School Officials Pitch Prop. Z As The Only Alternative to Exotic Loans

School Officials Pitch Prop. Z As The Only Alternative to Exotic Loans

Photo by Sam Hodgson

San Diego Unified school board member Scott Barnett, San Diego County Taxpayers Association CEO Lani Lutar and VOSD CEO Scott Lewis discuss Proposition Z.

 

San Diego Unified officials have pitched Proposition Z, a $2.8 billion bond on the November ballot, as a desperately needed cash infusion that will help pay for everything from leaky roof repairs to iPads. Now district officials say the bond will provide another crucial benefit: the ability to raise money without resorting to exotic loans.

In 2008, voters passed Proposition S, which approved the district borrowing $2.1 billion to improve and modernize schools and to invest in new technology for classrooms. But now district officials say the only way they can actually get their hands on that money is to take out controversial expensive long-term loans.

Those exotic loans, called capital appreciation bonds, have become politically toxic since a Voice of San Diego article outlined a $105 million bond at the Poway Unified School District that will cost taxpayers $1 billion to pay off. The loans are unpopular with the public because they push the cost of today’s borrowing onto future generations, and because districts end up paying back many times what they initially borrowed.

District officials say their only lifeline to avoid those loans is Proposition Z.

“I don’t see any reason whatsoever why we would use capital appreciation bonds if Proposition Z passes,” said school board member Scott Barnett.

A Cash Crunch

Homeowners within the San Diego Unified School district currently pay a $67 levy on every $100,000 of their home’s assessed value. The district uses that money to pay off loans used for facility improvements, upgrades and new technology.

The district’s problem is that every dollar of that revenue is currently being swallowed up paying off debt from bond projects that were completed years ago. There’s so much existing debt on the books that there’s no extra money coming in to make payments on new loans.

That means right now the district can’t borrow money in the conventional way, by taking out a loan it will pay back every year for the next 30 years or so, like a mortgage.

This cash-flow problem is a big reason why the district has only borrowed about $400 million of the $2.1 billion taxpayers approved it borrowing in 2008. And, thanks to stagnant assessed property values, the district currently projects it won’t have any extra cash available to make payments on new loans until 2028.

That’s where capital appreciation bonds come in. They don’t require any payments to be made on the loan for a long time, and thus have become increasingly popular with California school districts. They allow a district to defer making payments for as long as 20 years.

They’re kind of like interest-only mortgages, except districts don’t even pay the interest.

But borrowing money this way is really expensive, as San Diego Unified found out in 2010, when it borrowed $164 million by selling capital appreciation bonds that didn’t need to be paid off for 40 years. The final price tag for that loan is $1.2 billion, and long-term capital appreciation bonds like these typically end up costing districts as much as seven, eight or even nine times what they initially borrowed.

With more traditional bonds, a district typically only pays back about twice what it borrowed, even if it borrows money over 30 years. But that is only an option if a district can afford to start paying off its loans immediately.

Capital appreciation bonds have become so unpopular that other local districts proposing new bond measures have pledged not to use them. Indeed, The San Diego Unified school board passed a resolution in August pledging not to sell capital appreciation bonds — if Prop. Z passes.

If Prop. Z fails, the district still has a less controversial option on the table: It can sell 25-year capital appreciation bonds rather than 40-year bonds, which would still kick the burden of paying for debt down the road but are much less expensive. We’ll take a closer look at that option in an upcoming post.

A local state assemblyman is sponsoring legislation that would outlaw the most expensive bonds, and lower the maximum length of school district loans to 25 years from 40 years.

Proposition Z: An Influx of Cash

Proposition Z has largely been presented as an independent entity, wholly separate from the district’s existing bond program. It’s been promoted as a new fund of money, funded by new taxes, and used for new projects.

But should it pass, Proposition Z could serve another key purpose for the district: raising quick and ready cash using conventional loans.

The proposition raises the tax rate on local homeowners by $60 per $100,000 of a home’s assessed value.

That would create a whole new flow of cash into the district’s bond program. Overnight, the district would gain the ability to take out conventional loans, instead of capital appreciation bonds.

Adam Bauer, a financial advisor to the district, said he would advise San Diego Unified to hold off on issuing capital appreciation bonds and instead raise money by selling more conventional — and less expensive — bonds that require annual payments.

He said he would never advise a district to issue capital appreciation bonds if it had another option.

“There’s no reason to do that,” Bauer said.

