Record Number of California School Districts Want to Borrow Up to $11.8 Billion

A record number of K-12 school and community college districts in California want voters to approve bond measures for construction in the November 4, 2014 election (see chart below). Here are some preliminary findings from an ongoing California Policy Center study on construction bonds for educational districts in California. The complete study will be released later this year.

On November 4, California voters could potentially authorize new debt that over the next 30 or more years will cost taxpayers over $20 billion in repayment of principal and paying interest on bonds. The California Policy Center seeks to increase voter awareness of how bond measures increase public debt by highlighting a simple but often overlooked fact:

When voters approve bond measures for educational districts, they authorize the district to borrow money from investors and then pay that money back over time, with interest.

Voting on a bond measure requires more than a quick response based on emotional appeals. Voters need to look at the debt already accumulated by the school or college district and consider whether it is wise for the district to take on additional debt.

One example is the San Mateo Community College District, which is asking voters to authorize borrowing $388 million for construction to add to the $1.2 billion it now owes to investors as debt service from two earlier bond measures. (See document below.)

Another example is the Pittsburg Unified School District, which is asking voters to authorize borrowing $85 million for construction to add to the $478 million it now owes to investors as debt service from three earlier bond measures. (See document below.)

A third example is Napa Valley College, which is asking voters to authorize borrowing $198 million for construction. In 2002 voters authorized this district to borrow $133.8 million, but today it has $229 million in debt service – in part because of Capital Appreciation Bonds. (See document below.)

Not only are the amount of these bonds and their interest costs over time of critical importance, but the structure of bond sales often mislead voters. Some of California’s 108 educational districts asking voters to approve bond measures in November are likely to backload taxpayer repayments many years into the future through the scheme of capital appreciation bonds. Lightly regulated in California as a result of a new law (Assembly Bill 182) enacted in 2013, capital appreciation bonds are similar to the types of subprime loans that lured buyers into borrowing more than they could afford by putting balloon payments years in the future.

If a school district does not expressly prohibit capital appreciation bonds with its bond resolution, voters should consider the possibility that the district may use this unorthodox financing practice and burden future generations of Californians with excessive debt.

It’s important for local news media to make voters aware of the definition of a bond, the amount of existing bond debt for a school district, the true cost over time of a bond measure when interest is included, and the likelihood that a school district will sell capital appreciation bonds.

On the November 4, 2014 ballot in California are a record 113 individual bond measures for 108 local educational districts. Voters are being asked to authorize these districts to borrow a total of $11.8 billion. (See below.)

Previous amounts requested from California voters in November general elections:

2012 – 106 bond measures for 105 educational districts totaling $14.4 billion

2010 – 63 bond measures for 63 educational districts totaling $4.2 billion

2008 – 96 bond measures for 92 educational districts totaling $22.5 billion (includes $7 billion for Los Angeles Unified School District)

113 Bond Measures for 108 Educational Districts: Borrowing $11.8 Billion

San Mateo Community College District Debt Service, obtained from Official Statement dated September 12, 2014 and posted on Electronic Municipal Market Access website of Municipal Securities Rulemaking Board.

Pittsburg Unified School District Debt Service, obtained from Official Statement dated April 17, 2014 and posted on Electronic Municipal Market Access website of Municipal Securities Rulemaking Board.

Napa Valley College District Debt Service, obtained from Official Statement dated June 3, 2014 and posted on Electronic Municipal Market Access website of Municipal Securities Rulemaking Board.