$288 Million Orange USD Bond Measure Would Add to Large Pile of Existing Debt

If Orange Unified voters approve Measure S this November, newly authorized bonds will be added to an already large district debt. A California Policy Center review of OUSD financial reports finds that the district owed $120 million to bond investors as of June 30, 2016.

The largest portion of OUSD’s bond obligations takes the form of an unusual OPEB bond. While many California public agencies have issued bonds to cover their pension obligations, few have borrowed to cover Other Post Employment Benefit obligations. OUSD is a pioneer in this area, but it is not clear whether innovation in OPEB funding is desirable.

In April 2008, OUSD’s board approved the issuance of a variable-rate bond to cover the district’s estimated $93.8 million OPEB obligation. The plan was to invest the proceeds into an actively managed portfolio of bonds and stocks. The bond proceeds and investment gains would be used to pay retiree healthcare expense, freeing the district’s general fund to cover educational expenses.

In May 2008, the district issued $94.8 million of “Index Rate Taxable Retirement Health Benefits Funding Bonds, Series A.” One million dollars of the bond proceeds went to various service providers including California Financial Services, who acted as the financial advisor on the deal for a fee of just over $450,000.

The remaining proceeds were invested in a vehicle called Futuris Public Entity Investment Trust, which is managed by Keenan & Associates. The investment got off to rocky start due to the Great Recession. In the fiscal year ending June 30, 2008, the trust lost $3.3 million; it shed another $7.3 million in the year ending June 30, 2009.

The investment losses exacerbated a fiscal crisis confronting OUSD at the time. The board engaged the state’s Fiscal Crisis and Management Assistance Team to assess district finances. In its report, FCMAT recommended that the board “seek advice from an independent investment advisor regarding strategies to address the decline in OPEB bond program asset values.”

It is not clear from board minutes whether this recommendation was followed, but the stock market rebound that started in 2009 raised the value of OUSD’s investments and relieved its fiscal distress. Last year, Standard and Poor’s upgraded the OPEB bonds from A+ to AA- citing the district’s “very strong available general fund reserves.” The district also benefited from its choice to issue variable rate bonds, with interest rates periodically reset based on changes in the London Interbank Offer Rate (LIBOR). Although banks attempted to manipulate LIBOR, it fell during the Recession and has remained low ever since. Consequently, debt service costs for the OPEB bonds have been lower than expected.

That said, it does not appear the bonds have provided the general fund relief originally intended. Each year the district pays about $2.9 million in debt service on the OPEB bonds, and it remains unclear whether the invested bond proceeds can shoulder the district’s mounting retiree healthcare costs.  In some recent years, the district has transferred additional money into its Retiree Benefits Fund to support OPEB payments.

In addition to the $83 million still outstanding on the district’s OPEB bond, OUSD also owes $28 million on Certificates of Participation and $9 million on Capital Lease obligations. OUSD also has two Mello-Roos districts that have issued bonds. The $12 million in outstanding principal on these Mello-Roos bonds (issued by Community Facilities Districts 2005-1 and 2005-2) is technically not an obligation of the school district, but debt service payments are funded by taxes on certain homes within OUSD.

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