State legislators seek crackdown on expensive form of school finance

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Two state lawmakers moved on Friday to crack down on a costly method of finance that hundreds of school districts have been relying on to pay for new construction.

Assembly members Ben Hueso (D-San Diego) and Joan Buchanan (D-Alamo) introduced legislation that seeks to check the use of long-term capital appreciation bonds, which can carry debt payments many times the amount borrowed to build schools, classrooms and sports facilities.

Fiscal watchdogs, including county treasurers and California State Treasurer Bill Lockyer, have warned repeatedly that the bonds are risky and reminiscent of the lending and Wall Street excesses that contributed to the Great Recession.

“We have been very careful to draft the bill in a way that will solve the problem,” Hueso said. “All the points we put together should address any potential abuse in financing strategies.”

The legislation would reduce the maximum maturity of capital appreciation bonds from 40 years to 25 years and limit a school district’s repayment ratio to no more than $4 in interest and principal for every $1 borrowed.

Districts would be given an option to refinance capital appreciation bonds with maturities greater than 10 years if better terms become available. Schools also would be required to provide their boards with public reports that detail planned borrowings that involve capital appreciation notes.

The analysis would include the cost of the bond issue, a comparison to conventional forms of financing, the reason for using capital appreciation notes and disclosures by brokerages hired as underwriters.

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 can be eight, 10, even 20 times greater than the principal.

According to a Times analysis, at least 200 school and community college districts in California have borrowed billions of dollars using the long-term notes since 2007. The bonds 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 and far more than conventional bonds.

The bill is expected to be heavily scrutinized by members of the state public finance industry, school district officials and various education-related interest groups.

Though the capital appreciation bonds are more costly than conventional notes, local educators have said such bonds have been an effective way to finance capital improvement projects during the tough economy while still complying with statutory limits on property taxes that can be imposed per bond measure.

Officials for the Coalition for Adequate School Housing and the California Assn. of School Business Officials have said the Legislature should not take a cookie-cutter approach to school finance or restrict the flexibility of districts to pay for new construction.

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--Dan Weikel