cost $453 million by 2042 – six times the principal.
- Chabot-Las Positas Community College District will pay $850 million by 2046 on $169 million in bonds – totaling five times the principal.
District officials chose the more expensive bonds for a number of reasons. Some said they saw the bonds as the best way to maximize buying power without exceeding legal or promised limits on tax rates.
Here’s the difference between capital appreciation bonds and the standard variety: With traditional current interest bonds, districts borrow money and start paying interest right away. The money for the debt payments comes from taxes on residents.
They can only borrow so much this way because state law says community college districts can’t levy more than $25 per $100,000 of property value.
With capital appreciation bonds, districts get the cash up front but don’t have to pay interest or levy taxes right away. The interest on these bonds compounds over time, without being paid out, until the bond comes due. The further out the bonds come due, or mature, the bigger the payoff for investors and the higher the price tag for districts and future taxpayers.
State law prohibits districts from selling bonds that come due more than 40 years out. The Los Angeles County treasurer and tax collector’s office published a white paper [PDF] stating it would not support capital appreciation bonds in that county with maturities greater than 25 years.
And Baron said the office would advocate changes in the law that would set a cap at 25 to 30 years.
So why would a district choose to use these bonds?
Officials at Victor Valley Community College District did not respond to requests for comment.
At Yosemite Community College District, a drop in property values meant the district neared the tax rate cap sooner than expected. Without the controversial bonds, officials said, the district might have had to wait many years before getting the cash to finish construction projects promised to voters.
In 2004, voters approved Measure E, authorizing Yosemite to borrow $326 million to repair buildings, equip science labs and build new classrooms.
Property values had risen about 9 percent per year at that point, so district officials thought they would be playing it safe by assuming those values would rise 4 percent annually.
They sold their first bonds and began taxing. But then property values sunk. In 2009-10, the district was nearing the $25 rate but still had projects to finish and the authority to borrow $82 million more.
District officials met with financial advisor Caldwell Flores & Winters and three board members.
“As I was studying the significant drop (in property value), the fear was, if we have to charge more than $25, we won’t be able to issue that last $82 million for which we had already invested funds in projects,” district Executive Vice Chancellor Teresa Scott said.
The district sold $4 million in regular bonds, on which it will pay $2 million in interest. It also issued $78 million in capital appreciation bonds, where payments – and taxes – won’t start until 2031. When the last bonds come due in 2042, taxpayers will have paid $375 million in interest.
Scott argued inflation would make that future debt cheaper. Future taxpayers will still be able to use the buildings the district constructed in 2042. And when you combine all the bonds sold under Measure E, the ratio is much lower. Taxpayers will spend roughly $3 for every dollar borrowed.
“Frankly I can see both sides of the story,” Scott said. “(But) I don’t feel bad about what we did at all. I think we did the best we could.”
At San Bernardino Community College District, vice chancellor of fiscal services Charlie Ng also noted that capital appreciation bonds make up a small slice – about 13 percent – of the district's total borrowing. The executives who decided to issue bonds that will cost $9 for every dollar borrowed have since left the district. But Ng said the district made that choice so it could build as many buildings as possible, as quickly as possible.
Property values have now sunk so much that the district has hit the $25 tax rate cap, Ng said. Officials can't issue the remaining $242 million in bonds voters authorized the district to sell under Measure M until the assessed value increases or the district finishes paying debt service in 2049, meaning some projects, like a $43 million parking structure, may never be built.
Voters in the Chabot-Las Positas Community College District approved Measure B in 2004, authorizing $498 million in bonds to upgrade classrooms and repair facilities. District officials promised to keep taxes below the legal cap: at $19.88 per $100,000 in property value.
In 2006, the district sold two series of bonds. Under one series, the district sold $169 million in capital appreciation bonds with the last set coming due in 40 years. Total repayment will cost $850 million, or $6 for every dollar borrowed.
Lorenzo Legaspi, vice chancellor of business services, pointed out that overall in 2006, the district borrowed $398 million on which it will pay back $1.3 billion – about $3 for every dollar borrowed.
“Those were issued at the same time. You can’t take things in isolation,” Legaspi said. “With this amount of principal, if you take it in total, I think it’s a good financial strategy.”
The district chose to issue some long-term capital appreciation bonds as part of the mix in 2006 because it wanted to stick to its five-year time frame and take advantage of a flat economy and keep the tax rate promise.
“We wanted to have our resources now. If we waited 20 years from now to issue – how are we supposed to build the projects today?” Legaspi said.
Baron, of the office of the Los Angeles County treasurer and tax collector, said districts often use long-term capital appreciation bonds because of a tax rate promise, but that doesn’t mean it’s prudent.
“Ironically the only way to honor that tax rate promise is to increase taxes on future generations,” Baron said. “To a degree that kind of overwhelms any tax promise.”