The Morning Report
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A local school district needs a $100 million loan for construction projects, but doesn’t want to pay off the debt for decades as interest compounds in order to keep its tax rate pledge to voters.
Sound familiar? It should.
This is the predicament San Diego Unified finds itself in – and it’s nearly the same position Poway Unified was in when it turned to capital appreciation bonds in 2011 to get fast cash for a higher price in the long-run.
But unlike Poway, San Diego schools will have to issue its $100 million CAB under new cost-saving state limits sparked by outrage over Poway’s $105 million deal, which will cost taxpayers $981 million by 2051.
But it’s a new era.
State laws enacted in 2014 brought “some sanity to the CAB structure,” said County Treasurer-Tax Collector Dan McAllister, who advocated to rein in costly borrowing on the local and state-level. “We’ve come a long way in a short period of time.”
Among other things, capital appreciation bonds must now be repaid in 25 years or less – down from 40 years – and must cost no more than four times the principal amount. Districts previously promised to repay bond investors up to 23 times the amount borrowed.
Amid public outcry in 2012, San Diego Unified promised not to use CABs when it asked voters to pass the $2.8 billion Proposition Z bond measure. They also pitched Z as the only alternative to CABs. Voters bought it, and got a $60 per $100,000 assessed home value tax added onto their bill.
But San Diego’s earlier $2.1 billion Proposition S bond measure – passed in 2008 – came with no such CAB ban, and was approved before the state enacted CAB limits. It did come with its own separate tax rate promise of $66.70 per $100,000 assessed home value. In order to keep that promise and access some of the $1.5 billion left on that bond, officials must delay payments.
That’s where the capital appreciation bonds come in handy by kicking the wad of new debt down the road to future generations when hopefully higher property values will generate more revenue.
If approved by the school board later this month, San Diego’s $100 million Prop. S CAB will end up costing $235 million by 2040 – more than double its worth but more palatable than the 7.6 times repayment price of years past.
San Diego Unified could save more money on the deal if officials choose to repay the debt 15 years early in 2025 for $147.57 million, an option now required by state law.
“These were almost dirty little secrets before,” said McAllister. “I don’t think there should be any heartburn or heartbreak at all, and in fact, voters should be pleased the new rules are being applied to the old (Prop. S) bond because it will mean a better deal for them.”
This wouldn’t be the first time San Diego Unified has turned to CABs since the new rules took effect in 2014. In April 2014, the district sold $50 million in Prop. S CABs with the promise to repay investors $157.4 million by 2038, or 3.15 times the principal.
The new CAB sale would primarily be used for school-site modernization and safety and security projects. It is just one piece of a larger bond plan rolled out this month that includes selling $625 million in new Prop. Z bonds.