Schools Statewide Are Risking Big With CABs

Schools Statewide Are Risking Big With CABs

Photo by Sam Hodgson

At a meeting of the Poway Unified School District, Superintendent John Collins addressed a packed room to explain why the district purchased controversial capital appreciation bonds.

 

A big story in The Los Angeles Times Thursday takes a look at school district-borrowing statewide using capital appreciation bonds.

The Times analyzed state data to conclude that roughly one-fifth of school districts in California have borrowed money by selling capital appreciation bonds, which don’t require any repayments for as long as 20 years.

The story gives us a hat-tip for writing about the Poway Unified School District’s now-infamous billion-dollar bond deal last year. (Though we weren’t the first to report on the bonds. As we’ve noted, Michigan blogger and former journalist Joel Thurtell deserves the credit for publishing the first stories on Poway’s deal.)

Here are a couple of snippets from the Times story:

The practice is controversial and has been banned in at least one state. In California, prominent government officials charged with watching the public purse are warning school districts to avoid the transactions.

One sounding the alarm is California Treasurer Bill Lockyer, who compares CABs to the sort of creative Wall Street financing that contributed to the housing bubble, the subsequent debt crisis and the nation’s lingering economic malaise.

“They are terrible deals,” Lockyer said. “The school boards and staffs that approved of these bonds should be voted out of office and fired.”

The piece also analyzed just how much debt is out there on these loans:

Overall, 200 school systems, roughly a fifth of the districts statewide, have borrowed more than $2.8 billion since 2007 using CABs with maturities longer than 25 years. They will have to pay back about $16.3 billion in principal and interest, or an average of 5.8 times the amount they borrowed.

Nearly 70% of the money borrowed involves extended 30- to 40-year notes, which will cost district taxpayers $13.1 billion, or about 6.6 times the amount borrowed on average.

State and county treasurers say debt payments of no more than four times principal are considered reasonable, though some recommend a more conservative limit of three times.

“This is part of the ‘new’ Wall Street,” Lockyer said. “It has done this kind of thing on the private investor side for years, then the housing market and now its public entities.”

The story singles out two school districts in San Diego County for scrutiny, Poway and Santee Unified. The Times reports that Santee borrowed $3.53 million in capital appreciation bonds and will pay back $58.6 million — $16.57 for every $1 borrowed.

The piece also includes an interactive database of all the capital appreciation bonds in the state. Take a look and see if your local district is on there and, if so, let us know.

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
Dennis
Dennis subscriber

Of course, some here will still spin the same tired argument that schools are failing.

Dennis Michael
Dennis Michael

Of course, some here will still spin the same tired argument that schools are failing.

Chris Wood
Chris Wood subscriber

In 20 or 25 years those making such agreements will be retired or have died – and it will be somebody else’s problem.

Chris1
Chris1

In 20 or 25 years those making such agreements will be retired or have died – and it will be somebody else’s problem.