Tapping Proposition Z money to pay for projects the district promised under Proposition S might prove tricky, however. Proposition Z comes with its own project list, which lays out all the projects that will be paid for with the money it raises.

The district hasn’t provided a detailed schedule for completing these projects. And the school board retains significant leeway under the wording of Proposition Z to add, subtract or replace projects from the list.

If the proposition passes, that means the school board could use the proceeds not to pay for these projects at all, but rather to fund dozens of projects it already has in the pipeline and that it promised under Proposition S. School board members Richard Barrera and Scott Barnett both said that would make sense.

“Why wouldn’t we do that?” said Barrera. “We’ve got one big master project list, and if we’ve got revenue available, let’s move ahead.”

Double Dipping

Lani Lutar, president of the San Diego Taxpayers Association, which has opposed Proposition Z, said she doesn’t believe the district would stop using capital appreciation bonds even if the proposition passes.

Lutar said San Diego Unified has a history of financial irresponsibility when it comes to its bond program, and said giving the district the ability to borrow more money is a bad idea.

“The district’s actions have shown that misusing or inappropriately spending the taxpayer’s money is not an issue they are concerned with,” Lutar said.

The school board passed a resolution two months ago saying it wouldn’t issue capital appreciation bonds for Proposition Z.

But it hasn’t made such a pledge for its existing bond program.

As things stand today, the district could continue to take out those exotic loans to pay for the projects it has yet to break ground on. District officials say Proposition Z would allow them to borrow money in a far less expensive way, but without an official promise from the school board that they will cease in issuing capital appreciation bonds altogether, the public has no guarantee that Proposition Z will actually end that practice.

Will Carless is an investigative reporter at Voice of San Diego currently focused on local education. You can reach him at will.carless@voiceofsandiego.org or 619.550.5670.

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Will Carless

Will Carless

Will Carless is the former head of investigations at Voice of San Diego. He currently lives in Montevideo, Uruguay, where he is a freelance foreign correspondent and occasional contributor to VOSD. You can reach him at will.carless.work@gmail.com.

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30 comments
Matt Watkins
Matt Watkins subscribermember

What this article doesn't address is this: if Prop Z passes, how much in bonds will be able to be issued in, say, the next 5 years using conventional financing? And how much of the district's construction/repair backlog will that discharge?

Matt W
Matt W

What this article doesn't address is this: if Prop Z passes, how much in bonds will be able to be issued in, say, the next 5 years using conventional financing? And how much of the district's construction/repair backlog will that discharge?

Scott Barnett
Scott Barnett subscriber

Personally I am am very wary of using any more CAB financing. But we will review options if Prop Z fails

Craig Nelson
Craig Nelson subscribermember

Here's an idea SDUSD - if you can't pay for what you already built STOP SPENDING MONEY!

Craig Nelson
Craig Nelson

Here's an idea SDUSD - if you can't pay for what you already built STOP SPENDING MONEY!

Scott Lewis
Scott Lewis administrator

Not sure what you're seeing in the picture but I did wear shoes, not flip flops. All VOSD staff wore staff T-shirts that day, and, it being an outdoor festival, I wore jeans with mine. I dress like an "adult" quite often but felt that the sunny outdoor Politifest deserved a different take.

scottlewis
scottlewis

Not sure what you're seeing in the picture but I did wear shoes, not flip flops. All VOSD staff wore staff T-shirts that day, and, it being an outdoor festival, I wore jeans with mine. I dress like an "adult" quite often but felt that the sunny outdoor Politifest deserved a different take.

Scott Barnett
Scott Barnett subscriber

t's for another article) SDUSD's investment in the Library Charter is in fact a great deal for the taxpayers and underserved kids.

Scott Barnett SD School Board
Scott Barnett SD School Board

t's for another article) SDUSD's investment in the Library Charter is in fact a great deal for the taxpayers and underserved kids.

Scott Barnett
Scott Barnett subscriber

Well i do have two teenaged daughters (who are still in SDUSD schools) I started in politics as a Del Mar councilman at age 21, younger then Lewis is when he started at the Voice. . I have found that most reporters avoid dressing like adults. I think its part of the independent streak many of them have. For me, After wearing suits and ties for 30 years I am happy to find opportunities to be more casual. I wear jackets and ties to board meetings as a sign of respect for the public and the institution. I'm not saying its disrespectful to be sans suit and tie. Just a personal choice.

