Reality Check: Are Some School Bonds Really 'Ticking Time Bombs'? - NBC Bay Area
Reality Check

Reality Check

Vets the truthfulness of claims and measures the efficacy of public policy

Reality Check: Are Some School Bonds Really 'Ticking Time Bombs'?



    In this edition of Reality Check, Sam Brock investigates claims voters are being duped at the polls when it comes to school bonds. (Published Monday, Nov. 4, 2013)

    As Bay Area voters head to the polls Tuesday to decide whether to bankroll major investments in their community school districts- many of which suffer from overcrowding and aging facilities- San Mateo County homeowner Matthew Reising has a message about school bond financing to voters: Ask questions, because you might not know what you’re approving.

    Reising, who describes himself as a community watchdog type concerned with responsible government, happened upon a recent San Mateo Civil Grand Jury Report that characterizes some school bond measures as ‘Ticking Time Bombs’ and a major liability to future taxpayers.

    The report details the increasing use of Capital Appreciation Bonds, or bonds which lower or defer payments for years but create major tabs for school districts down the road.

    “What’s going on with the money that Joe the Taxpayer is paying annually for these bond measures?” Reising asked.

    Worried about so-called ‘balloon payments’ cropping up, Reising asked NBC Bay Area to investigate whether school districts are really saddling community residents 30 years out “with a payment that is 5 or 6 times the original bond measure.”

    So, are the allegations in the report true?

    Some modest fact-checking reveals that many of the grand jury report’s conclusions regarding San Mateo’s debt are inaccurate and, in some cases, not even in the right ballpark.

    But the grand jury findings do shed light on some financing practices that voters might find troubling.

    It’s true that when residents approve school bond measures, they’re signing off on a borrowed amount without any binding commitment, or sometimes even an indication from school districts as to how the bonds will be structured.

    That means that in the case of Capital Appreciation Bonds, or other financial instruments meant to ‘bridge’ money shortfalls, the total bill for taxpayers can end up being multiples larger than what was originally borrowed.

    (More on this in a minute).

    It’s also true that since a state law took effect in 2010 that loosened restrictions over ‘level’ debt servicing- a requirement that bond payments be made in relatively even increments over the life of the bond - the use of Capital Appreciation Bonds, or ‘CABs,’ by schools districts in California has exploded.

    The civil grand jury’s assessment of San Mateo’s CABs and its exposure to future balloon payments, however, is deeply flawed and inaccurate to the point of being highly misleading to voters, according to both the San Mateo County Office of Education and school bond experts.

    “It tells the taxpayers that there’s more out there than there really is,” said Denise Porterfield, San Mateo County’s Deputy Superintendent of Business Services and the person responsible for overseeing the finances of all 23 school districts within the county.

    “The intention of the grand jury wasn’t to malign [the county],” Porterfield added, “but I think it was an inaccurate report. They included an amount [of debt] that was not CABs, and so it did overstate the use of CABs in San Mateo County which then has a negative impact on districts seeking to go out for bonds.”

    The folks who authored the highly critical report, “Capital Appreciation Bonds: Ticking Time Bombs,” estimated that San Mateo County has about 20 of these CABs on its books at a borrowed amount of $553 million that would eventually cost county taxpayers “$2 trillion” to pay off.

    $2 trillion??

    A closer look at the report reveals that the numeric figure listed by the grand jury was actually $2 billion, with a purported average term of about 26 years for each bond.

    Furthermore, regarding specific bonds issued within each district, the grand jury misclassified some bonds and wrongly projected the financial impact of others, said dozens of San Mateo school districts in their response to the Superior Court judge.

    San Mateo Union High School District, for example, took issue with the report’s finding that the district issued three CABs worth $190 million in recent years that will cost taxpayers almost $1 billion to pay off.

    Board President Peter Hanley called those figures “egregiously incorrect” in the district response.

    According to San Mateo Union, it has issued two CABS in the last several years that are worth $125 million and will cost local taxpayers about $600 million to pay off.

    That’s a debt service to principal ratio of nearly 5-to-1 (meaning the taxpayer is spending five times as much as the borrowed amount to finance the bond).

    San Mateo says when you factor in more conventional bonds for one of its recent school bond measures, Measure M, the ratio shrinks to 2.64-to-1. But still, do residents have any idea this is how voter-approved school bond measures are being financed?

    Alicia Minyen, a school bond expert and certified fraud examiner, fears the answer to that question is “no.”

    “There’s really not any law that requires that they put that type of bond information in [the ballot measure],” Minyen explained.

