But a counter narrative is emerging that suggests the real problem is that all school districts are being unfairly tarred with skepticism over their bonds because of high-profile problems that Los Angeles Unified has had with its use of $1.3 billion in bond funds to buy iPads and laptops. George Skelton’s latest column — headlined “Don’t punish other districts for L.A. Unified’s problems” — makes this case.

However, those who pay attention to education issues (and/or Cal Watchdog) know that there are a wide range of scandals involving school bonds that go far beyond the controversial practice of using borrowed money to purchase short-lived technology. Here’s a short list:

Capital appreciation bonds

This is from a 2013 L.A. Times story:

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

My five-month-old crusade to get the California mainstream media to acknowledge the insanity of “construction bonds” which take 30 years to pay off being used routinely by school districts for short-lived electronics and basic maintenance hasn’t gotten far yet. The most significant article from a respected mainstream education reporter about this outrage came in December from John Fensterwald in EdSource. State newspapers’ education reporters? They can’t be bothered.

Yes, the California media do care about nutty capital appreciation bonds, which can’t be prepaid and delay initial repayments for 20 years out, leading to such ridiculousness as the Poway Unified school district borrowing $105 million that will take $981 million to repay — beginning two decades from now. But the problem of using 30-year borrowing for short-term needs is much worse than CABs. It’s far more common; it’s everywhere.

Maybe what the Los Angeles Unified school board did Wednesday finally will give this issue the attention it deserves:

“During the … meeting, the board also approved {Superintendent John] Deasy’s proposal to spend millions to supply every student and teacher with a tablet computer by 2014. …

“Deasy’s plan to supply all 650,000 students in the district with a tablet computer by 2014 will ultimately cost $500 million. The tablets are supposed to support the transition to Common Core Standards. They are being paid for by revenues raised for school construction bonds R, Y, and Q, which voters approved to address ‘unmet facilities needs.’

“Several school principals spoke during the meeting about a spike in math and English test scores after incorporating tablet apps into their lesson plans.

“Gina Russell-Williams, principal at Curtiss Middle School, said the tablets would help her teachers provide additional intervention and tutorial services to students. Other teachers said teaching students on tablets would allow them to compete with wealthier, smaller, private schools.

“Board member Bennett Kayser abstained from the vote, saying in a statement after the meeting that the process should be slowed down and studied further. No one voted against the measure.”

Is giving kids quality high-tech devices to assist in their education a good idea? Of course.

Is giving kids quality high-tech devices to assist in their education a good idea if bonds to pay for the devices are still being paid off in 2043 — decades after the devices stopped being usable? Of course not. That’s grotesquely irresponsible.

If CEOs did what superintendents did, they’d be in jail

But what would be criminal or subject to shareholder lawsuits in the private sector is just fine in the corrupt world of public education.

The L.A. school board’s actions confirm what I heretofore will refer to as Reed’s Law: Whether in the Legislature or in local school districts, the top priority is always freeing up or increasing revenue to allow tenured teachers to receive the automatic “step” raises that typically are provided for 15 of their first 20 years on the job — just for showing up.

That’s why we see lies about attendance and property tax receipts. That’s why we see grotesque bond abuses. It’s all about preserving the pay status quo for veteran teachers. Understand this, and California politics becomes demystified and uncomplicated.

It’s not “all about the kids.” It’s all about the veteran teachers.

Maybe L.A. Unified spending a half-billion dollars over the next 30 years on iPads that will be broken or stolen by 2016 will finally hammer this home.

By Chris Reed

If we are going to have a debate about school finances in California because of the Legislature’s interest in making it easier for school districts to get parcel taxes approved to boost their budgets, let’s have a serious debate. A serious debate would focus on three related school finance scandals.

1) The unconstitutional practice of school districts asking parents to pay for basic educational resources.

2) The insane but apparently legal practice of school districts using 30-year borrowing to pay for shortlived electronics like laptops and for the most routine maintenance, including graffiti removal.

3) The ridiculous practice of school districts using capital appreciation bonds — which districts often don’t start paying back for decades and which can’t be refinanced. The result is bonds that can cost 10 times or more the original sum being borrowed.

How are they interrelated? Because they are all driven by standard teacher compensation practices in which most teachers get automatic raises for 15 of their first 20 years on the job and get additional raises just for taking graduate courses of any kind — not even in their teaching field.

This has led to employee compensation consuming 90 percent or more of the budget in many school districts — and to desperate attempts to find money to cover teacher pay such as 1, 2 and 3.

Isn’t this, yunno, news — this phenomenon? Not to the Sacramento media, which has covered the third scandal but never placed it in the larger context of why school finances are so stressed.

The key to understanding Sacramento is that goal no. 1 of the CTA and the CFT is preserving and funding those automatic raises, and the unions are the most powerful force in Sacramento. It would be nice if George Skelton ever mentioned this, don’t you think? But don’t hold your breath.

