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The Poway Unified School District became famous for its billion-dollar bond.
The district’s complicated and ultimately very controversial deal saddled taxpayers there with a mountain of debt that they won’t pay off for 40 years.
We’ve spent months trying to understand the district’s deals and present them in a concise, interesting way. But there are a lot of complicated issues at play here. So we’ve identified and answered nine key questions to explain what Poway did.
This all started in 2008, when residents there voted to approve Proposition C, a measure that allowed the district to finish a decade-long effort to modernize and repair aging schools.
By passing Prop. C, voters approved the district selling $179 million in bonds. Since then, the district has sold bonds twice:
• In 2009, it sold $74 million worth of bonds;
• In 2011, it sold the remaining $105 million worth of bonds.
School districts often borrow money that way. Poway, though, used an exotic type of financing called capital appreciation bonds.
That decision has attracted nationwide attention.
1. What are capital appreciation bonds?
Traditional school bonds work just like a home mortgage: An investor buys bonds from a school district and the district pays the investor back the price of the bond, plus interest, over a certain period of time.
Essentially, bonds are loans. In their simplest form, the district repays part of that loan every year until the total debt is paid off, just like a mortgage.
Capital appreciation bonds work differently.
Rather than paying off part of the loan each year, the district agrees to just pay the investor a lump sum on a certain date decades in the future. The idea is that the district has 30 or 40 years to, in effect, save enough money to make good on that payment.
School bonds are repaid with property taxes paid to the district. And capital appreciation bonds give districts a way to get around the fact that they don’t have enough money coming in from those taxes to be able to pay back a steady payment on their loan each year.
2. Why are capital appreciation bonds so controversial?
They allow districts to borrow future tax revenues now.
Districts take a loan out, even though they don’t yet have enough money coming in to pay it. They assume they’ll be able to collect enough taxes in future years, before the loan is due, so they can repay it.
But capital appreciation bonds go even further. They also count on property taxes growing enough to ensure the district has enough money coming in to make good on its debts.
3. Where does the money come from to pay off these loans?
In general, it comes from a levy on property taxes within a school district.
When voters allow a district to sell bonds, they typically also approve a source for that money: A small increase in local property taxes.
Poway’s Proposition C in 2008 was a bit different. In that election, voters didn’t approve an additional increase in property taxes. Rather, they approved an extension of an existing tax that had been put in place when the district’s previous bond measure passed in 2002.
This allowed the district to tell voters they weren’t actually increasing taxes; they were just keeping an existing tax around longer.
The tax levies are typically a set dollar amount per $100,000 of assessed property values. In Poway, for example, the levy is $55 per $100,000 of assessed value. The owner of a $300,000 home pays $165 a year towards paying off the district’s loans.
4. Why is Poway paying back more than nine times what it borrowed on its 2011 deal?
Normally when school districts borrow money, they repay two or three times what they got. And they typically repay it over 20 or maybe 30 years. Poway, meanwhile, won’t even start repaying its loan for 20 years and won’t have paid it back until 2051 — 40 years after it got the money.
The reason goes back to the district’s choice not to increase taxes in 2008. This decision limited how much money the district has coming in each year from its property taxes.
By the time the district sold its bonds in 2011, it had already committed all the tax money it would receive for the next 20 years. The only way to pay off a new loan was to set up one where the district didn’t have to pay anything for 20 years — a capital appreciation bond.
And that sort of loan is expensive.
Had the district immediately started paying off its loan in 2011, and repaid it steadily over, say, 30 years, it would have ultimately cost taxpayers far less. But the district didn’t have the option of doing that.
5. How does the district plan on eventually paying back the $1 billion?
Poway Unified officials essentially gambled that assessed property values in the district will rise significantly between now and 2031, when the district will make its first payments on its 2011 loan.
Today, the district has about $11 million coming in every year from the property tax it uses to pay off its bonds. Because it’s pegged to assessed property values, that amount will rise or fall over the next 20 years, depending on what happens to property values in the district.
In order to have enough cash coming in to be able to afford its payments on last year’s loan, the district needs assessed values there to more than quadruple by 2031.
Nobody knows whether that will happen.
6. What if assessed property values don’t rise that much?
Homeowners will be charged more in property taxes to make sure the district can pay off its loan.
If assessed property values in the district don’t more than quadruple between now and 2031, when the district has to make its first payment, Poway homeowners will have to pay higher taxes.
Homeowners are the district’s backstop.
7. How did the district get more than the $179 million that voters authorized?
When Poway sold its bonds in 2009 and 2011, the district figured out a way to get more money upfront on the deals.
For a full analysis of how this worked, read this story, but here’s the gist: The district figured out how to get its investors to kick in about $30 million extra on its two deals. In exchange, the district promised to increase the interest it would pay back on its bonds.
The bottom line: Getting that extra money will ultimately cost taxpayers about $220 million to pay back over the life of the two bonds.
8. Is that illegal?
The district says its deals are legal, since it got a judge to sign off on them.
But last year state Attorney General Kamala Harris’ office warned Poway that getting extra money this way was against state law.
California bond attorneys I’ve spoken to are split. They agree that Poway pushed the envelope on its last two deals, but some argue state laws are too vague and that Poway may have stayed within the law.
9. What can Poway do now?
This is the question a lot of Poway residents have been asking recently.
One of the more extraordinary things about Poway’s 2011 deal is that it can’t be refinanced. Bond experts say that’s rare for school bonds, which typically come with the option to “call” or refinance the deal.
The Poway school board says if they had wanted the deal to be refinance-able, it would have cost them about another $100 million. So they didn’t do it.
On the face of it, then, there’s not much the district can do to get out of its obligations.
Taxpayers appear to be stuck.
We’d like to hear your questions too. What elements of these deals are you still unsure about? What would you like to know? I’m Will Carless, an investigative reporter at Voice of San Diego currently focused on local education. You can reach me at firstname.lastname@example.org or 619.550.5670.
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