California's Superintendent of Public Instruction Tom Torlakson on Thursday issued a letter strongly cautioning school districts against issuing Capital Appreciation Bonds (CAB)—the type of bond that now has Poway Unified School District-area taxpayers on the hook for nearly $1 billion over 40 years.
In exchange for the debt, PUSD only received about $105 million for school repairs.
In the letter addressed to county and district superintendents (see below), Torlakson and State Treasurer Bill Lockyer ask districts to agree to a moratorium on CABs until state legislators settle on reform measures to rein in "exorbitant debt service payments."
Though Poway Unified has become a "poster child" for how CABs can go wrong, other districts across the state have made deals that are just as bad or worse, said Tom Dresslar, a spokesman for Lockyer.
"It's become clear that in many cases, school district officials were not fully aware of what they were getting into," Dresslar told Patch.
PUSD board members have deflected blame for the costly CABs to taxpayers, saying they had just as much information as the voters who approved the bonds.
And while PUSD Superintendent John Collins has said the bond money was needed to repair schools right away, Thursday's state letter said CABs with such high repayment costs "cannot be justified" and likely won't benefit the people repaying them decades down the road.
One of the most controversial aspects of PUSD's bond agreement is the lack of what's usually a standard out-clause that would allow the bond to be repaid early, cutting' taxpayers interest costs.
Dresslar said Lockyer wants to see reform requiring any district bond deal with a maturity beyond 10 years to include an option for early repayment.
Patch has reached out to PUSD Superintendent John Collins for his reaction to the letter and will update this story with his response.
Dear County and District Superintendents:
CAPITAL APPRECIATION BONDS
We understand many districts face a critical need to build or modernize facilities for their children, and we recognize that falling property tax assessments, revenue losses, and statutory debt service limits have all combined to reduce districts’ debt financing options. As a result, some districts have turned to capital appreciation bonds (CABs), which have forced taxpayers to pay more than 10 times the principal to retire the bonds.
Thus, we urge you and your Board of Education not to issue CABs until the Legislature and the Governor have completed their consideration of this year’s proposals to reform the CAB issuance process by improving transparency and protecting taxpayers against exorbitant debt service payments. Through this process, we welcome and encourage your input to ensure that the needs of districts are still being met.
In too many cases, CAB deals have forced taxpayers to pay more than 10 times the principal to retire the bonds. Also, the transactions have been structured with 40-year terms that delay interest and principal payments for decades, resulting in huge balloon payments and burdens on future taxpayers that cannot be justified. Too frequently, board members and the public have not been fully informed about the costs and risks associated with CABs. In some cases, board members have reported they were not even aware they approved the sale of CABs.
It is important to note that CABs with terms exceeding 25 years place the repayment obligation on future taxpayers who likely will not benefit from the capital improvements financed by the CABs. At the same time, the CABs payments will reduce those taxpayers’ capacity to finance construction and modernization projects their own children will need.
We are convinced that remedial legislation is needed to prevent abuses and ensure that both school board members and the public obtain timely, accurate, complete, and clear information about the costs of CABs, and alternatives, before CABs are issued. The Governor has told us he wants reforms. Key lawmakers and legislative leaders have made clear they agree statutory changes are needed.
For all these reasons, we believe your district and every other district in the state should impose a moratorium on issuing CABs. The moratorium should remain in effect until the Governor and Legislature decide on reforms in the current legislative session. If reforms are enacted, subsequent CABs deals can be conducted in compliance with the new statutory requirements.