On Thu, 09 Aug 2012 10:00:54 -0400, "
wrote:


The govt has no difficulty getting loans.

That's why the Fed has had to buy T-bills.

http://www.voiceofsandiego.org/educa...a4bcf887a.html


Where Borrowing $105 Million Will Cost $1 Billion: Poway Schools

Posted: Monday, August 6, 2012 6:00 am | Updated: 12:39 pm, Thu Aug 9,
2012.

by Will Carless



Last year the Poway Unified School District made a deal: It borrowed
$105 million from investors to fund a final push in its decade-long
effort to revamp aging schools.

In many ways, the deal was unspectacular. Some of the money was used
to pay off previous debts from delayed and over-budget construction
projects. The rest went towards finishing upgrades that Poway
taxpayers had been promised as far back as 2002. To a casual observer,
it was just another school bond.

But Poway Unified’s deal was far from normal.

In 2008, voters had given the district permission to borrow more money
to finish its modernization, and they had received a big promise from
the elected school board in return: No tax increases.

Without increasing taxes, the district couldn’t afford to borrow money
in the conventional way. So, instead of borrowing from investors over
20 or 30 years and paying the debt down each year, like a mortgage,
the district got creative.

With advice from an Orange County financial consultant, the district
borrowed the money over 40 years in a controversial loan called a
capital appreciation bond. The key point for the district: It won’t
make any payments on the debt for 20 years.

And that means the district’s debt will keep getting bigger and bigger
as interest on the loan piles up.

The bottom line: For borrowing $105 million in 2011, taxpayers will
end up paying investors more than $981 million by 2051, or almost 10
times what the district borrowed. That’s wildly more expensive than a
typical school bond, in which a district pays back two or maybe three
times what it borrowed.

As well as being expensive, capital appreciation bonds work by tapping
future growth in property values to pay today’s debts, a concept
considered by many in the school bond business to be both risky and
inequitable. In 1994, the state of Michigan banned school districts
from issuing bonds like this, deeming them too toxic to taxpayers.

Nevertheless, California’s ever-strapped districts have increasingly
looked to capital appreciation bonds to raise money for improvements
without increasing taxes on current residents. Across the state,
districts have borrowed billions this way, using exotic financing to
shift the burden for paying for today’s school construction to future
generations of Californians.

Poway Unified, a district more accustomed to praise for its fiscal
austerity, has found itself at the center of the debate over these
bonds. For a year now, it’s come under fire from taxpayer groups and
concerned elected officials around the state, for whom Poway’s bond
has reached legendary status.

"This is way worse than loan sharking," said Michael Turnipseed,
executive director of the Kern County Taxpayers Association in central
California, which has lobbied the state Legislature to tighten laws on
school district borrowing. "And Poway is the poster child. What they
have done is absolutely insane."

Officials at the district and two members of the school board who
approved it acknowledge that the deal is expensive. But they say
Poway’s overall construction program has been a roaring success and a
boon to local students and homeowners alike.

District taxpayers should have understood that borrowing money over a
longer period of time, without raising taxes, would be pricey, the
officials said. And, they said, they’ve stuck to their word.

"We could have authorized more taxes, it would just have been breaking
the promises we made to the community," said school board member Todd
Gutschow.

But last year’s bond doesn’t just affect the taxpayers who voted on
it. It also saddles their children and grandchildren with hundreds of
millions of dollars in debt, and raises the risk that property taxes
could spike once the district finally starts making payments on its
loan.

In short: In order to keep its promises to current residents, the
district entered into a deal that places a billion-dollar burden on
future residents. Last year’s deal, in the words of County Treasurer
and Tax Collector Dan McAllister, "is a perfect example of how
something that’s done today can adversely affect the next generation
and the generation after that."

A Hard Sell

In 2008, Poway Unified’s school modernization plans were way off
schedule.

Construction costs had spiraled upwards, fueled by the region’s real
estate boom. This, combined with other construction delays and cost
overruns, meant the district needed more money to complete its
ambitious renovation program.

Voters had agreed back in 2002 to allow the district to borrow $198
million to bring state-of-the art facilities to 24 schools. But by
2008, the district was asking for $179 million more to finish the job.

Traditionally, school districts in California fund renovation programs
by borrowing money from investors and paying back those loans with
small increases in local property taxes.

That’s what Poway Unified’s first bond did in 2002. With California’s
economy starting to warm up from the boom-and-bust of the late-1990s,
voters approved the district bumping local property taxes up by $55
for every $100,000 of home value. That revenue was then tapped to pay
off the district’s construction loans.

By 2008, however, the economy was in trouble. The real estate market
had already been tanking for a couple of years. Stocks were sliding
downwards and unemployment was on the rise.

It was a tough time to sell a tax increase to voters.

But with some Poway Unified residents still waiting for the
renovations they had been promised back in 2002, the district decided
to approach voters once more.

"We knew the voters wanted these projects, and we knew they wanted
them sooner rather than later," said Poway Superintendent John
Collins.

This time, Poway Unified didn’t try to push a tax increase. Instead,
it came up with a different way to pay for its new bond program,
Proposition C.

Rather than increasing the tax rate, the district asked voters if
they’d be willing to extend the life of the existing property taxes
for an estimated additional 11 to 14 years.

That passed muster. Despite some vocal opposition, on Feb. 5, 2008,
district residents voted 63.9 percent in favor of Poway Unified
borrowing another $179 million.

