The Morning Report
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Three California county grand juries have recently issued damning reports on school districts’ use of controversial capital appreciation bonds.
In May, the San Diego County Grand Jury published this report, which raises concerns about CAB usage by local districts, particularly the Poway Unified School District. (We covered Poway’s bond deals extensively.)
Another report in May from the Santa Clara County Civil Grand Jury concluded that school districts shouldn’t use the bonds. “CABs borrow from future taxpayers and deprive schools of the revenues they require in order to provide for the needs of students,” the report concluded.
This week, the San Mateo Grand Jury in the Bay Area released a report that calls capital appreciation bonds in that county “reckless” and a “ticking time bomb.”
Strikingly, the San Diego report also concludes that Poway engaged in practices that violate state law.
The report doubles down on the California attorney general’s legal opinion that Poway ultimately borrowed more money than taxpayers approved, in defiance of state law.
We examined Poway’s practice of squeezing millions of extra dollars out of its bonds last year. The grand jury report agrees that the district cleverly figured out a way to stick taxpayers with more debt than they signed up for.
California Treasurer Bill Lockyer has called on public prosecutors around the state to study local school bond practices and, if necessary, bring prosecutions.
A spokesman for Lockyer emailed a statement: “We’re not surprised that independent grand juries, after carefully studying the issue, have concluded that using CABS has been a big mistake that has hurt taxpayers.”
But California Attorney General Kamala Harris, the state’s primary public prosecutor, seems uninterested in pursuing the issue.
Back when Poway was putting together its now-infamous bond deal, an attorney with Harris’ office wrote the district a letter stating that Poway’s plan to squeeze extra cash from its bonds “is not authorized by the law.”
But Poway went ahead with the deal anyway, saddling taxpayers in the district with $219 million in extra borrowing costs to pay for the $31 million extra it worked into its bond deals.
A spokeswoman for the attorney general’s office said last year that the ignored warning letter was “the end of the case as far as we’re concerned.”
A spokesman for the office declined to comment Thursday.
The grand jury reports serve as a clear reminder to Harris and other prosecutors around the state that the public is concerned about the bond borrowing.
In San Mateo, the local school district borrowed about $190 million by selling bonds, incurring almost $1 billion in debt. The grand jury in that county tore into the district’s borrowing, and CABs in general, in this week’s report.
Capital Appreciation Bonds (CABs) have an innocent-sounding name. A more appropriate name might be “Too-Good-to-be-True Bonds.” CABs are the ultimate ticking time bombs. They are a method of borrowing now and paying back later – much, much later and often at a very high cost.
While most bonds are due in 25 years, some CABs have terms up to 40 years. More troubling is that all CABs, regardless of the length of their term, don’t require any payment (principal or interest) until they are due. During that time, the interest payments continue to accrue and compound, creating massive balloon-type payments at or near the CABs’ maturity dates.
Moreover, CABs create a disconnect between when borrowed money is spent and when (and by whom) it is paid back. The taxpayers who approve these loans are presenting the tab to their children and grandchildren.
Legislation introduced by local state Sen. Ben Hueso would significantly limit the use of CABs. It is currently working its way through the state Legislature.