Belmont Financing Leaves Total Cost in Question

The nearly $200-million price tag usually attached to the unfinished Belmont Learning Complex fails to include tens of millions of dollars in future interest payments on money the Los Angeles Unified School District borrowed to build the nation’s most expensive high school, a Times study of the project’s financing has found.

In fact, because of the novel approach used to fund the project, the Board of Education cannot even calculate how much it will ultimately cost to pay off the $91.4-million debt on Belmont. That is because the money was borrowed for 20 years at a variable interest rate, which changes on a weekly basis.

And that debt must be repaid regardless of whether Belmont is ever completed, because the loan was secured by pledging five of the district’s existing high schools and three of its middle schools as collateral. All of the money used to pay off the Belmont debt comes out of the district’s general fund, whose primary purpose is to pay for students’ education.

Public finance experts to whom the arrangement was described were perplexed. Short-term, tax-exempt bonds--particularly seven-day notes--are usually reserved for so-called swing financing. None of the experts could recall seeing such a short-term instrument used to fund a long-term capital project.

One public finance expert, who spoke on condition of anonymity, said borrowing large amounts of money at any variable rate to construct a new school is very uncommon in California because “it’s too uncertain for long-term capital projects. Most folks in that situation would prefer to have locked in a lower interest rate.”

The only reason to use short-term borrowing at variable interest rates is to provide a temporary bridge to longer-term financing at a fixed rate, the expert said. “We’re in a period of rising interest rates. Why would you take that risk?”

But, like many aspects of the project rising on an abandoned oil field just west of downtown, Belmont’s financing is unique: It is the only time in the school district’s long history that it has financed a new school with variable interest rate bonds.

“We prefer a fixed rate,” the district’s acting controller, Yoshiko Fong, said. “We’d rather know what our payment would be.”

Olonzo Woodfin, the district’s chief financial officer, defends the use of the variable rate financing as a very prudent financial decision. “The interest rates that the district has paid on the money [are] well below the market over the life of the variable rates to this point,” he said.

Woodfin said the variable rate was intended only as a temporary measure, not as the permanent way to finance the project. So, like a homeowner, the district may refinance the debt to lock in a fixed interest rate.

“What I’m trying to do is to let some of the controversy die down,” Woodfin said, “because when we go out to fix [the interest rate], it will still be for the purpose of paying for whatever the cost was of the Belmont Learning Complex. Whether it is abandoned or not, obviously the name [Belmont] is not going to do well in the market. We are going to have to use the district’s name and its financial stability to offset that.”

During the last two years, the district has paid $5.3 million in interest on Belmont. The cost of the financing and related fees, including payments to Wall Street bond underwriters, law firms, banks, trustees and others, has added $1.4 million, bringing the total financing expense so far to $6.7 million.

That amount is counted in the district’s calculations of the project’s overall cost, but future interest and financing expenses are not.

The district has also repaid $6.2 million of the original amount borrowed, lowering the outstanding debt to $85.2 million.

Woodfin said the approach was used because it offers flexibility. He said the district hopes the state will pay for half of Belmont’s cost. The weekly re-marketing of the project’s debt gives the district the ability to quickly pay off or refinance the debt if the state money is approved.

But as concerns have grown about the cost, absence of competitive bidding and the presence of hazardous methane and hydrogen sulfide on the site, the State Allocation Board has declined so far to pay for building Belmont, leaving the district’s general fund to carry the debt burden alone.

The question of how to pay for building a high school on a steep site near Temple Street and Beaudry Avenue has dogged the project from the beginning.

Campus Was Intended to Be a Showpiece

The Belmont Learning Complex, across the Harbor Freeway from downtown Los Angeles, was designed to relieve overcrowding that forces thousands of students to be bused far from the area to attend classes.

The project includes a new high school for as many as 5,000 students. There is also space for retail stores.

Intended to be a showpiece for the school district, the project instead has become a symbol of the district’s problems. A new school board worried about environmental hazards and concerned about the unprecedented cost has temporarily halted completion of the project.

