OC Firm Behind Poway School Bond Advises Other SoCal Districts

Until the first week of August, Poway residents knew little about the behind-the-scenes maneuvering of local school finance.

That’s when the San Diego-based news site about Poway school officials using CABs, or ultra-long-term capital appreciation bonds, to complete renovation of a number of schools in the district.

Now residents know more than they ever wanted about the high interest rates they’ll have to pay over the next 40 years for those renovations. They’ll have to pay 10 times the original principal amount because the bonds can’t be repaid early.

The strategy of using CABs came at the recommendation of Irvine-based consulting firm Dolinka Group. Benjamin Dolinka is listed as the president and CEO, and several published sources say he has been advising schools for the past two decades. He did not respond to requests for comments regarding the Poway bonds.

His biography says he “focuses on creating new financial and demographic services.”

Dolinka’s apparently familiar with local school officials up and down the state — his firm is frequently hired to consult with districts on the best way to pay for such things as school construction projects.

On the firm’s website, the firm says it has 250 clients, including a long-standing relationship with the Poway school system.

The firm “is a strategic partner in financial advisory and facilities planning services exclusively for the California education community,” the website says. “And it also advises local community college districts as well as county offices of education.

Besides Poway, the firm lists as clients the San Diego Community College District, San Diego Unified School District, San Marcos Unified School District and San Ysidro School District.

Dolinka is also advising Del Mar school officials on an upcoming bond ballot measure, according to local newspaper reporting, and also has a working relationship with the Escondido school system.

The firm’s website includes a letter of reference from Poway Schools Superintendent John Collins, who wrote in a recommendation letter dated March 21, 2011: “For the past 20 years, Benjamin Dolinka has served as a financial advisor to the Poway Unified School District. During this period, Benjamin was a key player as a member of the District’s financial consulting team.”

“I strongly believe it is extremely important for all school districts in the State to identify a financial advisor who understands the needs, the vision, the community, and the politics of a school district,” added Collins. “As superintendent of the Poway Unified School District, I can state that the working relationship with Benjamin Dolinka and his staff has been excellent.”

A copy of the letter is attached in the PDF section of this article.

The firm occupies sleekly designed and furnished office near The Irvine Co.’s upmarket Spectrum Center in the heart of Orange County.

The firm declined to return calls for comments about the bonds.

Dolinka and bond manager Stone & Youngberg, a unit of Wall Street financial firm Stifel Nicolaus & Co., are receiving a total of $1.4 million in fees for their services to the Poway school district, according to Fox News.

Dale Scott, who is president of education financial advisor Dale Scott & Co. in San Francisco, said the revelations in Poway will probably do as much as legislation to stop districts from using CABs in the future.

“They’ve been pretty much done in de facto,” said Scott, a 25-year veteran of the industry.

“CABs can be a very effective tool in helping school districts design programs that provide the guarantees for taxpayers,” he said. “We have used them in moderation.”

“Where they get tuned sideways is when they are used to avoid the payment of taxes, to design some structure to kick some problem down the road,” he said. “That’s where the problem lies.”

Scott considers his firm to be one of the top half dozen in the state advising the education market out of 30 to 40 such firms statewide. He said that the top dozen has about two-thirds of the market for bond work.

Scott explained that an increasing number of school districts have turned to CABs as an unintended consequence of Proposition 39, a state ballot measure passed in 2000 that lowered the percentage of voters needed to pass bond issues to 55 from two-thirds, but set caps on tax rates for repaying those issues.

He said more and more school districts are turning to CABs to get around those caps so that they can finance capital projects.

Scott said he recommends that districts go back to voters to reauthorize existing bonds that haven’t been issued rather than using long-term bonds that can be so costly in the years ahead. The process can save millions of dollars over CABs.

He said the underwriters often write up terms that favor the investors over the districts, such as issuing instruments that can be “called” or retired early to save money.

“The fact that the bond is not callable is what’s ticking people off,” Scott said of the situation in Poway.

Meanwhile, the consulting industry’s ability to recommend such costly bonds in the future might be restricted, if San Diego County Treasurer-Tax Collect Dan McAllister has his way.

He said he made a presentation Aug. 17 to the top business officers of the school districts in the county, and told them he would pursue legislative changes to prevent such bonds from being issued in the future.

Six of the 11 California school districts issuing CABs are located in San Diego County. Three of those 11 were advised by the Dolinka Group.

McAllister said at a that he wants to ensure that “disclosure, openness and transparency, or DOT, is part of all school financial transactions.”

He wants local school boards and their superintendents to sign off on all future bond issues and make those letters public. McAllister also said he wants to limit bond terms to 25 years, along with a number of other changes to prevent financial abuse to taxpayers.

He said he also wants the school districts to be able to repay the debt early. Prepayment options are missing from most bond issues, which means the districts are obligated to pay the full amount of principal plus interest no matter what happens over the next 40 years.

McAllister OK’d Poway’s bonds, but said the long term was “outrageous.”

“It seems as though local districts are able to work and wiggle depending on the economic climate to manufacture something that isn’t necessarily in the best interests of their constituents,” he said. He said that obligating the city for such a long period would impact not only the next generation, but future generations. He described the terms as “onerous.”

Nevertheless, McAllister said, “There’s nothing illegal about them, they do have a place in a monitored, managed bond portfolio for school districts and local governments.”

Michigan journalist Joel Thurtell, who first broke the story about the Poway bond scandal on his blog in early May, is an expert in CABs.

He wrote the groundbreaking series of stories about the abuse of the bonds in Michigan in the early 1990s, stories that prompted Michigan lawmakers to outlaw the practice.

Thurtell said he uncovered a cozy relationship between consulting firms, as well as the firms that issue the bonds, construction companies and other vendors that benefit when schools have money and contracts are awarded. He couldn’t say if he has detected any evidence of that activity in California.

But he says the bonds should be banned.

“If Michigan can do it, California can do it,” Thurtell said. “I saw what could happen in Michigan. If it hadn’t been for me, it wouldn’t have happened.”

He said his stories in the Detroit Free-Press made it so toxic that the districts couldn’t issue CABs, and lawmakers stepped in.

“They’ve been outlawed since 1994,” he said. “So, why can’t California do the same thing?”

“I think the financial advisors who do that have some interest in mind besides the taxpayers of the school districts,” he said.