The real price of debt was made clear this year to many California school districts that took out loans to make up budget shortfalls brought on by state and federal budget cuts. Around the state, there are now several districts who find themselves in a situation of owing much more money than they borrowed — and without any real plan to deal with the problem.
Such is the case of West Contra Costa School District, which borrowed $2.5 million in 2010 to secure a $25 million loan subsidized by the federal government. The district desperately needed the funds because the growth of its student population left it woefully short of elementary school places. In the end, school board president Charles Ramsey said that it felt like paying $2.5 million to get $25 million was a pretty good bargain – at the time.
Yet now, because of the vehicle the district used to finance that loan, issuing CABs – capital appreciation bonds rather than typical bonds — and pushing the repayment forward indefinitely to square the $2.5 million they borrowed, they will need to repay close to $34 million.
Ramsey says it was a good deal, because his district is getting a brand-new $25 million school. “You’d take that any day,” he says. “Why would you leave $25 million on the table? You would never leave $25 million on the table.”
But that doesn’t make the arrangement a good deal, says California State Treasurer Bill Lockyer. “It’s the school district equivalent of a payday loan or a balloon payment that you might obligate yourself for,” Lockyer says. “So you don’t pay for, maybe, 20 years — and suddenly you have a spike in interest rates that’s extraordinary.”
When Lockyer looked through a database compiled by the Los Angeles Times of districts that have recently used CABs to raise money, he found that while in total districts borrowed somewhere around $3 billion, mainly to finance new buildings and improve old ones, they are now more than $16 billion in the hole.
Although refinancing might be an option for some districts, for most there will be no way to get out from under these obligations according to Lockyer’s analysis.
Among the hardest-hit is the San Diego’s Poway Unified School District. The district borrowed about $100 million — and the cost of servicing the debt will have them repaying close to $1 billion when all is said and done.
The superintendent of the Poway School District, John Collins, wasn’t available for comment. But he recently defended his district’s use of capital appreciation bonds in an interview with San Diego’s KPBS Investigative Newsource.
“Poway has done nothing different than every other district in the state of California,” Collins told the program.