Proposed restrictions on school bonds would harm districts

Seth Rosenblatt

We've seen this pattern fourth dimension and again. Some public agency or public official gets negative press for apparent bad behavior. Often it is deserved, and sometimes not. But far too oft the press oversimplifies the situation and reduces the story to sensational sound bites. And then politicians leap into the fray, promising to fix the situation and "protect taxpayers" (who wouldn't support that?). But it's likely that the issue is more than nuanced than at first perceived, and policymakers hazard overreacting. And the worst role is that often the cure is worse than the disease.

Such may be the case regarding the recent legislative proposals on Capital letter Appreciation Bonds (CABs). The lack of critical thinking and thoughtful dialog on this consequence has been scary, and nosotros are in serious danger of doing more damage than good to both taxpayers and responsible schoolhouse districts beyond the state. The internet issue of this potential legislation is that it will likely (a) reduce the bond capacity of school districts, (b) delay receipt of gain to use for construction projects, and/or (c) increase the present-value price to taxpayers.

Quick primer: There are generally two types of bonds that school districts issue. The beginning, called Current Involvement Bonds (CIBs), require the borrower to pay the interest payments each year, and and then at the terminate of the term pay back the unabridged master corporeality. The other, Capital Appreciation Bonds (CABs), just have the interest accrue over time, and and then both the main and all of the accrued interest is paid back at the end of the term. Naturally CABs will have a greater total payment at the end of their term, as interest payments were accrued rather than paid along the way, and CABs will likely have slightly higher interest rates because of the lack of current income to the investor. In both cases, all payments are made from a tax cess on property owners—the revenue enhancement collected becomes the money available to "service" the bond. If a district issues a Proposition 39 bond (the ones which only need 55% to laissez passer), at that place is a statutory limit on that revenue enhancement assessment allowed (the "revenue enhancement rate limitation"). This inherently limits the "bonding capacity" of the commune. Likewise, some bonds accept "call" provisions which allow the principal amount of the bond to be paid dorsum early. Nearly districts build bond programs to layer the bond repayment schedules to create a relatively level taxation brunt over time (structured around previously issued bonds to maintain tax rate targets) and spread that burden over the life of the facilities (essentially it's a combination of many individual bonds with dissimilar structures and terms to create these level payments over time and within existing bonding capacity limits). This often requires both CABs and CIBs to make the math work, and of form it'due south dependent upon when funds are needed, the interest rates at the time, the total amount of bonds authorized, and the overall revenue enhancement charge per unit limitations.

The current controversy stems from the fact that the Poway Unified School District issued CABs that will cause them to repay 10 times the original bonds' gain at their maturity in forty years. Other districts have had like problems with the seemingly high "repayment ratios" (the total amount of the repayment divided past the original amount) with CABs.

To be articulate, I'one thousand not defending Poway—nor, frankly, practise I take any of the details or context about their state of affairs—but even if their actions were improper or sick-advised in any way, that inappreciably ways that the zeal to avoid such situations in the hereafter should cause us to enact a unmarried standard across the state that could be very dissentious for many public schools. While well intentioned, some of the proposals coming from Sacramento are problematic because they (a) utilise a one-size-fits-all approach to financings that disregard a district's unique characteristics and prior debt issuances, (b) disregard market factors, and (c) ignore bones finance principles such as the fourth dimension value of coin.

It's a basic principle of finance that money today is worth more money tomorrow (and less than money yesterday). This is illustrated a few ways. The almost mutual way is to expect at inflation of goods and services. The toll of milk was a lot cheaper decades ago than it is now, and will be more expensive in the future. The median dwelling price in the U.S. is about eight times what it was forty years ago. The other mutual manner to illustrate this principle is interest on money (which has been historically higher than inflation). For example, if you were to take out a loan, at a half dozen% interest rate, making no payments along the manner and compounded over forty years, yous volition accumulate a balance x times the amount yous borrowed. Does that mean you got a bad deal? Not necessarily, because effectively (if involvement rates averaged 6% over those 4 decades), the coin you'll be repaying with is worth i-tenth the corporeality of the coin you borrowed.

Unfortunately, the proposal to limit the repayment ratio to 4-ane, while intended to reduce nominal borrowing costs, ignores how bond series are structured. The first issuance of a bond program typically has the lowest repayment ratio because districts have more taxing capacity (i.e., they may issue shorter term bonds). As bonds become issued and upfront tax chapters is utilized, later bond financings tend to have higher repayment ratios. Moreover, due to the time value of money, repayment ratios are meaningless absent-minded information on the term of such repayment. They measure "nominal" dollars spent (significant the total of all money spent ignoring that a dollar today is worth more than a dollar tomorrow).

Additionally, the proposal in Sacramento to limit all school bonds—non just CABs—to a 25-year maturity ignores the simple fact that about all schoolhouse facilities last a lot longer than 25 years (in our district, we're about to remodel or replace some facilities more than l years old!). Limiting the term of these bonds would have the effect of forcing current taxpayers to subsidize future taxpayers, who will notwithstanding savour use of an asset for which they didn't pay.

In the absence of context, bail term limits and repayment ratios are both inherently arbitrary. In addition, these proposals also ignore the fact that nigh districts upshot Prop. 39 bonds, which already have a tax rate limitation that prevents the district from having a bond plan with excessive repayments in whatsoever given yr and hence serves equally a protection to taxpayers and a limit on borrowing. And given that such tax charge per unit limitations are always disclosed in Prop. 39 bond elections, there is transparency. To my knowledge, these proposals coming from Sacramento practise not distinguish betwixt Prop 39 bonds and other full general obligation bonds. Districts with Prop. 39 bond programs may be most negatively affected by the current legislative proposals, equally existing tax rate limitations combined with a reduced ability to use capital appreciation bonds will limit districts' flexibility to construction bond serial in the most rational way and address needed modernization or rubber projects.

Two of the other proposals coming out of Sacramento are less onerous merely still require discussion. These include giving greater oversight responsibilities to county offices of pedagogy as well as requiring that bonds be "callable," i.due east., they can be paid off prior to maturity. While the former proposal adds another layer of administration and bureaucracy to the procedure, this could be a reasonable cheque and oversight on districts that step over the line—at a minimum information technology will force a public dialog near special circumstances. A call option on all bonds would of course be a do good to districts, simply information technology'south of import to signal out that requiring bonds to have this feature would increase their toll to taxpayers as investors are forgoing certainty in future interest payments and would have to be compensated for this (some other basic principle of finance).

I have been disappointed by much of the press on this topic with attending-grabbing headlines about repayment ratios that merely ignore the time value of money and simple principles of finance. In addition, many school districts are extremely concerned that, in reaction to perceived poor decisions by a handful of school districts, the country is because far-reaching and one-size-fits-all legislation that could adversely impact responsible schoolhouse districts.

Of course the big irony in all of these discussions is that many districts' more aggressive stance in bond financing is a straight result of the failure of our state to provide proper funding for building and remodeling crumbling school facilities, particularly in an era where we badly need new 21^st century facilities. In the absenteeism of the state taking responsibility, many local communities take stepped up to laissez passer bond measures to support their struggling local schools. And now we may be stifling that.

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Seth Rosenblatt is a member of the Governing Board of the San Carlos School District. He also serves equally the president of the San Mateo County School Boards Association and sits on the Executive Committee of the Articulation Venture Silicon Valley Sustainable Schools Task Force. He has 2 children in San Carlos public schools. He writes frequently on bug in public education, including in both regional and national publications besides as on his own blog.

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Source: https://edsource.org/2013/proposed-restrictions-on-school-bonds-would-harm-districts/29136