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Dale Scott was wary of taking on a high-profile client like Poway Unified School District.
Scott is the guy Poway has called on to restructure its infamous billion-dollar bond deal.
“Your opponents in this business always say three things about any new ideas,” Scott said. “First, they say, ‘It’s illegal.’ Then, they say, ‘Well, at least it’s immoral.’ Then, lastly, they say, ‘I can do that, too.’”
Scott, who has been meeting with Poway for about a month, stressed that he and the district aren’t currently moving forward with anything. Poway’s board is just hearing his proposal, he said, and seeking to understand it.
We wanted to understand how Scott’s proposal works, too.
I contacted three independent school bond experts from around the state, all of whom agreed to speak anonymously, since they may have separate ongoing business with Poway or Scott unrelated to the current deal.
What emerged were four main criticisms of the proposal, as well as one silver lining that will certainly appease some critics of Poway’s original billion-dollar deal.
It Might Not Save Any Money, Part I: Price
The central logic of Scott’s deal involves buying some of Poway’s capital appreciation bonds from investors and then refinancing them at a lower interest rate.
The first criticism of this plan is the price Poway will have to pay to get those bonds back. Because the bonds are non-callable (meaning they can’t be re-financed), investors are not obliged to sell them back to Poway.
That means they can charge whatever they want for their assets.
Think about it like this: If you own $1 million of Poway’s bonds, and that $1 million is due to turn into $9 million in, say, 20 years, it’s up to you how much you want to sell that asset for today.
Scott thinks he can find enough investors willing to sell at low enough prices.
Other financial advisers say that’s just not possible.
“You cannot save money from refunding a non-callable bond. You just can’t do it,” said one of the advisers I spoke to.
Ultimately, the three experts said sellers aren’t going to part with their bonds unless they get an equivalent payout today to what they will get in the future. That word is key: equivalent.
The district will be buying the bonds for their present market value. But it’s also borrowing the money to buy back the bonds, meaning it will pay interest on that market price.
The financial advisers said that once you take into account the price the bonds will be sold at, plus the interest on that cost, there’s no way the district can save money.
Scott strongly disagrees. His critics clearly haven’t ever tried to do a deal like this, he said, and the mathematics still make it worthwhile to buy the bonds and refinance them, even if the bonds are currently expensive.
And, he said, the moment the plan stops making sense, he’ll shut it down. Simply put, he won’t do a deal that doesn’t save Poway money, he said.
It Might Not Save Any Money, Part II: Future Money
Even if Scott can find enough investors to sell, the district is still faced with the question of the time value of money.
The concept behind Scott’s deal is that by refinancing Poway’s really expensive bonds – the ones with the highest interest rates – he can save Poway millions in future interest.
But all three financial advisers said that claim is a “smokescreen.”
Scott claims he did a similar deal at the Stockton Unified School District, which he says will save the district $70 million in interest over the next 25 years.
The wrench here is that most of that interest isn’t owed until way into the future. Put simply, $10 million in interest paid in 20 years won’t be worth the same as $10 million paid in interest next year.
So, what’s the present value, today, of the $70 million Scott says he’ll save Stockton in the future?
Scott estimated what investors call the “Net Present Value” of that interest savings would be $19 million.
All three experts questioned that calculation. They all said Scott didn’t use industry standard methodology to tabulate how much Stockton is saving in today’s money.
So, Scott had another go: Using industry standard methodology, he calculated the Net Present Value of Stockton’s savings at $6.8 million – considerably less than $70 million, when calculated in today’s dollars.
Poway Needs to Hear More Opinions
Scott says he can save Poway millions. His competitors – the advisers I spoke to – say he will end up costing the district money.
But according to its records, the district has only met with Scott and has not heard any alternative opinions about Scott’s plan. It’s also not looking into other ways to pay down its mountain of debt, according to board records.
“If that’s the only presentation they’ve heard, that’s ridiculous. They just haven’t learned their lesson,” said one of the three financial advisers.
Even Scott agrees.
He acknowledged that it would be useful for Poway to hear a presentation on the bonds from someone “without a dog in the fight.”
The San Diego County Taxpayers’ Association is doing its own independent analysis of Poway’s new deal. Sean Karafin, an economic policy analyst at the Taxpayers Association, said he couldn’t talk about that analysis, but said his group is encouraging Poway to seek outside opinions on Scott’s proposal.
“We’re working on our analysis, and we think it’s important for the board to listen to the community and other groups before making their decision,” Karafin said.
Poway still has time to get other opinions. The board’s next meeting with Scott is Sept. 15.
The Deal Would Raise Taxes Without a Vote
Key to the proposal is almost immediately raising the property tax rate on residents so the district can pay for its new bonds.
Three years ago, Poway had the option to raise taxes. Had it done so, it could have borrowed the final $126 million it needed to finish the work on its schools in a much more reasonable and sensible loan.
Scott says Poway would be legally allowed to do this because the new bonds are technically a “refunding” or refinancing of existing bond debt. Under California law, as long as refunding bonds results in an overall savings to taxpayers, districts are allowed to increase taxes without a vote.
The Silver Lining
There is one very stark silver lining to Scott’s deal.
Even if it doesn’t save any money and even if it denies taxpayers the right to vote on a tax increase, it would result in a payback plan that’s ultimately a lot fairer to Powegians.
The main criticism of capital appreciation bonds is that they burden tomorrow’s taxpayers with today’s spending.
As things stand, Poway won’t even start paying off some of the work that was done back in 2008 until the buildings that were built have already started to fall apart in 2033.
Why should the children and grandchildren of today’s Powegians be responsible for paying for their parents’ and grandparents’ gymnasiums and science labs?
By shortening the length of Poway’s loan and bringing all the payments into the next 20 years, Scott has come up with a formula that addresses that disparity.