Friday, Oct. 31, 2008 | Loath to raise taxes on strapped homeowners, San Diego Unified crafted its new facilities bond proposal to extend an existing tax, riding the coattails of a waning bond. It reassured voters that they could revamp schools without ramping up their taxes by swapping a new bond — the $2.1 billion Proposition S — for an old one.
But avoiding a tax hike meant a tradeoff: Paying for the new bond until 2044.
The plan, on Tuesday’s ballot, hinges on extending an existing tax. A decade ago taxpayers approved a $1.51 billion bond called Proposition MM to build new schools in San Diego Unified, which levied $95.75 in taxes for every $100,000 in assessed property value. Construction and renovation on that bond has ended but property owners are still paying for it, and will be until 2029. The tax has already dropped to $66.67 per $100,000, and if no new taxes were approved, the taxes would continue to taper off over time.
But to raise more money to install wireless Internet and replace aging trailers, San Diego Unified has proposed a new bond that would extend the current tax, paying off two bonds at once.
Bond consultants predict that for roughly 20 years, taxes paid by property owners in San Diego Unified would cover only the interest on the new bond while paying off the rest of Proposition MM. The bulk of the new bond, Proposition S, would be repaid toward the end of its lifespan, accumulating more interest year by year. Property owners would keep paying their current taxes until 2029, a slightly lower tax for another 15 years, and are predicted to finish paying the debt in 2044.
“Increasing taxes was not somewhere they wanted to go,” said Mark Young, principal for Gardner, Underwood and Bacon LLC in Los Angeles, which is consulting San Diego Unified on the bond and donated to the bond campaign. As a result of keeping taxes steady, Young said, the borrowing will cost more over time because interest costs will be higher.
How much that added interest will cost San Diego Unified is unknown. Young said his group had no specific figures on how much extending the debt would ultimately cost, compared to paying a higher tax for a shorter time span. But the cost of borrowing for decades could be outweighed by other savings during the financial downturn, making it advantageous to buy now and pay later. Economist Kim Rueben said the calculations could still pencil out for the better for San Diego Unified as the costs of raw materials for construction and renovation drop.
“Things are actually cheaper now,” said Rueben, a public finance economist with the Urban Institute based in Washington, D.C. “They might be able to do it at a lower real cost, even though the financing cost will be higher.”
The lengthy payoff is one of the chief complaints raised by the few organized opponents to Proposition S, who have struggled to net funding and support. While the campaign for a new bond in San Diego Unified has been bolstered by television advertisements and endorsements from the mayor, the teachers union and the San Diego County Taxpayers Association and more than $300,000 in donations from heavyweights such as construction consultants Gafcon, Inc. and Qualcomm founder Irwin Jacobs, the opposition has limped along with no donors, relying principally on media appearances and editorials to make its case that the bond will saddle taxpayers with debt for too long.
“I wouldn’t want to be on the school board in 2030,” said Pat Flannery, a real estate broker who is leading the opposition to Proposition S. Flannery argues that the lengthy debt would be a burden to future generations. He added, “We’re not looking at the alternatives, and there are alternatives other than just borrow, borrow, borrow.”
Proponents of Proposition S argue that passing the bond will not preclude San Diego Unified from seeking more funds in the future, nor is its payoff prohibitively long.
It would extend the current rate of $66.67 per $100,000 that property owners are currently paying for Proposition MM until 2029, then drop the rate to $60 per $100,000 for an additional 15 years. The alternative way to reap the same funding would be a higher, shorter-lived tax that could prove unsalable during a downturn. Proposition S consultant Scott Barnett compared the tax extension to a home mortgage and touted the benefits it has promised, such as updated technology for classrooms and replacing portable buildings, and the potential boost in housing values if schools are repaired and updated.
Similar tactics and complaints have arisen in the Escondido Union High School District, where proponents of Proposition T pledge that tax rates will not rise if the new $98 million school facilities bond is passed next week. Opponents argue that the delayed payback is irresponsible and would “obligate our grandchildren to 44 years of payments,” according to the opposition statement. Like the San Diego Unified bond, it follows a previous bond and is being billed as a tax extension instead of a hike.
Bonding has become a way of life for schools in California, where bonds are more likely to pass than fail, according to historical data gathered by the nonpartisan research group EdSource. Lowering the bar for passing school bonds from 66 to 55 percent in exchange for added accountability has ushered in more school facilities funding in California, according to Quinnipiac University economist Eric Brunner. Voters approved more than $28 billion in local school bonds in the five years after the new law, Brunner found, compared to $16.4 billion in bonds in the five years before it was passed.
School facilities funding once lagged in California compared to the nation; as of 2006 it had outstripped the national average, Brunner wrote, largely due to state and local bonds.
“The state is not providing adequate funds for the maintenance and renovation of school facilities,” said Lani Lutar, president of the San Diego County Taxpayers Association. Her group has endorsed both the San Diego Unified and the Escondido bonds, despite some initial apprehension about the San Diego Unified measure. “It has become an unfortunate reality that local bonds quite frequently are seen as the alternative for funding school facilities.”
And following bonds with bonds is now routine, said Judy Marks, associate director of the National Clearinghouse for Educational Facilities. Young of Gardner, Underwood and Bacon said he knew of other school districts that were extending taxes to cover new bonds, much like Escondido and San Diego Unified, and Marks cited the unprecedented $7 billion bond proposed for Los Angeles Unified schools, the fifth bond it has floated in 11 years, as another example of layering bonds over bonds.
The San Diego Unified plan is dependent on an expected 5 percent annual increase in the assessed value of property within the boundaries of San Diego Unified. Flannery called that unrealistic, pointing to the fact that recent growth in assessed value fell short of that mark.
But the assessed property values in San Diego Unified have grown an average of 11 percent annually between 1987 and 2006, according to data supplied by Young, who believes that pegging the new bond to a 5 percent annual growth is conservative. His firm also consulted San Diego Unified on Proposition MM, which won two awards from the Taxpayers Association for saving money when bonds could be issued sooner and at lower interest rates than originally expected. Lowering the tax rate on MM, he said, was what made room for Proposition S to be layered on top.
“It’s a wise thing to do in a community that has supported a tax before,” said Tom Duffy, legislative director and chief lobbyist for the Coalition for Adequate School Housing based in Sacramento. “You just say, ‘Can we extend this?’”
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