From the 2.13.13 edition
By Benjamin Fordham
The California State Legislature recently passed a bill restricting the use of Capital Appreciation Bonds, or CABs. The bonds, commonly used by school districts to fund building projects, came under heavy criticism late last year for their high debt ratios and long maturation periods. Several Humboldt County school districts possess CABs, including McKinleyville Union School District.
The new legislation would change the issuance of CABs in several ways. First, the debt ratios would be capped at 4-to-1. The debt ratio for MUSD’s CAB is around 10-to-1. Secondly, the option to refinance, which was not included in every CAB, would be written into the terms of the bond.
School Districts would also be required to announce to the public when a CAB was being considered, and why, and a comparison with lower-interest Capital Interest Bonds would have to be presented. The total cost of the bond would also have to be clearly stated by the broker. School districts are being pushed toward CABs, in part, because of reductions in state funding and a poor economic climate.
MUSD Superintendent Michael Davies-Hughes says that the new restrictions could have the effect of further reducing districts’ fund-raising options. “You’re taking something off the table, but you’re not replacing it with anything,” said Davies-Hughes.
A letter was also sent out in January from State Superintendent of Schools Tom Torlakson and State Treasurer Bill Lockyer to all school districts in the state discouraging them from issuing CAB’s. The letter stated, in part, “Too frequently, board members and the public have not been fully informed about the costs and risks associated with CABs.”
It went on to say, “The CAB payments will reduce the taxpayers’ capacity to finance construction and modernization projects their own children will need”. This is exactly the situation County Auditor/Controller Joe Mellet warned of regarding the bonds.
The use of CABs by school districts first came under scrutiny in August of last year when The Voice of San Diego, a non-profit news organization, reported that local district Poway Unified owed $1 billion on its CAB, with no option to refinance. In MUSD’s case, they do have the option to refinance without penalty, starting in 2021. Refinancing of the bond under more favorable economic conditions could mean lower payments, a shorter term, or both.
A recent report from KNN, the district’s financial consultant, said that if the increase in assessed property values in McKinleyville were to remain steady at the current 1 percent, the property tax would climb to $339-per-$100,000 of assessed value by 2050. If assessed values were to rise by 5 percent, the tax would reach $80-per-$100,000. And if assessed values were to reach and stay at 7 percent through the life of the bond, property taxes would never exceed $40-per-$100,000. These projections help to inform the school district’s refinancing options, and Davies-Hughes says the board plans on revisiting the issue regularly.
All the recent attention paid to CABs is encouraging, but begs the question: Why not ban or restrict their use in the first place? In many, many cases, the damage is already done, unless the Legislature plans some relief for the 200-plus districts in the state already possessing CABs. As school board member Tim Hooven said when the controversy first erupted, “I place a lot of blame on the state. They cut our funding, and then we take the heat for the tough decisions.”
The MUSD school board meets on the second Wednesday of each month. Members of the public are encouraged to attend.