The financing question moved to the forefront in September 1995, when four members of the school board voted to enter exclusive negotiations with developer Temple Beaudry Partners, a team headed by Kajima International. The huge Japanese conglomerate had offered to finance the project. The three other board members abstained from the vote.

Before that decision, Wayne D. Wedin, an Orange County businessman and consultant to Dominic Shambra, the district’s development director, prepared a financing strategy for the project.

Wedin laid out a series of options for either the developer or the district to finance the school. He also identified a variety of revenue sources to pay for the project, ranging from building fees to voter-approved bond issues or, as a last resort, the district’s general fund.

But Henry Jones, the district’s chief financial officer at the time, countered that “most of the sources listed seem highly unlikely to be available.” He expressed concern about the use of financing provided by the developer, saying that it would result in higher costs to the district. But Kajima executives persisted.

In August 1996, when the school board considered signing a memorandum of understanding with Temple Beaudry Partners, Kajima Vice President Ezra Mersey sent a letter restating the company’s willingness to provide “developer-led” financing approaches instead of “district-led” approaches.

“We continue to believe . . . that there may be an advantage to the district in the case of a ‘developer-led’ financing, namely the possibility of keeping the project debt ‘off-balance sheet’ for the district for a period of up to five years, thus freeing up the district’s capital for other important uses during the same time period,” Mersey wrote.

Jones concluded that developer financing was more costly and riskier than other approaches available to the district. However, he said the developer’s innovative concept for financing the school by borrowing at a variable rate which changes weekly, monthly or quarterly had some appeal.

Over time, it became apparent that there were only two real choices to pay for Belmont: Use proceeds from a voter-approved school bond issue or another type of borrowing called certificates of participation.

The certificates are a form of borrowing. They are sold to investors who receive interest and principal payments. To assure the investors that they will be repaid, the certificates are generally backed by a lease payment on an asset like a building. Because the certificates are somewhat riskier than a voter-approved bond issue backed by a property tax, they usually carry a slightly higher interest rate.

Certificates of participation have one big advantage: Unlike bonds, they do not require voter approval. Because of that feature, certificates of participation became very popular with California’s local governments and school districts after Proposition 13 passed in 1978. The property tax-cutting measure required that all future general obligation bonds be approved by a two-thirds popular vote.

With a huge backlog of maintenance projects and a need to modernize schools and build campuses to cope with a surge of new students, voters in the Los Angeles school district were asked in November 1996 to approve a $2.4-billion bond measure, which fell just short of passage.

A new measure, Proposition BB, was placed on the ballot in April 1997. A coalition of interested citizens, business, labor, big law firms and financial service companies went back to work promoting the bond measure.

To avoid jeopardizing the campaign, the school board delayed consideration of a development agreement for Belmont until after the election. Proposition BB won decisively.

But no sooner had the votes been counted than some school board members began discussing the possible use of BB funds to pay for Belmont. The mere suggestion of using Proposition BB funds for the school so soon after voters were promised repairs, upgrades and, in some cases, long-needed air conditioning at existing schools sparked public outrage.

Two weeks after the proposition passed, a sharply divided school board voted 4 to 3 to approve the development agreement with Temple Beaudry Partners. While approving the school’s construction, the board left the question of how to pay for Belmont unanswered.

One of those who appeared before the board to support Belmont at that April meeting was Steven Soboroff, now a mayoral candidate and chairman of a citizens oversight committee created by the voters to monitor use of Proposition BB funds. “It is time to move forward on this project,” he said.

Two unions--United Teachers-Los Angeles and the Hotel and Restaurant Employees, which was trying to organize workers at Kajima’s New Otani Hotel in downtown Los Angeles--filed suit to stop the Belmont project.

