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Poway schools’ Proposition C Series B, $105 million capital appreciation bond is unconscionable and illegal — illegal in that it materially exceeds both term limits and borrowing limits. As such it can and should be rescinded/redeemed.
The primary problem with this bond is that we are paying near twice the interest rate on this bond (7 percent) as we would pay on a reasonable alternative (less than 3.75 percent). The 40-year term with no interest payable for 22 years means we will be paying this excessively high and increasing interest expense for an excessively long term. This is not just an inter-generational rip off; it is a multi-generational rip off. We are not pushing the full payment of this bond on our children. We are now or will be paying principal and interest into this bond’s sinking fund as will our kids. The school district won’t have to pay out any cash until 2033, but taxpayers will.
Summary — The current interest rate on a 20-year, AAA, current-interest municipal bond is less than 3 percent. It was only slightly higher in July 2011 when this bond funded but nowhere near the 7 percent interest paid on this bond. The bond needlessly refinanced $98.3 million of the 2008 lease-revenue bonds with an interest rate of only 4 percent and an already long 35-year term and already deferred partial interest and principal. The Series B Bond’s much higher interest rate was used to create a large premium allowing the district to exceed its borrowing limits. The bond’s borrowing limit was $105 million Par value plus interest and issuance costs while net proceeds were $124.6 million. Even with the high premium, the effective interest rate on the net proceeds is still an unconscionably high 5.9 percent.
The district breached its borrowing limits before this bond was funded. There was $25 million in original principal due on its 2010 bond anticipation notes but only $12.3 million available in Prop. C Funds — $179 million less Series A bonds of $74 million, less 2008 lease revenue bonds of $92.7 million for a net of only $12.3 million. I believe refinancing the 2008 lease revenue bonds with a high-interest rate and thereby a high premium was used in an attempt to eliminate this problem. This bond was not the solution to this problem.
The longest maturity portion of these bonds matures between Feb. 1, 2047 and Aug. 1, 2051, accretes interest at 8.0 percent/annum tax free, has a Par value of just $14 million, and a maturity value of $273.4 million for a repayment ratio of 19.55/1. (Note: A portion of the premium is attributable to this $14 million and effectively reduces this ratio.) $273.4 million of the $981.6 million total repayment on this bond is attributable to this special 14 million. Who are the special holders of these special bonds? What are their relations with district employees?
John F Scanlon lives in San Diego.
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