Of CIBs and CABs: McK School Board Addresses Expensive Bond Financing

From 12.19.12 issue

By Benjamin Fordham
Special To The Press

The McKinleyville Union School District School Board of Trustees met last Wednesday, Dec. 12, and on the agenda was the pricey school bond they acquired last year. As reported last week, MUSD’s Capital Appreciation Bond, or CAB, has a debt repayment ratio of about 10-to-1, meaning the $7 million bond could end up costing area taxpayers $70 million.
At the meeting the board spoke by phone with a representative from Kelling, Northcross, and Nobriga (KNN), the Oakland finance firm that brokered the bond sale. She explained that it was a “very difficult market” at the time and rumors abounded of school districts defaulting on bonds, which spooked investors. This led MUSD to the very high-interest, back-loaded CAB, the best deal they could get at the time for the money they needed.
“We got hit with a perfect storm of bad credit, high interest-rates, timelines to meet, rising construction costs, and a reduction in the growth rate of community asset values,” said Board member Tim Hooven of the situation.
“We had a contract with a project manager, and other significant costs invested in the middle school project,” said Hooven. When Measure C was on the ballot in 2008 voters were promised, among other things, a new gymnasium for McKinleyville Middle School.
“With the benefit of hindsight one would wish they had delayed the offering,” said County Auditor-Controller Joe Mellett, “but I’m sure the Board acted as they thought best at the time.”
Some Board members expressed surprise at the terms of the bond. Board member Sara Alto was quoted in the North Coast Journal as saying, “It was a shock for me… If I had seen that figure ($70 million) at that meeting, there would have been more questions from myself.”
Members of the public are invited to speak at the Board meetings, and two such people showed up to voice their displeasure on Wednesday. “You called her a representative,” said McKinleyville resident Mark Olsen of the KNN rep, “but she’s a salesman, and she sold you a bag of goods.”
“Do you know what the interest-rate will look like next year? Does anyone?” said Olsen regarding the Board’s options to refinance. Jeff Lytle, also of McKinleyville, said that he had warned the Board of the possibility of declining property values before the bond was approved in 2011.
MUSD Superintendent Michael Davies-Hughes later said of the criticism, “It is a complex issue, and the District will need to be diligent in looking for the best time and the best method in which to take action for improving the debt service over the long term.” The earliest the bond can be refinanced without penalty is 2021.
Six school districts in Humboldt County currently possess CABs, McKinleyville Union’s being the largest. Part of the concern with the MUSD CAB is that, over the last 10 years of its life, property-owners could see the $30-per-$100,000 of assessed home value tax skyrocket to up to $300-per-$100,000 to pay off the bond. This could affect not only home-owners, but also renters if costs are passed on to them.
Also at issue is the fact that the firms associated with the bond donated heavily to the passage of Measure C, a practice Mellett feels should be banned. “Wall Street interests with no ties to our area impose themselves into local tax and school financing decisions, at times to the significant detriment of the local community.”
Five firms donated a total of $16,750 towards the passage of Measure C, which passed by .44% of the vote. These include KNN, the financial firm; Jones Hall, a financial consultant specializing in bonds; Godbe Research, a firm hired to gauge Measure C’s chances of approval; and Siskiyou Design, an architectural firm. These donations amounted to approximately 90% of the funds raised toward the passage of the Measure. Between them, the firms made over $140,000 in fees.
At the time of the passage of Measure C, well-known McKinleyville resident David Elsebusch had complained about the donations, stating that without them, “the bond measure would surely have failed.”
Four years later, the promised gymnasium is not complete, and won’t be unless the political/economic climate changes. Other projects ran over-budget, including asbestos removal at Dow’s Prairie, leaving the district short on funds. Options, including selling 7.5 acres the district owns on Washington Avenue and applying for state funds, are not feasible at the moment.
“At some point we will have to make a decision on the gym project, as there are timelines associated with the plans, bond proceeds, etc.,” said Hooven. “I suppose that will be determined by the numerous factors that influence the decision to use these bonds to finish up the Middle School.”
The MUSD School Board meets on the second Wednesday of every month at 6:30 pm in the Azalea Conference Center at McKinleyville Middle School. The meetings are open to the public.

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One response to “Of CIBs and CABs: McK School Board Addresses Expensive Bond Financing

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