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In May 2011, the Poway Unified School District Board of Education was faced with a difficult decision in the midst of a national recession and one of the worst budget years in California’s history.
The district needed to pay off a short-term construction loan originally taken out in 2008 that was coming due in December 2011. That construction loan included a set of short-term borrowings – part of an ongoing program designed to save taxpayers money by accelerating school construction and avoiding inflation-driven cost increases. This short-term debt was an obligation of the district’s general fund which is used to pay for teachers, text books, and other resources for the classroom. The board wanted to avoid any decision that would further deplete this fund.
That is why the district considered two options to refinance its short-term borrowing. One option was current interest bonds, or CIBS, which begin paying bond-holder interest immediately and are generally paid back within 25 years. CIBs require an immediate increase in taxes to pay for the interest and principal as it comes due.
The second option was capital appreciation bonds, or CABs, which do not require interest payments until the bonds mature in 20 to 40 years, which is why CABs do not require an immediate tax increase. CABs can be set up so that their payback uses the continuation of an existing tax rather than requiring a new tax.
In February 2008, voters approved a proposition that authorized the board to issue bonds to modernize school facilities. They did so believing that the district would not increase the tax rate.
Instead, the district’s intention, as stated on the ballot, was to extend the existing property tax at the existing tax rate by 11 years, making 2058 the latest the tax could be levied. This commitment to taxpayers combined with the economic climate, high inflation expectations, and the pressing need to refinance our short-term borrowing, convinced the board that CABs were the best option available at the time.
Since May 2011, much has changed. As a result, the board is now considering an option to restructure some of the long-term CAB debt into lower-cost CIB debt. Doing so will require an increase in property taxes now in order to reduce property taxes in the future, and lower the overall cost of borrowing.
The board has received criticism for studying this option. However, three years after the initial decision and after significant public debate regarding CABs, there is a lot of new information for the board to consider:
• The economy has improved significantly: Property values rebounded dramatically and unemployment fell from over 9 percent to 6.1 percent.
• Interest rates are at near historic lows.
• The district’s short term borrowing has been refinanced, eliminating the pressure to act. This gives the board time to gather input from the community and other experts before making a decision.
• Non-financial factors have emerged as arguments to pull forward some of the CAB debt. One is a concern over transferring tax burden to future generations. Another is a desire to lower future taxes to improve the possibility that new bonds will be approved by voters to meet future school facility needs.
Together, all of these factors have compelled the board to study this new option. The board is moving forward with a deliberative process but there is no definitive deadline for a decision. We are conducting community forums and gathering information via a survey on the district website. We are also gathering input from an independent financial adviser, as well as our own finance team.
As the board processes all of this information, we want to be as clear and transparent as possible so that when we reach a decision, our community will understand what we have decided and why. Toward that goal, we welcome input from any member of our community.
Todd Gutschow is president of the Poway Unified School District Board of Education. His commentary has been edited for style and clarity. See anything in there we should fact check? Tell us what to check out here.