School bond reform needed to protect taxpayers

June 08, 2013

By Ben Hueso & Dan McAllister

This month, the California State Senate’s committee on education and the committee on governance and finance, are expected to hear and vote on Assembly Bill 182 (AB 182). This bill seeks to reform the way California school bonds are currently issued and financed through the use of Capital Appreciation Bonds (CABs).

In April of this year, AB 182 overwhelmingly passed in the California State Assembly with bipartisan support of 75-0. It is our hope that the Senate will also lend its unanimous support to this important legislative bill. As currently written, this bill incorporates each of the key provisions that we raised last year when we called for reform legislation.

Since 2007, more than 600 California school and community college districts have financed construction projects with CABs that defer repayment far into the future and ultimately cost 10 to 20 times more than what the district originally borrowed.

School districts turned to this approach of financing due to the economic downturn. Many major school renovation projects were necessary, which unfortunately, led to borrowing money with huge interest and pay back ratios.

Currently, CABs are structured by extending the term of a bond and allowing districts to postpone the collection of taxes for many years, with the assumption that in the future, the assessed valuations of property will be high enough to pay off the CABs when they mature. This could be more than 20 and up to 40 years after the bond was issued and the debt service to principal ratio for CABs can be 10 to 20 times the principal. School districts are counting on substantial increases in property values in two to four decades to cover the outrageous payback obligations.

No matter where you look throughout the state, many school districts have managed to utilize these egregious bond issuance schemes. Worst of all, our taxpayers living in these districts will have the burden of paying the debt 20-40 years later.

AB 182 will protect the taxpayers by requiring school districts and community college districts to issue bonds under the guidelines of the State of California’s Education Code, which limits the term of bonds to 25 years. Additionally, this bill will also cap the debt repayment ratio at four to one and will ensure that districts are not locked in without a way to refinance the CAB if it makes financial sense to do so.

Lastly, this bill requires additional transparency and information to the taxpayer. The agenda of a school district or community college board meeting must indicate that a CAB is being recommended. These governing boards must be provided information about the overall costs of the proposed CAB, compared with the cost for a current interest bond, and an explanation as to why a CAB is recommended.

Not only is the message loud and clear that California school districts are in need of guidelines for the issuance of school bonds, but most importantly, we need to protect our taxpayers from these outrageous debt loads that will ultimately become a financial burden to current and future homeowners.
As elected officials, we have a responsibility to fight for reform that protects our schools, taxpayers and the well-being of our state. As we move forward in full support of AB 182, we need to keep in mind that disclosure, openness and transparency are paramount in order to achieve comprehensive school bond financing reform.

AB 182 is supported by California State Treasurer Bill Lockyer, the California Taxpayers Association, the California Association of County Treasurers and Tax Collectors, the California League of Bond Oversight Committees, Howard Jarvis Taxpayers Association and a number of other groups.

We strongly urge the members of the Senate to support school bond financing reform by approving AB 182.

Hueso represents the 40th Senate District, which includes portions of San Diego and Riverside counties and all of Imperial County; McAllister is San Diego County Treasurer-Tax Collector.