SAN FRANCISCO – California’s Department of Education head, Tom Torlakson, has joined Treasurer Bill Lockyer in a fight to curb the sale of what they call high-cost capital appreciation bonds, calling for a moratorium.

Torlakson sent a letter Thursday to school district officials asking them to hold off on issuing CABs with high payment-to-principal ratios until Gov. Jerry Brown and the Legislature have a chance to consider proposals to reform the process.

“In too many cases, CAB deals have forced taxpayers to pay more than 10 times the principal to retire the bonds,” Torlakson said in the letter to county and district superintendents. “Too frequently, board members and the public have not been fully informed about the costs and risks associated with CABs.”

The state schools superintendent said Brown wants reforms and key lawmakers and legislative leaders have agreed statutory changes are needed.

CABs pay a compounded interest rate and principal upon maturity instead of through regular interest payments over time.

Some school districts turned to CABs as a way to finance construction projects despite sluggish property-tax revenues amid legal limits on the amount of debt they can take on. The bonds allow them to defer debt-service payments in the short term, avoiding near-term property-tax rate increases, but incur much higher costs in the long run.

The moratorium is likely to have only a minor impact on municipal bond sales in California as CABs are only a small part of the market.

“Last year [CABs] did come at a reasonable frequency, but there haven’t been many sold in the last four, five months,” said Kelly Wine, executive vice president of R-H Investment Corp., a broker-dealer in Los Angeles. “It is a reasonably small piece of the market and I don’t really see a big impact if there is a cutback on issuance of CABs.”

Lockyer caused a stir in October when he said he would cut out underwriters, advisors and bond counsel from state bond deals if they are unwilling to renegotiate existing CAB deals that have high payment to principal ratios. He later said those involved in the “egregious” CAB deals could be cut out of doing business with the state as early as this spring.

Lockyer spokesman Tom Dresslar said the treasurer’s office held discussions with underwriters, financial advisors, bond counsel and education community members to discuss the problem and outline ways to fix the problem.

“There will be legislative reform introduced this year,” Dresslar said. “We expect it to encompass most if not all the reforms that have been discussed.”

San Diego County Treasurer and Tax Collector Dan McAllister has proposed legislation to limit the terms of CABs in California to 25 years and provide more transparency for taxpayers. Lockyer has come out in support.

Lockyer has said the most problematic CAB deals are the one that provide maturities beyond 25 years – in some cases up to 40 years – and restrict early payment while interest compounds annually.

Since 2000, California school districts have issued around $20 billion of capital appreciation bonds, according to the state treasurer’s office. Of the $19.73 billion of CABs school districts issued, $832.8 million, or 4.2%, had 40-year maturity lengths, while another $469.7 million, or 2.4%, had 39-year maturity lengths, according to data from the treasurer’s office.

CABs got bad publicity last year when the Voice of San Diego detailed how the Poway Unified School District in San Diego County sold $105 million of the bonds this year that require nearly $1 billion in debt service at their 40-year maturity, without an option to call the bond.

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