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.

By Wayne Lusvardi

Imagine you can get in a time machine and fast-forward to the year 2032 in the Poway Unified School District, the third largest school district in San Diego County.  In that year, $981 million in deferred interest on a $105 million bond for school facility improvements will become due and payable.  That is nearly 10 times what the school district borrowed in 2012.

Imagine paying a $1 million mortgage for your one-bedroom tract home worth only $100,000 in 2012. (Typically, bonds only have to pay double what was borrowed, just like your home mortgage — not 10 times.)

By 2032, nobody can sell their home in the Poway area due to the huge property tax liens on every property.  And the large proportion of over-mortgaged homes — also called “underwater mortgages” — is still depressing home values in 2032 in the Poway area.  The $105 million borrowed in 2012 to improve school buildings stimulated the local economy.  But, by 2032, the Poway economy is now stagnant.  The largest industry is financial-disaster tourism, like in Detroit today.

Poway cannot attract new teachers because their pension plan is broke.  Local churches have had to take over the school system so that the education of a future generation is not lost.  The school board now leases the former renovated school buildings to churches for a dollar a year in rent.

No bond investors will loan funds for any public improvement project in the area, such as repaving roads or repairing broken water pipes. The burden of bond debt is too high for any more debt to be added.

Poway is a local example of present-day Detroit. Detroit still thinks that every Starbucks is an economic jobs multiplier worth $1 million and that corporate bonds for the unionized auto industry will be paid back by some federal bailout.  Poway’s unionized school district is the equivalent of Detroit’s unionized auto industry.

‘Capital appreciation bond’

The mechanism in this future economic disaster is something called a “capital appreciation bond.”  It is the bond equivalent of a “negative amortizing home loan” where the interest owed is just added to the loan principal for 20 years.  A capital appreciation bond is worse than an interest-only loan where the repayment of the principal amount borrowed is deferred to the future in a so-called balloon loan.

In a “capital appreciation bond,” the interest just keeps growing, and both the principal and the interest become due in 20 years. By then, the $105 million originally borrowed by the Poway School District has become $981 million by 2032.  And it won’t be paid off until 2052.

The official statement of Poway’s School Improvement Bond makes no mention that it is a capital appreciation bond and does not disclose the terms and conditions of payment of the bonds.

Capital appreciation bonds are the 2012 equivalent of what “sub-prime loans” were to low-income borrowers and “collateralized mortgage bonds” were to lenders during the Housing Bubble of the last decade. Capital appreciation bonds are highly risky debt instruments for local governments only with tax-exempt bond financing.

The Poway Unified School District has become the local government equivalent to Lehman Bros. or Countrywide Financial.  The bond houses that may fund such debt will become the new Fannie Mae and Freddie Mac.  The California State Debt Advisory Commission has become the new Standard and Poors bond rating firm.  Mark Saladino, the Treasurer-Tax Collector of Los Angeles County, has prepared on open letter warning about capital appreciation bonds.

Poway 2032

In 2032, Poway will have become a public joke.  Hedge funds were the rich man’s way to make money in risky investment markets during the Housing Bubble from 2003 to 2008.  Sub-prime home equity loans were the poor man’s way to make money during the Bubble.

Now, capital appreciation bonds are the “poor community’s” way to borrow its way out of insolvency in the aftermath of that Housing Bubble.  Hence the term: “the right way, the wrong way, and the Poway” or poor way.

In 2012, the Poway school district is betting that future population growth, housing development, and increases in property values will bail out what appears to be an un-payable debt.   The state of Michigan has had to ban school districts from issuing such “capital appreciation bonds” for areas like Detroit ,where the old auto industry economic base collapsed.  But apparently, in the economic disaster zone of California, for local government and public schools there is no such restriction.

What is worse, by 2032 the cancer of capital appreciation bonds may have spread to the gigantic Los Angeles Unified School District.  Seeing what little Poway was able to do, Los Angeles may be tempted to swallow such a poison pill in the hope of curing its financial cancer.

Some 63.9 percent of voters in the Poway area approved a second school improvement bond for $179 million in 2008.  This would not have passed had the two-thirds supermajority vote requirement for taxes under Proposition 13 been in effect. But that was overturned by voters and replaced with a lower 55 percent voter threshold for bond financing of school building improvements.

Ironically, Prop 13 could have prevented the future disaster that the Poway school district is headed for.  But in 2012, teacher’s unions and the Democratic Party erroneously claimed that the money problem that public schools faced was due to Prop 13.

In California circa 2012, there is the right way, the wrong way, and the Poway to bail out debt-laden communities.  Foreclosures, short sales, reformed public pension and health plans, cutbacks of “categorical” jobs and political earmarks, and budget austerity rather than bailouts would be the right way.  The wrong way would have been to continue with the status quo.  But the Poway was to pile more debt on top of existing debt in the hope of a magical self-bailout that can only end in disaster.