How to Learn From Our School Bond Mistakes

Thanks to reporting by multiple media outlets, taxpayers and school officials are now painfully familiar with capital appreciation bonds – the most infamous being the Poway school bond financing scheme that will cost taxpayers nearly $1 billion for borrowing $100 million.

The Poway debacle led California lawmakers to seek reform, culminating in the passage of Assembly Bill 182 sponsored by state Sen. Ben Hueso and San Diego County Treasurer-Tax Collector Dan McAllister.

The San Diego County Taxpayers Association, which works to protect taxpayers from wasteful government spending, supported the bill because it restricts school districts from borrowing money using capital appreciation bonds longer than 25 years; limits the payback ratio of bonds to four-to-one; increases transparency; and requires bond deals longer  than 10 years to be re-financeable.

AB 182 goes into effect Jan. 1. It’s a reasonable bill that makes many improvements, but is not the silver bullet needed to prevent bad school bond deals in the future.

Many factors come into play while establishing school bonds that don’t fleece taxpayers. Most of the work occurs before a bond is even placed on the ballot – extensive planning, analysis and community outreach is key.

When considering an endorsement, the taxpayers association reviews more than 15 factors as part of our bond support criteria. We look at financial projections, comprehensive facilities assessment reports, assessed tax value projections and more. We regularly update our criteria to make sure the projects promised to voters are delivered on time and on budget.

After voters approve school bonds, ongoing community engagement and oversight of the bond program by school board members, parents and taxpayers is critical. Without qualified and experienced construction management staff, sound legal advice and financial advisers, numerous things can go wrong.

As we approach the end of this calendar year and school districts consider potential school bond measures for the 2014 election, here are several important issues to consider.

DON’T: Pull a year-end mad dash for long-term capital appreciation bonds.

Since AB 182 doesn’t go into effect until the start of 2014, a handful of school districts have considered trying to sneak under the wire and issue long-term 40-year bonds before the end of the year. This is a terrible idea.

DO: Make bonds fair for taxpayers.

School and community college districts need to consider not only what is legal, but what is fair for taxpayers. Just because our group supported AB 182 does not mean we support all AB 182-compliant capital appreciation bonds. Districts should always pursue the most financially prudent option available and be transparent with the community.

DO: Be realistic.

AB 182 does not address the often unrealistic assumptions about how much property values will grow. These projections are often used by school districts, and bond counsel regularly sign off on them. Right now, this is the No. 1 issue causing problems for school districts because many bonds passed in 2006 and 2008 used projections that were simply out of reach. If the projections are off, districts cannot finance the construction and renovation of facilities, thus creating a temptation to use risky financing.

DON’T: Bet on future growth.

A bond anticipation note is a short-term financing mechanism that allows districts to defer payments for no more than five years. After five years, the total payment plus interest is due. Similar to a payday loan, districts receive the capital up front in the hopes they’ll secure additional money before they have to pay it back. It’s a high-risk gamble.

If the funding doesn’t materialize, the district’s general fund, used to pay for teachers and administrators, is at stake. The idea of having a quick influx of money to continue paying for construction projects can be enticing, but the risks must be understood and carefully considered.

DO: Engage your community.

If a school district has hit its taxing capacity, and no longer has the ability to finance its bond program, the district should be transparent with the community on the available options.

Those options could be to stop or slow down the construction schedule, consider new financing options or pursue a bond re-authorization.

That last option decertifies unissued bonds and increases the tax rate with voter approval without increasing the amount of bond money given to the district. But it could result in significant long-term savings for taxpayers in comparison to pursuing some of the risky and expensive financing options.

We cannot emphasize enough the importance of transparency and community engagement. Numerous school districts have reached their taxing capacity, creating difficult decisions for school boards. Hiding from reality – or worse, pursuing a bad financing deal that will hurt taxpayers in an effort to cover up the situation –  is not the answer.

Districts should involve their oversight committee members, parents, teachers and the taxpayers association in assessing the available options.

Sean Karafin is an economic policy analyst at the San Diego County Taxpayers Association. Karafin’s commentary has been edited for clarity. See anything in there we should fact check? Tell us what to check out here. Want to respond? Submit a commentary.