SAN FRANCISCO - The Contra Costa County, Calif. civil grand jury found that seven of the county's 20 school districts have issued capital appreciation bonds, and released a report urging districts not to sell any more.
The issuers are Acalanes, Byron, John Swett, Mt. Diablo, Pittsburg, Walnut Creek, and West Contra Costa Unified School Districts. Original amounts of issuances range from $19,583 to $100 million with those amounts growing to $140,000 and $260 million due at maturity, respectively.
The districts issued these CABs between 2004 and 2012.
"School districts in Contra Costa County should seriously consider avoiding CABs in any future bond sale," the jury said in the
CABs pay a compounded interest rate and principal upon maturity, instead of through regular payments over time. They allow school districts to finance construction projects and defer debt-service payments in the short-term, avoiding property tax increases. But the districts incur higher costs in the long run.
As an example of these higher costs, the Contra Costa jury pointed to a $2.5 million CAB sold by West Contra Costa USD in 2010. The debt may become a $33.8 million obligation by the time it matures in 2034.
The use of CABs among school districts got a bad publicity a few years ago when media attention brought to light situations where CABs had been issued with repayment schedules that had greater than a 10-to-1 ratio of interest payments to principal.
Critics say such structures saddle taxpayers and school districts with massive debt burdens and interest payments.
In response to the controversy surrounding these bonds, California lawmakers adopted legislation that limits school districts' issuances of CABs.
Under the new law, which went into effect in January, total debt service to principal ratio for each bond series cannot exceed four-to-one, maturities are limited to 25 years, and call provisions are required on CABs with maturities longer than 10 years.
California civil grand juries are made up of volunteer citizens who sit for a year, charged with investigating local governments to recommend improvements.
The Contra Costa County report said that the seven districts believe they can make all approved bond payments, and have each published a repayment plan showing the rising indebtedness and the estimated tax they must charge to make scheduled payments.
However, the jury notes that these projections of future income rely on a steady increase in home and business valuations of 3% or 4%, compounded, per year.
"The school districts likely would face financial difficulties if the housing market does not increase for the next 20 to 30 years at this projected rate," the report said.
