Gov. Jerry Brown’s skepticism about state assistance for local school districts’ construction projects appears to be primarily based on an intense disdain for adding more billions to what he likes to call the state’s “wall of debt.”Two hundred school districts across California have borrowed billions of dollars using a costly and risky form of financing that has saddled them with staggering debt, according to a Times analysis.
Schools and community colleges have turned increasingly to so-called capital appreciation bonds in the economic downturn, which depressed property values and made it harder for districts to raise money for new classrooms, auditoriums and sports facilities.
Unlike conventional shorter-term bonds that require payments to begin immediately, this type of borrowing lets districts postpone the start of payments for decades. Some districts are gambling the economic picture will improve in the decades ahead, with local tax collections increasingly enough to repay the notes.
CABs, as the bonds are known, allow schools to borrow large sums without violating state or locally imposed caps on property taxes, at least in the short term. But the lengthy delays in repayment increase interest expenses, in some cases to as much as 10 or 20 times the amount borrowed.
Shady bond firms
The Orange County Register, also in 2013, had a long analysis[2] piece that pointed out how one Missouri firm orchestrated 60 dubious bond deals as a one-stop shop — coming up with the financial details, then helping market the proposals to voters. The story noted how this practice ignored state “laws, rules and guidelines”:
•It is illegal for California school officials to hire political consultants with public funds to help pass bond measures. Using the bank’s political consultants is not a legal way around that law, according to the state Office of Legislative Counsel.
•Finance experts advise school districts to sell bonds through public auctions to get the lowest interest rate and to employ independent financial advisers to review the details. Placentia-Yorba Linda, like most of Baum’s California school clients, did neither.
•State law requires that donated consulting work on an election be reported as an in-kind, or non-cash, political contribution. Baum did not disclose its consulting role on state campaign filings in three elections the Orange County Register reviewed.
Use of 30-year borrowing to pay for maintenance
School districts used to face tough rules on use of borrowed funds, including a requirement that school buses paid for with loans had to last at least 20 years. But as I wrote for Cal Watchdog in 2012[3], it’s now common for bond dollars to be used for …
… the most routine maintenance, such as painting and minor repairs. [San Diego Unified’s] Proposition Z, on the November ballot, also includes repair funds for schools that just opened five years ago.
John DeBeck, a San Diego school board member from 1990-2010, told me using bond funds to supplant operating funds has gotten far more brazen in recent years. He said that bonds could easily be written to make the supplanting of general fund spending with bond fund spending impossible, but that such language was increasingly rare. DeBeck also said bond trickery used to be more likely from district staff, but now it was likely to be cooked up by staff in cahoots with trustees.
What motivates bond maneuvers?
DeBeck and several education insiders have told me that the bond shenanigans are driven by political pressure to free up operating funds in the general budget — pressure from teacher unions seeking higher pay.
This theory is disputed by some school district superintendents. They depict their bond decisions as being driven by unpredictable state financing and say iPads are paid off quickly, not over 30 years.
However, the DeBeck theory is in keeping with recent attempts[4] in districts around California to divert Local Control Funding Formula dollars from their intended use — to specifically help English-learner students — to teacher compensation.