California schools asked to put moratorium on controversial bonds

Two high-ranking state officials Thursday called on school districts across California to impose a moratorium on costly capital appreciation bonds while changes are considered to limit their use.

Bill Lockyer, state treasurer, and Tom Torlakson, state superintendent of public instruction, sent letters to education officials asking them to avoid using the sometimes risky bonds until the governor and Legislature can weigh proposals to restrict the method of finance, which can carry enormous debt payments.

“We believe your district and every other district in the state should impose a moratorium,” the letter states. “If reforms are enacted, subsequent capital appreciation bond deals can be conducted in compliance with the new statutory requirements.”

So-called CABs with maturities of 25 to 40 years have become a highly controversial way to fund school construction because they result in debt payments that are many times the principal.

According to a Times analysis, at least 200 school districts in California have borrowed billions of dollars using the long-term notes, which have saddled them with staggering debts that will eventually have to be paid off by district property owners who are assessed a tax per bond issue.

Nearly 70% of the money borrowed involves extended 30- to 40-year notes, which will cost taxpayers $13.1 billion, or about 6.6 times the amount borrowed on average.

Unlike conventional shorter-term bonds that require payments to begin immediately, long-term capital appreciation notes let districts postpone the start of payments for decades. The lengthy delays can increase the debt payments to as much as 20 times the amount borrowed.

In San Diego County, the Poway Unified School District issued $105 million in long-term capital appreciation bonds to complete a school rebuilding program. By the maturity date of 2051, the notes will cost district property owners almost $1 billion in principal and interest — more than $9 for every $1 borrowed.

“Our problem is with the way these deals are structured,” said Paul Hefner, a spokesman for Torlakson. “We are concerned about bonds with debt payments that are way out of proportion to what taxpayers are getting” for their money.

Lockyer and county treasurers across the state are now developing a variety of proposals for legislation that could be introduced later this year. Among other things, officials are considering limiting bond maturities to no more than 25 years, allowing districts to refinance on better terms and having the process overseen by outside government agencies.

Assembly members Ben Hueso (D-San Diego) and Joan Buchanan (D-Alamo) plan to sponsor the legislation. Gov. Jerry Brown also has expressed an interest in pursuing changes.

Tom Duffy, the chief lobbyist for the California Assn. for Adequate School Housing, which represents districts statewide, said local education officials need to consider the moratorium request, but they also need to look at serving students with the bond issues that have been passed, and they need to deliver on promises made to their communities.

Jeff Vaca, deputy executive director of governmental relations for the California Assn. of School Business Officials, said it would be difficult to comment on the proposed moratorium because he did not know where school districts were in their financial planning for pending capital improvement projects. The association represents district business managers.

Vaca added that schools are going to be cautious and more transparent about their bond issues because of the scrutiny capital appreciation notes are receiving from the public and elected officials.

Vaca and Duffy said the changes that might come out of the Legislature should not take a cookie-cutter approach to school finance or restrict the flexibility of districts to pay for new construction.

Though more costly than conventional notes, school district officials have said long-term capital appreciation bonds have been an effective way to finance capital improvement projects during the tough economy and still comply with statutory limits on property taxes that can be imposed per bond measure.

Members of the California Assn. of County Treasurers and Tax Collectors, which is also proposing legislation to restrict the use of long-term capital appreciation bonds, said they generally support the call for a moratorium.

“I think Treasurer Lockyer shows great wisdom and leadership in asking school districts to observe a moratorium on these questionable financings,” said George Putris, the treasurer-tax collector for Santa Clara County and chairman of the association’s legislative committee.

Siskiyou County Treasurer-Tax Collector Wayne Hammar, the group’s president, however, cautioned that capital appreciation bonds with maturities of less than 25 years and lower debt payments can still be a responsible way to fund school improvements.

dan.weikel@latimes.com