California school districts have been in a building boom for the past decade. To finance the shiny new buildings, they’re taking on billions of dollars in debt using financing tools that some state officials say should be banned. But as KPCC’s Vanessa Romo found, some schools argue it’s a good deal.
Mark Keppel High School’s music director Carla Bartlett is corralling students into the school band room. The big Winter Concert is just hours away, but her problems aren’t as bad as they were a few years ago.
"We were in a bungalow that was...I don’t know maybe the '60s, it was put up there?" said Bartlett. "It had asbestos… it would leak whenever it rained...one place was over the piano, we’d have to have trash cans all around to catch the drips."
Sweeping her arms out like a game show model, she shows off the school's expansive new music facilities. "It’s magnificent. …we are so grateful to the voters," said Bartlett.
The voters she's referring to are voters in Alhambra, who’ve approved bonds leading to this and three other new buildings on campus since 2009. Like thousands of construction and upgrade projects across the state, Keppel’s new buildings are paid for in part by something called a capital appreciation bond, a CAB. It's a type of bond that lets school districts put off payments of the principal loan and interest, until it matures.
"So you can say to voters, you’re not going to have a tax increase but you’re going to get new facilities," said California’s State Treasurer Bill Lockyer. He says there’s a huge, possibly crippling problem with these unconventional bonds. By deferring payment, sometimes by 20, 30 years, districts could end up owing up to 20 times what they originally borrowed.
He’s urging state legislators to put a stop to issuing them, and on Monday, Lockyer is meeting with school administrators and their financial advisors.
"We’re trying to convince the people who do this business…they should have a self imposed moratorium for a while, while the legislature figures this out and decides whether they just want to ban the practice or whether there should be circumstances where they’re allowed but they’re constrained a lot," said Lockyer.
In the case of Alhambra Unified, the district issued a long-term bond for $21 million but will end up with a debt of almost $130 million. That’s a little over $6 for every dollar that was borrowed. Until the recent economic meltdown it was unusual for schools to issue CABs. But plummeting property values equal fewer tax dollars for schools which means in order to pay for big projects school administrators needed to get creative.
"These are terms that are imprudent, unreasonable and irresponsible," said Lockyer, referring to his belief that capital appreciation bonds are a shortsighted solution.
Other states, like North Carolina and Michigan, have already taken similar steps, either severely restricting the use of CABs or banning them altogether.
"The reason it’s very concentrated in CA is because the state has capped debt borrowing limits," said Cate Long, who writes a municipal bonds blog for Reuters. "This is a funny finagling way to get around that, so on paper it doesn’t look as though they’ve borrowed as much as they have."
She says these types of loans are a lot like variable interest rate mortgages, where homeowners are offered a low rate in the beginning that can later bounce up quite high. Just as homeowners were faced with balloon payments and penalties for paying off a loan ahead of schedule, the same is true for the 200-plus school districts that have issued CABs in California.
Still, some school administrators insist they’re good deal, you just have to look at them in the right way. Most are issued as part of a package of different kinds of bonds that are bundled together. So, again, in the case of Alhambra, the $21 million loan is part of an $85 million bond issue.
"So in total all of our bonds, our overall ratio now is running about 2.7-percent repayment," said Denise Jaramillo, the Assistant Superintendent of Finance for the district. "So you single out one piece of the CABs, yeah, that looks really big but when you put the entire package together it really is a pretty fair repayment structure that gave this community a lot of money."
Voters in the area approved all three bond measures that have been on the local ballot since 2004.
Over at Alhambra’s Marguerita Elementary School, there’s another construction project underway. A bright red, blue and yellow playground that includes Maya Garcia’s favorite feature: the swirly slide.
Maya’s in first grade and says loves the slide because it’s, "Kind of like when you’re skating and you want to skate fast." The only thing is she'll be 29 when that slide gets paid off.
Explore the data
View details from school districts in Los Angeles, Orange, Riverside, San Bernardino or Ventura counties that have issued a Capital Appreciation Bond since 2007.