But the bond’s supporters hadn’t made clear to the public just how
they planned to borrow money without raising taxes, or how much that
would end up costing taxpayers.

In 2008, there wasn’t enough money coming in from the district’s $55
property tax levy to pay for all the new borrowing it wanted to do.
All the cash being generated by the existing taxes was eaten up paying
off old loans that had already been used for upgrading schools.

The district’s plan, then, was to borrow money against the future tax
revenues it would receive by extending the life of the taxes. In other
words, it would get the money now, but wouldn’t start paying it back
for a long time.

Borrowing money in this way is possible for school districts, but it’s
much more expensive than paying a loan back year-by-year.

Last year, the district put together its deal to borrow $105 million,
without paying anything towards the debt for 20 years.

In two decades’ time, taxpayers will start paying about $50 million a
year towards the loan. They’ll make those payments for the next 20
years or so.

It’s a bit like a massive version of one of those exotic loans that
got homeowners into so much trouble.

With one key difference: For the next 20 years, Poway Unified isn’t
even paying the interest.

‘
Poway officials say it’s important to look at the big picture.

Yes, last year’s bond is expensive, they say, but it’s just one part
of a larger $540 million campaign that has totally revamped 24 local
schools. They said the district has been an effective steward of the
taxpayers’ money, and that the school board has the support of
taxpayers, who understand the cost and implications of the latest
deal.

But a voter reading the ballot statement for Proposition C in 2008
would have learned nothing about the overall cost of the deal the
district was setting itself up for.

The full 2,200 word statement makes no mention of capital appreciation
bonds, and says little about how the borrowing would be paid back. The
ballot arguments against the bond don’t mention the unusually high
costs involved in borrowing money that won’t begin to be paid back for
20 years.

The bond also had considerable cachet, thanks to a coveted endorsement
from the San Diego County Taxpayers Association. Indeed, association
President Lani Lutar’s name was first on a list of five local
dignitaries named on the ballot as supporting the bond.

Lutar said had she known the full implications of the bond, she would
not have recommended the association support it.

The taxpayers association recently started studying capital
appreciation bonds to fully understand their impact. Its main case
study: Poway Unified.

Last month, the association changed its criteria for endorsing school
bonds. In the future, it will ask districts how, exactly, they will
finance their bonds. If a district plans on using expensive long-term
capital appreciation bonds like Poway’s, it won’t get the
association’s backing.

"Poway should have been more forthright with us," Lutar said. "Had we
known then what we know now, we would probably have taken a different
path."

Poway’s bond has received negative attention from elsewhere, too.

County Tax Collector McAllister said his office met with the district
last year to raise concerns about the deal.

He said his staff was worried both about the sheer cost of the bond
and the idea of placing such a large burden on future taxpayers. And,
because the deal depends on property taxes steadily increasing in
order to pencil out, McAllister said his staff warned Poway Unified
against making the deal.

"We suggested it might be something they want to rethink," McAllister
said.

In the wake of Poway’s deal last year, Los Angeles County Treasurer
and Tax Collector Mark Saladino wrote an open letter to school finance
officials in California warning against the use of long-term capital
appreciation bonds for the same reasons.

Glenn Byers, Los Angeles’ assistant treasurer and tax collector, said
districts like Poway have been dishonest by issuing bonds without
laying out the consequences and costs of the loans for taxpayers.

"If they ever told the truth, they would never get these approved by
the voters," Byers said.

On The Hook

Apart from its overall cost, there’s another reason why Poway’s
massive capital appreciation bond should matter to taxpayers.

In 20 years, the school district will be on the hook for its first
payment towards last year’s loan. That payment will be a little more
than $30 million, $24 million of which is interest.

The following year, the payment will balloon to almost $47 million.
And, for the next 18 years after that, until 2051, district taxpayers
will have to pay about $50 million every year towards the debt —
essentially paying off their initial loan every two years for the next
two decades.

The district and its advisors assumed that Poway Unified would have
enough coming in from the existing taxes by 2033 to pay those bills.
But that's far from certain.

Right now, the district receives about $11 million a year from
homeowners towards paying off its bonds.

So, to be able to afford its debt payments 20 years from now, the
total assessed value of property within the taxed area would have to
quadruple.

That’s possible. In the last 10 years, the total value of property in
the school district almost doubled. But if the last decade has shown
municipal governments anything, it’s that relying on consistent growth
in tax revenues is a risky business.

If the district’s projections don’t come true, homeowners will see
their taxes spike to make up the difference.

And there’s no chance of the district refinancing the deal. The loan
contains a provision strictly barring the district from refinancing
its debt.

The district told taxpayers back in 2008 that it probably wouldn’t
have to raise taxes to meet its payments. But it’s fully within its
legal rights to do so.

McAllister, whose office is tasked with making sure local school
districts pay their bond debts, said his office could be compelled to
raise property tax rates to ensure the district can make its payments
on the bond.

Of course, many of the residents who voted on Proposition C will be
long gone by then. They’ll be dead, or living somewhere else.

But whoever’s left living in the taxed area will have to pick up the
tab for the money the district borrowed last year, and for the $877
million in interest the district will have accumulated by then.

Will Carless is an investigative reporter at Voice of San Diego
currently focused on local education. You can reach him at
or 619.550.5670.