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October 21 2012

School Bond Wars: High Stakes Borrowing with Other People’s Money

Vicki E. Alger

The Folsom Cordova Unified School District in Rancho Cordova, California, reported $9.7 million in debt interest funds as of the 2010-11 school year. But to retire $514,000 in capital appreciation bonds issued by the districts, taxpayers will be stuck paying $9.1 million. That’s “about $18 in payments for every $1 borrowed,” according to the Sacramento Bee, which explains:

Capital appreciation bonds are a form of financing that allows school districts to delay bond payments in some cases for decades, unlike more conventional bonds where payments start almost immediately.

Districts issue capital appreciation bonds to get around several constraints: There are limits to how much a district can get from taxpayers in any given bond election. And because property values have fallen, those spending limits mean districts can't get as much from a conventional bond as they would have during the boom years.

Delaying payment on the bonds allows districts to gamble that property values will rise by the time they have to start making payments. Critics argue that capital appreciation bonds are too risky and allow school board members to reap the political rewards of improving schools while putting off the pain of repaying the bonds.

But the $514,000 is just the tip of the iceberg. That amount is about 2 percent of the $25 million in bonds the district issued in December 2009—but it represents 20 percent of the $42 million in total interest that will have to be repaid on all those bonds issued.

School officials were in a rush to qualify for federal stimulus funds to help offset the interest costs, and were trying to keep high interest rates manageable by spreading them out over 25 years. Officials didn’t realize just how high the interest rates would be because they were lumped together with other lower-rate bonds.

Officials have vowed that next time they’ll be more diligent. As the Bee continued:

Folsom Cordova Unified has issued $221 million in bonds since 1997; a third were capital appreciation bonds…Most carried costs that were higher than traditional bonds but well below the $18-to-$1 repayment ratio for the 2009 Rancho Cordova bond issuance. [Superintendent Debbie] Bettencourt said the district, after studying the terms on those 2009 bonds, would pay closer attention to bond terms and present them more clearly to board members. "In the future the board will have a study session with the financial consultant before issuance" and bring back anything with more than a 3-1 ratio of interest to principal, she said.

So school officials got to the roll the dice, but it’s taxpayers stuck paying the gambling debt.

Independent Women’s Forum’s mission is to improve the lives of Americans by increasing the number of women who value free markets and personal liberty. Sister organization of Independent Women’s Voice.
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