LOS ANGELES - California school districts substantially reduced their issuance of controversial capital appreciation bonds in 2013 compared to previous years, according to data from the California Debt and Investment Advisory Commission.
Last year, school and community college districts conducted 62 bond sales that included CABs, CDIAC found. That is down 36.4% from the annual average of 97.5 deals during 2007 through 2012.
The standard CAB principal in the 2013 deals totaled $517.03 million, which was down 43.5% from the 2007-2012 annual average of $915 million.
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.
The use of CABs among school districts got a flurry of 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.
One example was the Poway Unified School District in San Diego County, which sold $105 million of bonds that require nearly $1 billion in debt service at their 40-year maturity, without an option to call the bond.
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 proposed, and eventually adopted, legislation that limits school districts' issuances of CABs.
"AB 182 came in the wake of revelations that school and community college districts across California had sold CABs with excessive debt service payments that sometimes topped 10 times, even 20 times, the principal," the State Treasurer's Office staff said in its weekly briefing. "The CABs often had maturities as long as 30 years to 40 years, and the vast majority prohibited districts from paying them off early to save on interest."
Gov. Jerry Brown signed Assembly Bill 182 in October. It requires the total debt service to principal for each bond series to not exceed four-to-one.
It also limits maturities to 25 years, and requires deals to include call provisions on CABs with maturities longer than 10 years.
The bill did not take effect until Jan. 1, 2014, so any school district CABs issued in 2013 were not subject to its limits.
The report noted "one of the more interesting" 2013 CAB deals, in which Baldwin Park Unified School District sold $14.882 million in standard CABs, with maturities extending out as far as 40 years, including bonds without an early call provision.
The deal will require $146.5 million of debt service, a ratio of 9.84 times principal, according to the report.