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School Bonds: Walnut Creek School District Used Controversial Long-Term, High-Interest Loans

Walnut Creek is among hundreds of districts throughout the state using capital appreciation bonds to finance major projects. Taxpayers will repay at least $3.6 million for a $2 million loan.

Back in 2010, the Walnut Creek School District issued bonds to borrow almost $2 million. By the time taxpayers retire the debt, they will have paid $1.6 million in interest for a total of $3.6 million.

Walnut Creek is among the California school systems that are borrowing against the future to build facilities and improve infrastructure, according to a report in the Bay Citizen, which is also the source of the figures above. 

The publication says 1,350 school districts and government agencies throughout the state are using capital appreciation bonds to finance major projects.

These capital appreciation bonds have allowed the agencies to borrow billions of dollars while delaying payments, in some cases for decades.

Another district using the bonds is the Acalanes Union High School District, which includes Las Lomas High.

The Bay Citizen chart shows that in 2010 and 2011 the Acalanes district borrowed almost $68 million. It estimates the district will make $201 million in interest payment for a total of $269 million.

Mt. Diablo Unified School District, which includes Northgate High, will pay $100 million to settle a loan of $50 million from bonds issued in 2010.

Steve Lawrence, the superintendent for the Mt. Diablo district, said the 2:1 ratio of payback on the capital appreciation bonds is better than most school districts. It's also better than the 4:1 payback ratio proposed in pending legislation before the state Legislature.

Mt. Diablo will begin paying down the bonds in 2016 and pay a higher interest rate through 2022. After that, current interest rates will be charged until the bonds are paid off.

The money is being used for solar energy, technology infrastructure and heating and air conditioning systems.

In 2011, the Martinez Unified School District issued bonds to borrow almost $25 million. The loan will cost taxpayers $5 million in interest. 

Typically, school districts begin paying off bonds within six months and end up paying two to three times what they borrowed, the Bay Citizen said.

The bond market is like any other capital market, whether you're borrowing money from Big Vinnie or Wall Street — the more you need the money the more you'll have to pay for it.

Bill Clark, an associate superintendent for the Contra Costa County Office of Education, said that the state imposes a debt issuance ceiling for school districts based on property values. Districts from higher income areas have little problem issuing bonds for their construction needs. However, districts from lower income areas have to resort to more creative bond issuance plans.

"The schools cost about the same money, but the low wealth district can't build using more acceptable funding methods," said Clark. "Don't the low wealth kids deserve to have effective classroom environments that contribute to their academic success?"

With capital appreciation bonds, some school districts will end up paying more than 10 times what they borrowed. In some cases, the payments don't start for 20 years. In some cases, the facilities that were built with the bonds will have been replaced by the time the money is paid off.

District officials usually decide what type of bonds to use after voters have approved the money through ballot measures, The Bay Citizen reported.

Earlier this month, state Superintendent Tom Torlakson and state treasurer Bill Lockyer urged school districts to stop issuing capital appreciation bonds until the state does a thorough investigation of the practices.

LindaL February 01, 2013 at 03:51 AM
It is important to note that MDUSD had the opportunity to issue $348 mil in capital Appreciation Bonds and reversed course when a district-wide coalition of community members worked with the Superintendent and School Board to change the district's direction. Our community saved $500,000,000 because MDUSD did not issue the remaining bonds as CABs. Other communities can do the same provided all of their bonds have not yet been issued. Shortly after this action by MDUSD, Palo Alto School District community members followed suit. Future generations living in these communities with CABs will pay the price 20 years down the road when they have capital improvement needs in their schools but are paying for the bonds being issued today.
CT- West February 01, 2013 at 04:39 AM
Well, all I can say is California is not known for having the brightest voters in the land.
James Younger February 01, 2013 at 11:47 PM
Voters vote on the purpose of the General Obligation Bonds and the aggregate principal amount of the Bonds not the structure. See LindaL above, the Superintendent and School Board approve the structure of the Bonds. Besides issuing a huge amount of capital appreciation bonds, Acalanes High also issued cash-out refunding bonds in 2004 that were eventually outlawed by the State Attorney General.
LindaL February 02, 2013 at 03:06 AM
James, you are right but the voters do play a role. In the case of MDUSD the voters passed this bond measure because it would provide $348 for improvements at no increase in their tax rate. That statement alone should have caused the voters to pause but something for nothing was too hard to resist. After being approached to make a change MDUSD had to have the courage to go back to the community and say we are going to change the structure and it will cost you today but save you $500 million over time. More districts need to do the same. More communities need to insist.
Arthur Clarke February 09, 2013 at 01:06 AM
How long will it take to pay off those Walnut Creek school district bonds; what is the interest rate? For a fully amortized home loan of the same duration and rate, what portion of the total payments would be principal, and what would be interest?

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