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School District Owes $1 Billion On $100 Million Loan

Dec 7, 2012
Originally published on March 21, 2014 4:10 pm

More than 200 school districts across California are taking a second look at the high price of the debt they've taken on using risky financial arrangements. Collectively, the districts have borrowed billions in loans that defer payments for years — leaving many districts owing far more than they borrowed.

In 2010, officials at the West Contra Costa School District, just east of San Francisco, were in a bind. The district needed $2.5 million to help secure a federally subsidized $25 million loan to build a badly needed elementary school.

Charles Ramsey, president of the school board, says he needed that $2.5 million upfront, but the district didn't have it.

"We'd be foolish not to take advantage of getting $25 million" when the district had to spend just $2.5 million to get it, Ramsey says. "The only way we could do it was with a [capital appreciation bond]."

Those bonds, known as CABs, are unlike typical bonds, where a school district is required to make immediate and regular payments. Instead, CABs allow districts to defer payments well into the future — by which time lots of interest has accrued.

In the West Contra Costa Schools' case, that $2.5 million bond will cost the district a whopping $34 million to repay.

'The School District Equivalent Of A Payday Loan'

Ramsey says it was a good deal, because his district is getting a brand-new $25 million school. "You'd take that any day," he says. "Why would you leave $25 million on the table? You would never leave $25 million on the table."

But that doesn't make the arrangement a good deal, says California State Treasurer Bill Lockyer. "It's the school district equivalent of a payday loan or a balloon payment that you might obligate yourself for," Lockyer says. "So you don't pay for, maybe, 20 years — and suddenly you have a spike in interest rates that's extraordinary."

Lockyer is poring through a database collected by the Los Angeles Times of school districts that have recently used capital appreciation bonds. In total, districts have borrowed about $3 billion to finance new school construction, maintenance and educational materials. But the actual payback on those loans will exceed $16 billion.

Some of the bonds can be refinanced, but most cannot, Lockyer says.

Perhaps the best example of the CAB issue is suburban San Diego's Poway Unified School District, which borrowed a little more than $100 million. But "debt service will be almost $1 billion," Lockyer says. "So, over nine times amount of the borrowing. There are worse ones, but that's pretty bad."

A Statewide Problem

The superintendent of the Poway School District, John Collins, wasn't available for comment. But he recently defended his district's use of capital appreciation bonds in an interview with San Diego's KPBS Investigative Newsource.

"Poway has done nothing different than every other district in the state of California," Collins told the program.

And he's right. In some cases, districts are on the hook to pay back anywhere between 10 and even 20 times the amount they borrowed.

But Lockyer says it distresses him to hear school officials defend these bonds.

"It's so irresponsible, that if I were on a school board — which I was, 40 years ago — I would get rid of that superintendent," Lockyer says.

Back in the '90s, the state of Michigan banned capital appreciation bonds altogether. But Lockyer says California needn't go that far. He supports a series of reforms such as capping the payback of debt to four times the amount borrowed. Otherwise, says Lockyer, these bonds will be paid well into the future, by the children of today's students.

Copyright 2014 NPR. To see more, visit http://www.npr.org/.

Transcript

MELISSA BLOCK, HOST:

From NPR News, this is ALL THINGS CONSIDERED. I'm Melissa Block.

AUDIE CORNISH, HOST:

And I'm Audie Cornish.

School districts around California are taking a second look at the massive amount of debt they've taken on to finance new schools. Over 200 districts have collectively borrowed billions of dollars in risky financial arrangements that defer payments, in some cases for decades.

As NPR's Richard Gonzales reports, these districts often end up paying back many times what they borrowed.

RICHARD GONZALES, BYLINE: A couple of years ago, officials at the West Contra Costa School District, just east of San Francisco, were in a bind. The district needed two and half million dollars to help secure a federally subsidized loan of $25 million to build a badly needed elementary school.

CHARLES RAMSEY: We'd be foolish not to take advantage of getting $25 million and having to spend two and a half.

GONZALES: That's Charles Ramsey, president of the school board. He says the problem was that his district didn't have the upfront money, that two and a half million dollars.

RAMSEY: The only way we could do it is was with a CAB.

GONZALES: A CAB - that's the acronym for capital appreciation bond. Unlike a typical bond where a school district would have to make immediate and regular payments, the CAB allows districts to defer payments well into the future by which time lots of interest has accrued. In this case, that two and a half million dollar bond will cost the West Contra Costa School District about $34 million to repay. Ramsey says it was a good deal because his district is getting a brand new $25 million school.

RAMSEY: You'd take that any day. Why would you leave 25 million on the table? You would never leave $25 million on the table.

BILL LOCKYER: It still doesn't make it a good deal.

GONZALES: That's California's State treasurer Bill Lockyer.

LOCKYER: It's the school district equivalent of a payday loan or a balloon payment that you might obligate yourself for. So you don't pay for maybe 20 years and then suddenly you have a spike in the interest rates that's extraordinary.

GONZALES: Lockyer's in his office poring through a database collected by the Los Angeles Times of school districts that have recently used capital appreciation bonds. In total districts have borrowed about $3 billion and will have to the payback will be more than $16 billion. Some can be refinanced, but most cannot, says Lockyer. The poster child for the issue is the Poway Unified School District in suburban San Diego.

LOCKYER: They borrowed a little over $100 million. So that's what they really got. And debt service will be almost $1 billion. So, over nine times amount of the borrowing. There are worse ones, but that's pretty bad.

GONZALES: The superintendent of the Poway School District, John Collins, wasn't available for comment, but he recently defended his district's use of capital appreciation bonds in an interview with San Diego's KPBS Investigative Newsource.

JOHN COLLINS: Poway has done nothing different than every other district in the state of California.

GONZALES: He's right. In some cases, districts are on the hook to pay back 10, 15, and even 20 times the amount they borrowed. But California Treasurer Bill Lockyer says it distresses him to hear school officials defend these bonds.

LOCKYER: It's so irresponsible that if I were on a school board, which I was 40 years ago, I would get rid of that superintendent.

GONZALES: Back in the '90s, the state of Michigan banned capital appreciation bonds altogether. But Lockyer says California needn't go that far. He supports a series of reforms such as capping the payback of debt to four times of the amount borrowed. Otherwise, says Lockyer, these bonds will be paid by the children of today's students. Richard Gonzales, NPR News, San Francisco. Transcript provided by NPR, Copyright NPR.