The San Mateo Union High School District is sitting on a “ticking time bomb” in the form of $1 billion of capital appreciation bond payments that will come due in the next 32 to 37 years, according to a report from the county’s civil grand jury.
The district’s board of trustees contested the grand jury’s 12-page report, entitled “Capital Appreciation: Ticking Time Bombs,” saying in a response Thursday that it mistakes CABs for BABs, or Build America Bonds.
“The District wants to correct errors and inaccuracies in the report so the public has accurate information regarding its bond program,” the board wrote in its two-page response. The board said memberswere not consulted prior to the release of the report and when they contacted the grand jury to correct inaccurate statements, they were told that no revisions would be made.
CABs are bonds that pay a compounded interest rate and principal upon maturity instead of through regular 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 incurring much higher costs in the long run.
According to the grand jury’s report, which was released earlier on Thursday, San Mateo County school districts currently have 20 outstanding CABs, with three falling “outside of loan parameters declared prudent by elected officials, school boards, and other grand juries in California.”
The report said that three bonds issued in 2010 and 2011 in the amount of about $190 million create a total debt of close to $1 billion that will come due between 2034 and 2050.
“The Grand Jury finds that school districts need to ensure that they follow prudent loan parameters before issuing a CAB,” the report said. “The Grand Jury recommends that school districts within the County develop and adopt prudent loan parameters for issuance of school debt.”
The district, however, said it only issued two CABs deals in 2010 and 2011. It said the grand jury listed the Election of 2006 Series 2010B bonds as CABs, but that they were actually 100% current interest bonds issued as BABs.
Among other factual errors the district said it found in the report, the total principal amount issued in the two financings is $125 million, with a total debt service cost of $593 million, not $1 billion. Payments began in March 2012 and will end in 2042 and 2051 for each of the financings, the district said, instead of being made in 2034 and 2051, as the grand jury reported.
The grand jury requested responses from the San Mateo County Office of Education and the Board of Trustees of each school district in San Mateo County.
The report can be found on the Superior Court of California County of San Mateo website.