By Chris Reed

A bill that would prevent expedient, irresponsible school districts from issuing insane “capital appreciation bonds” that can’t be paid off early and that cost, over the long term, 10 to 20 times as much as the amount borrowed has had an interesting journey in Sacramento. It passed the Assembly unanimously only to be subject to an attempted hijacking in the Senate. As I wrote three weeks ago …

“The analysis of the reform bill by the Senate Education Committee’s top consultant, Kathleen Chavira, reads as if it were written by the firms that make fortunes by touting CABs. The analysis never cites a single example, such as Poway, that shows the bonds’ gigantic long-term cost — the factor driving the reform push. Instead, Chavira recapitulates process arguments about taking away flexibility from districts and describes the reforms as ‘punitive.’”

As John Fensterwald details on EdSource, the measure ended up surviving with most key provisions intact. In negotiating with state senators, Assembly Education Committee Chair Joan Buchanan, D-Alamo, played a key role in staving off Chavira and school administrators who want to continue to use CABs in order to avoid making tough decisions.

Much-bigger bond abuses tolerated — so far

But if Buchanan believes what she said about CABs — such borrowing “violates a basic principal of capital financing that ties the life of the financing to the life of an improvement” — then she should tackle a much-bigger abuse of school bonds, something that amounts toa systematic attack by school districts on the integrity of general obligation bonds, as I detailed for Cal Watchdog last fall.

By Chris Reed

The steadily building scandal involving school districts and capital appreciation bonds now has a specific villain — and the potential for a criminal investigation by Orange County’s district attorney or the state attorney general. CABs, in which school districts borrow money that they don’t begin to repay for 20 years or more, came into focus last summer with reports that the Poway Unified School District had borrowed $105 million at a long-term cost of $981 million — and couldn’t refinance the bonds. Normally, 30-year borrowing costs about twice the amount borrowed.

A comprehensive Los Angeles Times report found that about 200  school districts had taken out the bonds. But the scandal still had no central focus. Now it may have, thanks to an excellent investigative report by Melody Peterson in the Orange County Register.

“According to an analysis of data from the state treasurer’s office, [the Kansas City, Mo.-based George K. Baum firm] has issued more than 60 capital appreciation bonds for California school districts since 2007, including the single most expensive such loan. That debt – $283,612 borrowed by San Bernardino County’s Rim of the World – will cost future taxpayers 23 times the principal. …

“The story of how Baum pushed California schools into complex bond deals that charged payments to future taxpayers is one of naïve public officials, sophisticated financiers, and laws, rules and guidelines ignored:

“•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. …”

A road map for prosecution

Peterson focuses on Baum’s extensive political role in the Placentia-Yorba Linda district in a way that provides a road map for prosecution:

“California law is clear: It is illegal for school officials to use public money to hire political consultants to pass bond measures.

“You wouldn’t know that if you followed Baum executives around the state.

“In dozens of presentations, the executives have explained how schools get far more than a bank with decades of experience in bond underwriting. The schools also get step-by-step instructions on putting a bond measure on the ballot, the bankers explain, as well as aid from its political strategists.

“If the measure fails, the bank assures schools, they owe nothing. …

“The bank has ‘a full-service, in-house election team comprised of a campaign specialist, a pollster, copywriters, graphic designers and database professionals,’ according to its website. …

“Downey, the board’s president, insisted that Baum’s work for Placentia-Yorba Linda did not include political consulting. She said no school funds were paid to Baum for political work.

“But documents and interviews show that the bank was deeply involved in the election.”

Bond firm illegally ran political campaign

This next paragraph makes it seem like a disgruntled former Baum employee leaked dirt to the Register.

“According to a 52-page campaign report the bank’s political strategists prepared for Placentia-Yorba Linda officials in 2006, their pollsters surveyed 400 residents by phone to determine their likelihood of voting for the bonds and what political messages worked to persuade them. …

“In addition to the political consulting, the bank gave $25,000 to the campaign. Its donation was quickly followed by other large contributions from law firms, architects, construction contractors and other companies hoping to profit from the bonds and building projects. In all, companies from outside the community gave more than 90 percent of the $150,000 collected by the political committee.

“A company paying employees to work on a campaign in California must report the value of those services as a contribution, according to the state Political Reform Act. Breaking the law can result in fines of up to $5,000 per violation.

“But Baum did not report any in-kind donations for political consulting ….”

The article lays the blame a bit too entirely on Baum. School board members aren’t all naive. Some are just looking for easy ways to avoid making tough fiscal decisions and angering the local teachers union.

But this scandal needs a villain to keep the media motivated and the general public interested. And anything that keeps the focus on school finances makes it more likely that the media will eventually focus on the bond scandal that’s even bigger than capital appreciation bonds: the use of 30-year borrowing to pay for short-lived electronics and the most routine maintenance, almost always to free up funds to provide teachers with the automatic raises most get for 15 of their 20 years on the job.

