Two members of the state legislature have introduced a bill to regulate school bonds that some voters consider unfair to taxpayers following recent controversies sparked by high debt-service ratios on capital appreciation bonds or CABs. These high interest bonds were issued by the McKinleyville Union School District and numerous other districts throughout California, sometimes at debt-service ratios of more than 10:1.
If passed, AB 182 would limit the allowable debt-service ratio, or how much money the school district has to repay for each dollar borrowed, at 4:1. For every $1 million financed, school districts would repay a maximum of $4 million over the life of the bond. AB 182 would also include a 10-year callability measure that would allow school districts to refinance, and a 25-year limit on the term of the bond.
AB 182 would also regulate how school districts go about the business of authorizing a round of bond sales. Currently, that's done by agendizing the bond sale before a school board meeting where trustees vote on the matter after hearing public comment. AB 182 seeks to change that process so that any time a school board wants to issue a round of CAB sales they'll also have to present a cost analysis for the CAB in question and the district's other current interest bonds, as well as their reason for recommending the CABs use as a financing tool.
"This is finance 101," says Assemblymember Joan Buchanan of California's 16th District. "We don't take a 30-year loan to pay for our car because we expect our car to last five to seven years. I think the repayment period should match the life of the asset."
"No one can tell me that voters understand enough about capital appreciation bonds to make that decision," Buchanan says. "They know they're voting on bonds for school improvements, they don't know they're voting to pay $1 billion to retire a $100 million bond. I think the trustees for school districts have an obligation not only to manage the school district's money well, but they have an obligation to manage the taxpayers' money well and I don't think those debt finance structures are responsible."
If there's a problem built into AB 182, it may turn out to be that under new regulations some districts could be unable to secure bond financing under the new 4:1 cap on debt-service ratios.
The Redwood Times asked Catherine Scott, superintendent of the Southern Humboldt Unified School District, if it might be possible for AB 182 to inadvertently create a funding climate where school districts with high-risk tax bases are unable to find buyers when they issue bonds.
"It comes down to adequate funding for school construction. If the state won't provide funding, yet requires schools be in good condition, what are districts to do? Yes, it does come down to bad financing or no financing for some districts in the current climate. This proposed legislation could result in some districts not being able to obtain funding," Scott stated in an email.
It should be pointed out, however, that the SHUSD's debt service ratio on their bonds is at just over 3:1 - well within the limitations that AB 182 seeks to impose.
Humboldt County auditor Joe Mellett recently stated that he'd prefer to see school districts avoid CABs altogether, but that if the debt ratio could be kept near that 3:1 ratio, it seemed responsible.
The Redwood Times asked Mellett if the 4:1 ratio proposed by AB 182 is stringent enough. Mr. Mellett preferred not to speak by phone, but sent the following response via email:
"3:1 is more ideal certainly, but you have to allow some flexibility for the schools to get their deals done. I've seen ratios as low as 2:1 but those are rare. School bond debt is very secure in most cases so I don't think much over 4:1 would be justifiable in normal circumstances. But if a school district has a small tax base, or a tax base that presents more risk, then the markets will demand more return to provide financing for needed projects. What I would hope this legislation will do is prevent really unjustifiable returns on school bonds that could damage a community over the long run," Mellett wrote.
The Howard Jarvis Taxpayers Association is a watchdog group that monitors and advocates on tax issues. David Wolfe is the legislative director for the HJTA that has endorsed Assembly Bill 182. "As it stands, schools can introduce bonds through the education code or the government code, which is a little bit looser. AB 182 would essentially close that loophole," Wolfe says.
Locally, the Humboldt Taxpayer's League has not yet taken a position on the bill. But Cliff Chapman, the League's executive director, says they've put AB 182 on the agenda for their February meeting, next Wednesday at noon at the Samoa Cook House in Eureka. AB 182 was just introduced on Friday, Jan. 25, and there's plenty of time to study the issue before taking action. According to staffers with Assemblymember Buchanan's office, this bill won't be heard in committee until mid-March at the earliest - and it may be as late as May.