Scott Barnett SD School Board
Scott Barnett SD School Board

Well i do have two teenaged daughters (who are still in SDUSD schools) I started in politics as a Del Mar councilman at age 21, younger then Lewis is when he started at the Voice. . I have found that most reporters avoid dressing like adults. I think its part of the independent streak many of them have. For me, After wearing suits and ties for 30 years I am happy to find opportunities to be more casual. I wear jackets and ties to board meetings as a sign of respect for the public and the institution. I'm not saying its disrespectful to be sans suit and tie. Just a personal choice.

Bill Bradshaw
Bill Bradshaw subscribermember

Richard Rider may be a one trick pony when it comes to taxes, but he's got one thing absolutely right: There is no reform until you cut off the money! I'm voting "no" on all the tax measures on this ballot.

toulon
toulon

Richard Rider may be a one trick pony when it comes to taxes, but he's got one thing absolutely right: There is no reform until you cut off the money! I'm voting "no" on all the tax measures on this ballot.

Jim Withers
Jim Withers subscriber

I am continually surprised at how SDUSD can continue to keep Will Carless on their payroll given how dire their economic situation is.

Wiz1
Wiz1

I am continually surprised at how SDUSD can continue to keep Will Carless on their payroll given how dire their economic situation is.

cole macy
cole macy subscriber

seriously, Lewis showed up to this discussion wearing flip-flops? classy. must be causal everyday at VOSD...

moleman619
moleman619

seriously, Lewis showed up to this discussion wearing flip-flops? classy. must be causal everyday at VOSD...

Richard Bagnell
Richard Bagnell subscriber

So Prop Z is now being spun as a way to save Prop S? So why again was $25 million of Prop S money used for the downtown library? Let's get a board that works for the students rather than the unions.

RB
RB

So Prop Z is now being spun as a way to save Prop S? So why again was $25 million of Prop S money used for the downtown library? Let's get a board that works for the students rather than the unions.

Donald Kimball
Donald Kimball subscribermember

A 30 year bond should never be used to pay for an item like an iPad that will be obsolete in 2 to 5 years. At the electrical engineering labs at UCSD, the best we have been able to get out of a few Dell desktop PCs is 10 years. For example, near the end of a 30 year bond, tax payers will be footing the bill for about 10 generations of dead iPads.

CadillacMan
CadillacMan

A 30 year bond should never be used to pay for an item like an iPad that will be obsolete in 2 to 5 years. At the electrical engineering labs at UCSD, the best we have been able to get out of a few Dell desktop PCs is 10 years. For example, near the end of a 30 year bond, tax payers will be footing the bill for about 10 generations of dead iPads.

David Hall
David Hall subscriber

And I don't see any reason why us voters wouldn't get rid of any board member that votes to use these outrageous borrowing schemes when there's a perfectly good alternative. Treat the issue seriously and spend our money more wisely. Problem solved.

sdguy
sdguy

And I don't see any reason why us voters wouldn't get rid of any board member that votes to use these outrageous borrowing schemes when there's a perfectly good alternative. Treat the issue seriously and spend our money more wisely. Problem solved.

Elmer Walker
Elmer Walker subscriber

Reading the article as truthful, means the SDUSD is virtually bankrupt and only Prop Z can save them. So they propose to borrow their way to solvency? Or to raise taxes to attain solvency? What happened to good sound management to resolve a money crisis. San Diego taxpayers have reached their limit on what they are willing to be taxed. So find another way to stave off bankruptcy.

elmerew
elmerew

Reading the article as truthful, means the SDUSD is virtually bankrupt and only Prop Z can save them. So they propose to borrow their way to solvency? Or to raise taxes to attain solvency? What happened to good sound management to resolve a money crisis. San Diego taxpayers have reached their limit on what they are willing to be taxed. So find another way to stave off bankruptcy.

Chris Brewster
Chris Brewster subscribermember

What grates on me is the implication, by its name, that the organization is made up of average taxpayers (e.g. me). Have a look at the Board of Directors and note that only two people are listed as being a "taxpayer representative." http://bit.ly/iCyFzY So what are all the others?

B Chris Brewster
B Chris Brewster

What grates on me is the implication, by its name, that the organization is made up of average taxpayers (e.g. me). Have a look at the Board of Directors and note that only two people are listed as being a "taxpayer representative." http://bit.ly/iCyFzY So what are all the others?

Scott Barnett
Scott Barnett subscriber

Friends. Boycott VOS until they fix this outrage!