By Chris Reed

The state Senate committee report last week showing districts stealing federal funds meant for school lunch programs came as no surprise to students of California’s education establishment. There’s a strange mentality afflicting school governance in this state, an odd combination of an anything-goes ethos and a righteous sense of entitlement.

That’s why in recent years we’ve seen school districts in California caught lying about dropout rates. And about attendance rates, which determine state funding. And also about local property tax receipts, which can reduce state school funding depending on their amount.

We’ve also seen school districts’ legal but appalling abuse of school bonds, which used to be “construction bonds” but are now about finding ways to free up money for the general fund. One version of bond abuse is borrowing at ridiculous long-term rates to avoid short-term headaches through CABs — capital appreciation bonds. The more common version, though, is use of 30-year conventional bonds to pay for routine maintenance and educational equipment such as laptops and iPads.

CalWatchdog has written about these amoral assaults on taxpayers on several occasions. Anyone who pays attention quickly figures out what the Sacramento press corps never makes clear to Californians: Goal number one in the Legislature and in nearly all local school districts is accommodating veteran teachers, which means a constant push to free up enough funds in district operating budgets so that teachers can get the automatic “step” raises that they typically receive just for showing up for 15 of their first 20 years on the job.

All the other stuff we hear about education in budget fights? It’s all show. Democratic legislators beholden to the CTA and CFT know what they must do each budget season: Keep the auto raises coming to veteran teachers and stymie any reform that might discomfit them.

The latest example of K-12 chicanery

Understand this history, and it’s no surprise that federally funded school lunch programs are being looted as well to free up funds for teacher auto raises:

“At least eight California school districts have misappropriated millions of dollars in funding intended to pay for meals for low-income students — the biggest culprit being the Los Angeles Unified School District, according to a state Senate watchdog group.

“The California Department of Education has ordered districts to pay back nearly $170 million in misused funds to their student meal programs, the California Senate Office of Oversight and Outcomes said Wednesday. L.A. Unified has been forced to pay back more than $158 million in misappropriations and unallowable charges that the district made over six years ending in 2011.

“State officials suspect the alleged misuse of funds could be more widespread across California school districts but the system is overburdened and has only a small team of investigators.”

I would bet anything that this “alleged misuse of funds” is far more widespread. The never-ending pressure to free up money in the general fund to pay for teachers’ auto raises is a constant up and down the Golden State. Whether that means deceiving the federal government, ripping off Sacramento, or lying to parents and students, so be it. It’s the California way.

A governor who wants to enable the abusers

The key subplot here, of course, is that Gov. Jerry Brown in recent days has again made clear he wants more local control of schools.

Yo, Jerry! Yo, gov! I have some questions!

Do you get out much?

Do you think that leopards change their spots?

Do you think local school boards are full of smart, tough advocates of students?

Yo, Jerry! Yo, gov! I have more questions!

Have you been awake for any sustained period over the last 30 years?

Do you understand how California schools operate, and to the benefit of whom?

Have you even heard of Mark Berndt?

Sheesh. If this is the smartest guy in California government, we are doomed.

The Los Angeles Times has printed an analysis piece on the insane borrowing by dozens of California school districts using “capital appreciation bonds” (CABs), which delay any repayment for 20 years and often cost 10 times or more the amount borrowed. It does a good job of explaining the bonds and the financial risk they pose. But it does a laughable job explaining why school districts are issuing them, accepting state Treasurer Bill Lockyer’s assertion that they were pushed into the deals by fast-talking bond salesmen:

“This is part of the ‘new’ Wall Street,” Lockyer said. “It has done this kind of thing on the private investor side for years, then the housing market and now its public entities.”

But school boards and district superintendents are not complete idiots, for the most part. There’s a reason they will accept such bad deals. It’s the same reason they use “construction” bonds to pay for everyday maintenance and short-lived electronics. It’s the same reason they try to charge fees for school supplies that the state Constitution says should be free. It’s the same reason they constantly raise funds with pressure tactics on parents of schoolchildren.

That reason: a commitment to pay practices that give automatic annual raises to most teachers, typically for 15 of their first 20 years on the job. Over time, this means employee compensation eats up nearly the entire operating budget — especially when the state economy is weak and revenue stops growing.

In San Diego Unified, employee compensation consumes 93 percent of the budget. The norm in many school districts is 90 percent. There’s not much left for anything else.

This isn’t a minor detail. It explains why CABs, which have been around for decades and were banned long ago by the state of Michigan, are suddenly popular. School districts are often extensions of the local teachers union, and local teachers want to get paid. If it means intergenerational fiscal child abuse, that doesn’t bug them a bit. Leave the bills for future generations to pay.

But the L.A. Times accepts the bamboozlement argument. In this case, it was the Times that was bamboozled.