Tough Decision or Reckless Gamble: McK School Board on the Hot Seat

From thew Wednesday, Dec. 12, 2012 edition

 

By Benjamin Fordham

Special To The Press

 

In 2008 McKinleyville voters narrowly passed Measure C, a $14 million bond measure intended to pay for repairs and upgrades to Morris Elementary School, Dow’s Prairie Elementary, and McKinleyville Middle School.

Four years later, the McKinleyville Union School District School Board is facing some harsh criticism over the way half of that money was obtained. The first $7 million bond (series “A”) came through a standard, widely-used Capital Interest Bond. But the second $7 million (series “B”) came through a new type of bond called a Capital Assessment Bond, or CAB. That bond will potentially cost area taxpayers $70 million over 40 years, a repayment ratio of 10 to 1.

“The result over time will be an onerous tax burden on area property owners,” said County Auditor-Controller Joe Mellett, “as well as out-of-date school facilities for which there may be no good options for replacement or repair.”

District Superintendent Michael Davies-Hughes is quick to point out that unlike other CABs statewide, MUSD is able to refinance their bond, allowing them to seek a better deal when more favorable conditions arise. The earliest the CAB can be refinanced is 2021, years before the excessive debt payments kick in.

“The board recognized that these CABs had a high interest rate (8%), but also understood that these bonds could be restructured well before the debt service escalation would be realized,” said Davies-Hughes.

The original idea was this: borrow half the money, fix up Morris and Dow’s Prairie, and then in two years borrow the rest for the Middle School. Who knows, maybe they could get a better deal on the final $7 million in 2011. They didn’t. What happened instead was the housing market bottomed out. Now unable to raise the required funds and facing a tough choice between scrapping or scaling back the projects that had been promised to voters, the Board’s financial advisor gave them another option: the CAB. No payments till 2018-2019, all the money up front.

There was a catch. When Measure C was voted on, property-owners were told they would pay an additional $30-per-$100,000 of assessed value on their property tax. They had no way of knowing that, with the CAB, they could eventually end up paying 10 times that amount. That’s because most of the heavy interest payments on the 40-year bond come over the last 10 years of its life. If the tax base does not increase enough to pay the debt, property taxes will be raised accordingly.

The use of CABs generated statewide criticism recently after The Voice of San Diego reported that a local school district, Poway Unified, had used the bonds to obtain $100 million, for which they now owe a whopping $1 billion. A subsequent LA Times article reported that approximately one-fifth of California school districts have issued these bonds, about 200 districts in total. That article quoted State Treasurer Bill Lockyer as saying “The school boards and staffs that approved of these bonds should be voted out of office.”

He went on to say, “This is part of the ‘New Wall Street’. It has done this kind of thing on the private investor side for years, then the housing market, and now it’s public entities.” CABs have been banned in Michigan, being called “too toxic for taxpayers”, and similar measure are under consideration in California.

Whether the criticism is warranted or not, it’s fair to say that our schools have been put in a difficult situation in recent years. As facilities deteriorate, state funding steadily decreases. It’s a situation Davies-Hughes calls “the new reality of striving for excellence with diminishing resources”. MUSD Board member Tim Hooven says, “I place a lot of the blame on the state. They cut our budgets and then we take the heat for the tough decisions.”

Whatever the future of California schools, Mellett would like to see CABs taken off the menu for school districts.

“I’m hopeful that the publicity surrounding this very high-cost taxpayer obligation will deter other school boards from making similar choices,” said Mellet, “but I don’t see much help on the horizon in McKinleyville’s case.”

There is a McKinleyville Union School District Board of Trustees meeting scheduled for 6:30 tonight, Dec. 12 at the Azalea Conference Center, located at 2285 Central Ave. The meeting is open to the public. Bonds will be discussed.

 

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2 Comments

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2 responses to “Tough Decision or Reckless Gamble: McK School Board on the Hot Seat

  1. Anonymous

    Is the Azalea Conference Center at one of these schools?

  2. jackdurham

    I just posted something about the change of venue. The meeting will now be held in the McK Middle School gym. That’s the tall structure near the traffic circle/bus turnaround when you drive up to the school at Central and Railroad. The Azalea Center is located further east on the MMS campus. FYI.

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