Grant Scott-Goforth and Luke Ramseth
State officials are warning local school districts to stay away from capital appreciation bonds - high-interest bonds that districts often relied on to build and modernize schools across California.
Critics of the bonds say they burden homeowners with debts that take up to 40 years to pay off at exorbitant interest rates. Six school districts in Humboldt County issued capital appreciation bonds - or CABs - in the last several years, including McKinleyville Union School District, which issued a $4 million CAB in 2011 that has a total repayment of nearly $57 million after 39 years. The district is looking for ways the refinance the bonds or ease the debt burden.
In a press release issued Thursday, state superintendent of public instruction Tom Torlakson and state treasurer Bill Lockyer asked schools to self-impose a moratorium on the issuance of CABs until the state has time to discuss regulations on the bonds.
"We are convinced that remedial legislation is needed to prevent abuses and ensure that both school board members and the public obtain timely, accurate, complete and clear information about the costs of CABs, and alternatives, before CABs are issued," Torlakson and Lockyer wrote in a letter.
"For all these reasons, we believe your district and every other district in the state should impose a moratorium on issuing CABs," the letter continued. "The moratorium should remain in effect until the governor and legislature decide on reforms in the current legislative session. If reforms are enacted, subsequent CABs deals can be conducted in compliance with the new statutory requirements."
Humboldt County Office of Education superintendent Garry Eagles said the term of the payment and the interest rate a school accepts should be capped when issuing bonds, and schools should be allowed to refinance without penalties.
"As the fiscal climate for schools improves, they’ll be able to look at alternative ways to restructure their debt," he said. Arcata voters approved the sale of school bonds in November, and Arcata School District board trustee Jeffrey Schwartz said the district is in the process of finalizing the issuance of $3 million in capital investment bonds - more traditional bonds that typically carry a smaller debt burden and shorter maturity time. He said the district will not issue CABs.
"It’d be crazy for any board to even consider that anymore," he said, adding that he concurs with the state’s recommendation for a moratorium and regulations on bonds.
County treasurer-tax collector John Bartholomew agreed, saying that the California Association of County Treasurers and Tax Collectors is pushing for a maximum maturity date of 25 years and refinancing options for any bond longer than 10 years.
Longer maturity dates mean interest compounds for years before payments begin, Bartholomew said.
"That’s what skyrockets the debt," he said.
Bartholomew said schools should impose a moratorium on CAB issuance.
"I think it’s a great idea because the school boards don’t fully understand the ramifications of these long maturity capital appreciation bonds," he said.
Eagles said he "took exception" to how critical Torlakson and Lockyer’s letter was of administrators and school boards.
"I think it’s good advice to try and avoid (CABs)," Eagles said. But, he said, districts often use them because they have no other options for funding their projects.
Schwartz said there was no reason for school districts to issue CABs in a time of low interest rates.
CAB sales amount to slick salesmen taking advantage of school boards that are made up of unpaid volunteers who often have little time to explore the complicated issues before they have to make a decision, he said.
"Talk about a mark," he said. "I think a CAB is about as greedy as it gets."
Schwartz said other states regulate CABs, and expected California wouldn’t have too much trouble passing similar restrictions.
"I don’t think it’s a hot issue," he said. "It’s just a matter of them getting to it." Bartholomew said there is widespread support for laws on the government side.
"These restrictions do need to be put in place," he said. "But the financial services industry will not like it."