    A board member of the California League of Bond Oversight Committees, or CALBOC, Minyen arms local school bond watchdogs with the information they need to protect their school districts and avoid extravagant and overpriced bonds.

    Minyen attributes the rise in CABs to looser regulations, but also to school districts using overly optimistic projections of home value growth to keep tax rates low.

    “The voter information is drafted in such a way to really pull at your heart strings and make you feel good about voting for a school bond,” Minyen observed. “And when you’re promised a lower tax rate, you think, ‘wow, this doesn’t really cost me very much, I will go ahead and vote yes.’ But unbeknownst to the voter you may have been duped!”

    Though bond financing may be a bit in the weeds, one concept is fairly simple: School districts pay for school bonds by taxing a certain rate on the assessed value of your home.

    Elementary and Union High School districts can charge up to $30 per $100,000 of assessed value. Unified Districts can charge up to $60.

    Often times, however, the rates are lower than these ceilings, as the school districts are assuming a certain rise in assessed values.

    If those projections are met or exceeded then the bond measure will be fully-financed without issue.

    *If, however, the home growth projections aren’t met, the district can no longer pay for the project(s) underway.

    This is what’s known as hitting ‘bonding capacity.’ When that occurs, school administrators must get a little more creative if they want to raise money.

    One such option is issuing CABs, which in many cases don’t have to be serviced right away.

    “With the economic downturn that occurred, the assessed value in the area dropped yet the constituents still wanted the work to continue that was already started,” said Denise Porterfield, recalling recent events in San Mateo County. “So it is a way to bridge that financing until the assessed values come back up, so that they could then be paid for by the taxpayers who approved them.”

    Porterfield stressed that not all CABs are bad and that in most cases the county is only issuing them for short increments- one, two, or three years, typically.

    She characterized the situation as requiring schools to balance servicing aging facilities with making responsible decisions on behalf of taxpayers.

    “Are your schools unsafe?” Porterfield asked. “That always has to be the consideration: Not doing any bonds and let your facilities fall apart is not what your taxpayers want, either.”

    We asked Porterfield what sort of growth projections San Mateo County has been using for its school bond measures, and she referred us to the individual districts.

    San Mateo Union High School has passed two major bond measures since 2006, Measure M and Measure O.

    Measure M was approved at a tax rate of $16 per $100,000 of assessed value. Likewise, Measure O gained voter approval with a tax rate of $5.

    Elizabeth McManus, deputy superintendent for the San Mateo Union High School District said the district is using an assessed value growth rate of 4.75 percent to calculate those measures, well below the school district’s 30-year average of close to 6 percent.

    McManus noted in an email to NBC Bay Area that “currently 51 percent of the homes in the [school] district have taxable values below $500,000,” well below their market values.

    When those homes are sold, McManus says it will bring in a windfall of new revenue and explains why the district feels confident with its projections.

    Measure P, the $130 million bond measure on the ballot for San Mateo-Foster City voters this week has a tax rate of $19, again much lower than the maximum rate.

    Molly Barton, assistant superintendent with San Mateo-Foster City, called the Measure P growth projection of 4.15 percent “conservative” compared to that district’s 30-year average of more than 6 percent growth.

    Like San Mateo Union, Barton says her school district benefits from a large percentage of homes - about two-thirds - which are currently assessed below $500,000.

    The traditionally robust home growth and hefty number of undervalued homes are reasons why “we feel comfortable with a lower tax rate of $19 per $100,000 to accomplish the $130 million in priority school repair and improvement projects,” Barton said.

    Minyen, on the other hand, told NBC Bay Area these sorts of projections are still too aggressive and put school districts in the position of having to issue CABs in the future.

    She said San Mateo actually fares well compared to most California counties in financial health and CAB exposure, but these lower tax rates (and healthy growth projections) have raised red flags for her.

    “The reality is as we’ve learned in the past, the assessed values have dropped,” Minyen said. “They do drop. It’s not California is the place to be, and real estate always goes up.”

    When pressed on what a good number would be, Minyen said veering too far away from the 2 percent growth capped by Proposition 13 would be dangerous.

    “To predict a growth increase of 4, 5 or 8 percent every single year the life of the bond, I think is unrealistic,” she said. “And I think that you increase the risk that you set yourself up to reach your bonding capacity and be unable to sell additional bonds.”

    In response to a spate of risky CABs issued throughout the state, California lawmakers have tightened up CAB restrictions by passing A.B. 182.

    The legislation mandates that CABS cannot exceed a debt service to principal ratio of 4-to-1, and cannot have a maturity of more than 25 years.

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