Editor's Note: This story was updated at 11:50 p.m. Feb. 5 with the results of a vote by Riverside County Supervisors approving the sale of the bonds.
Though state officials recently urged a moratorium on a certain type of financing for large school projects known as capital appreciation bonds, or CABs, the Temecula Valley Unified School District is moving ahead with its plans to use them.
The suggested moratorium coincides with a bill introduced Jan. 25 by two state lawmakers, Assemblyman Ben Hueso (D-San Diego) and Assemblywoman Joan Buchanan (D-Alamo), that seeks to check the use of long-term CABs, which can carry debt payments many times the amount borrowed, the Los Angeles Times reported.
Of note is a bond series issued by the Poway Unified School District in 2011 that has Poway taxpayers on the hook for nearly $1 billion over 40 years. In exchange for the debt, PUSD only received about $105 million for school repairs.
“In too many cases, CAB deals have forced taxpayers to pay more than 10 times the principal to retire the bonds,” wrote State Superintendent of Public Instruction Tom Torlakson and California State Treasurer Bill Lockyer in a Jan. 17 letter addressed to county and district superintendents.
“The moratorium should remain in effect until the Governor and Legislature decide on reforms in the current legislative session. If reforms are enacted, subsequent CABs deals can be conducted in compliance with the new statutory requirements, ” wrote Torlakson and Lockyer. (The complete letter is attached to this article in PDF format.)
In the case of Temecula Valley Unified, 63 percent of Temecula voters approved Measure Y in November 2012, allowing the district to issue bonds not to exceed $165 million over the next several years.
The bonds are in essence loans to complete school projects and repairs that have fallen to the wayside over the last five years due to cutbacks in state education funding, according to Lori Ordway-Peck, assistant superintendent of business services for Temecula Valley Unified.
“It is not that they stopped (giving money for school repairs),” said Ordway-Peck. "What they said was ‘we are going to continue to give you that (maintenance) grant but you may use it in a flexible manner.’ Well of course what most districts did was they said ‘if we have a choice between re-roofing a school and keeping teachers employed, we will choose jobs.’”
As such, the district governing board on Jan. 28 approved the issuance of the first series of bonds under Measure Y. The board’s action will allow the district to immediately seek financing for $35 million in bonds—similar to a loan for a mortgage, according to Ordway-Peck—to begin chipping away at a number of school projects.
Of the $35 million ready to be issued now, Ordway-Peck said about 16 percent will be CABs, 16 percent will be issued at current interest rates, and 68 percent are convertible CABs—bonds that the district can convert from CABs to current interest seven years from now.
As a result of Measure Y bonds, taxpayers within the district’s purvey will be taxed at a fixed rate of approximately $36 per household, Ordway-Peck said. She explained that of the $36, $26 is still being used to pay off bonds approved by voters in 1989 when the district unified; the other $10 will go toward the newly issued bonds.
“It was $65 million way back then,” Ordway-Peck said. “There is a little bit that is still being paid off—I don’t know of the top of my head—there is a little bit that will be paid off in seven years and then a little smaller amount that will be paid off about three years later.”
Which is the reason Temecula Valley Unified elected to use CABs this go around, she said.
“Because the assessed valuation in our school district of all the taxpayers is only sufficient right now to meet the existing debt. In seven years we will have room to pay off new debt. If we wait seven years to start our program the cost of doing all of the projects that we need to do will escalate.”
Projects slated to occur with the bond proceeds include updating several campuses with current science and technology equipment. (See a full list of Measure Y projects attached to this article.)
“The cost of doing construction in education have gone up about 3.5 percent per year, so there is that piece. But in addition to that, we have already neglected our capital programs for about the past five years because there has been no money,” Ordway-Peck said.
Referring to the letter from Torlakson and Lockyer, which stated that “remedial legislation is needed to prevent abuses and ensure that both school board members and the public obtain timely, accurate, complete, and clear information about the costs of CABs, and alternatives, before CABs are issued,” Ordway-Peck said the district’s governing board members have been fully informed since the get-go.
“When we began this process over a year ago they understood all of the intricacies—because it is fairly complicated—of what we had to do because we had an existing bond,” Ordway-Peck said.
The proposed state legislation intends to set parameters on CABs by reducing the maximum maturity rate from 40 years to 25 years and limiting a school district's repayment ratio to no more than $4 in interest and principal for every $1 borrowed, according to the Los Angeles Times’ report.
Because assessed property valuation differs from district to district—in Riverside and San Bernardino counties it can be about $300,000 per household, while in San Diego and Orange counties and in the San Francisco Bay Area, it can be as much as $1 million—Ordway-Peck said the legislation would be hard to apply fairly throughout the state.
“It is a different conversation. They can raise three times, four times more per house, than we can raise. Our issuance (rate), for instance, instead of the 4 to 1 is like 2.3 or 2.2 to 1, so it is very, very conservative,” Ordway-Peck said.
“It is very difficult, I think, to have a good fair conversation about what works best statewide here, and I think that is where these folks in Sacramento have to do a good job in developing an understanding of what they are doing to us. That is the tough part for them.”
Riverside County supervisors on Tuesday approved the sale of the bonds. The county has to sign off on the proposal because the treasurer-tax collector is responsible for arranging the issuance. Interest rates on the notes will be set at auction, but are not to exceed 6 percent, county documents state. Interest payments will be made semiannually.
Los Angeles-based investment banking firm Stone & Youngberg has been hired to handle the sale, collecting a 1.1 percent fee for serving as underwriter.