In May, documents show Soboroff met with Jones, the district’s chief financial officer, to discuss the cost of issuing certificates of participation instead of using Proposition BB money. Soboroff also spoke to Marvin Suomi, president of Kajima Urban Development, about having Temple Beaudry Partners offer additional options for short-term financing.

On May 19, 1997, Kajima executive Mersey wrote to Soboroff “regarding the potential participation of Kajima Urban Development in certain financing options related to the development of the Belmont Learning Complex.”

Intense Debate on Financing

Mersey noted in the letter that earlier in the day, he and Soboroff had discussed using $50 million in “tax-exempt, floating-rate” certificates of participation to finance Belmont.

In an interview, Soboroff characterized the discussion as “just fact-gathering.”

By early June, a Superior Court judge was pressing the oversight committee to take a definitive stand on the use of Proposition BB funds.

After several attempts to define a clear position, the committee voted 9-0 to oppose use of bond proceeds for Belmont. But the committee agreed to revisit the issue if the state voted to share the cost of Belmont’s construction.

With the committee on record against use of the bond money, the four members of the Board of Education who favored Belmont--Jeff Horton, Victoria Castro, Barbara Boudreaux and Mark Slavkin--had little choice but to approve the sale of certificates of participation.

At an emotionally charged June meeting, they spoke of the urgent need to build a high school in the Temple Beaudry neighborhood where overcrowding forced the busing of students to schools as far away as the San Fernando Valley.

But three board members--Julie Korenstein, David Tokofsky and George Kiriyama--objected to proceeding with the financing. They expressed concern about the school’s cost, about the project itself, and paying for it out of general funds.

After a long and difficult debate, the board voted 4 to 3 to sell up to $100 million in fixed or variable rate certificates, leaving the choice up to Jones. With interest and expenses, Jones estimated fixed-rate certificates would cost $165 million by the time they were paid off in 2017.

The board’s motion specified that six Wall Street firms would be used to sell the bonds. The underwriters, Merrill Lynch, Lehman Brothers, Bear Stearns, Artemis Capital Group, Samuel Ramirez & Co. and M.R. Beal & Co., had been used on previous district certificates of participation. The firms also had contributed a total of $39,500 to the Proposition BB bond campaign.

Although Proposition BB bonds were not used, the same six firms were used to sell the Belmont certificates of participation.

The school board’s motion also said that O’Melveny & Myers, the Los Angeles law firm that represented the district in negotiations with Temple Beaudry Partners, should serve as bond counsel on the deal, as it had on previous certificates of participation.

O’Melveny and Myers contributed $24,750 to the Proposition BB bond campaign. Attorneys at the firm gave $2,250.

The board specified that another law firm, Curls, Brown & Duran, be named co-counsel on the bond deal. The firm contributed $3,000 to the campaign.

One of the district’s outside financial advisors, Annette Yee, and a leasing company, Stone & Youngberg, also contributed to the campaign. Both later assisted with the Belmont transaction.

Altogether, the companies involved in arranging Belmont’s financing had contributed a total of $70,450 to the Proposition BB campaign. District records show the firms have been paid $476,477 in connection with the Belmont financing.

Today, two years after the debt was issued, the Belmont Learning Complex is partially complete. A new school board has voted to sue O’Melveny & Myers for malpractice. And on Tuesday, the board unanimously decided to remove Temple Beaudry Partners and hire another contractor to protect the unfinished structure from the elements.

And this week, as it has every week for two years, Merrill Lynch will resell the Belmont certificates of participation at an interest rate yet to be determined by the marketplace.

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Borrowing for Belmont

The Los Angeles Unified School District borrowed heavily two years ago to pay for construction of the controversial Belmont Learning Complex. It was the first time the district had used variable rate financing with an interest rate that changes every week.

Amount borrowed: $91.4 million

Interest rate: Changes weekly

Range of interest rate: 1.75% to 4.2%

Interest paid: $5.3 million

Financing fees paid: $1.4 million

Principal paid: $6.2 million

Balance remaining: $85.2 million

Source: LAUSD