Explainer: Not All Exotic Bonds Are All That Exotic

Explainer: Not All Exotic Bonds Are All That Exotic

File photo by Sam Hodgson

The San Diego Unified school board

 

We explained last week that the San Diego Unified School District’s bond program is facing a cash crunch.

As the graphic below further illustrates, the district doesn’t have enough money coming in from property taxes to borrow money in the traditional way, by taking out a loan that it immediately starts paying back every year. The district’s only option, officials say, is exotic capital appreciation bonds. Those have become politically toxic because they’re extremely expensive and push the burden of today’s borrowing onto future generations.

But not all capital appreciation bonds are as controversial as the ultra-long-term loans that the Poway Unified School District sold last year and San Diego Unified sold in 2010.

Adam Bauer, a financial adviser to San Diego Unified, said the district has the option of selling capital appreciation bonds that last 25 years instead of the 40-year bonds. These shorter loans are a lot cheaper. Districts typically pay back about four times what they borrowed instead of seven or eight times what they borrowed, the typical cost of a 40-year loan.

District Chief of Staff Bernie Rhinerson pointed out that 25-year capital appreciation bonds would also be allowed under new legislation currently being pushed by state Assemblyman Ben Hueso and San Diego treasurer-Tax Collector Dan McAllister.

In its current form, that legislation would ban the longer 40-year loans, and limit the repayment ratio for school bonds to four times the initial amount borrowed.

There is, however, a downside to the shorter loans, Bauer said.

Selling 25-year bonds limits how much the district can borrow. Unless assessed property values rise significantly over the next few years, San Diego Unified would find its ability to borrow squeezed if it only sold 25-year bonds, Bauer said.

“They’re not going to get as much doing the 25s as doing the 40s,” Bauer said. “They won’t feel it in year one, but over 10 years, their ability to borrow will be limited.”

And even the 25-year loans are a much worse deal than taking out a loan that gets paid back every year, Bauer told me last week. He said he would never advise a district to sell capital appreciation bonds if it had the option to take out more conventional loans.

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

The graphic below, data for which was provided by Bauer, shows the district’s cash crunch in detail.

It’s worth noting that this chart assumes modest growth in the district’s assessed value in coming years. It assumes an increase in assessed value of 2 percent in the first year, 3 percent in the second year, 4 percent in the fourth year and 5 percent every year after that.

Even with this growth, the district won’t have any cash coming in to pay new debts until 2028.

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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4 comments
Jim Withers
Jim Withers subscriber

Yet another story on district loans. I think that makes two separate education stories this year. And talk about real investigative journalism: go to Bauer at the school district (he may have a vested interest here...), ask him to explain what they are doing, and then report it. Geez, that's investigative reporting for you...

Wiz1
Wiz1

Yet another story on district loans. I think that makes two separate education stories this year. And talk about real investigative journalism: go to Bauer at the school district (he may have a vested interest here...), ask him to explain what they are doing, and then report it. Geez, that's investigative reporting for you...

Annie O'Connor
Annie O'Connor subscriber

It is really quite simple. If they don't have the money now to start paying off the loan, they won't have in 2028 either. If you don't have the money, you do without!

China Doll
China Doll

It is really quite simple. If they don't have the money now to start paying off the loan, they won't have in 2028 either. If you don't have the money, you do without!