State Moves to Block 'High-Cost' Capital Appreciation Bonds

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    This story was originally published by our media partner, Voice of San Diego.

    State Treasurer Bill Lockyer and State Schools Superintendent Tom Torlakson asked California school districts and county education offices Thursday to impose a moratorium on issuing capital appreciation bonds.

    In a letter, they asked school officials to wait until lawmakers pass legislation tightening up the rules on school district borrowing.

    Capital appreciation bonds, or CABs as they have become known, have become highly controversial since a Voice of San Diego story outlined a deal at the Poway Unified School District, where taxpayers will eventually pay almost $1 billion to pay off a loan of $126 million.

    IRS Investigates Poway Bond

    [DGO] IRS Investigates Poway Bond
    Will Carless from Voice of San Diego talks to NBC 7 reporter Rory Devine about the investigation surrounding a Poway school bond. (Published Friday, Oct 26, 2012)

    Dozens of districts across California have issued the bonds, which often don't require repayment for decades and allow districts to push the cost of borrowing onto future generations. The Los Angeles Times calculated that districts across the state owe more than $16.3 billion in the loans.

    Here's a snippet from the letter that went out to districts today:

    In too many cases, CAB deals have forced taxpayers to pay more than 10 times the principal to retire the bonds. Also, the transactions have been structured with 40-year terms that delay interest and principal payments for decades, resulting in huge balloon payments and burdens on future taxpayers that cannot be justified. Too frequently, board members and the public have not been fully informed about the costs and risks associated with CABs. In some cases, board membershave reported they were not even aware they approved the sale of CABs.

    The letter doesn't define "high cost" bonds. As we've described, there are big differences between CABs with 25-year terms and those with longer terms. The letter hints that bonds with terms of longer than 25 years are at issue here.

    Fact Check Poway School Bonds

    [DGO] Fact Check Poway School Bonds
    Scott Lewis from our media partner Voice of San Diego talks to Felix Salmon from Reuters about the borrowing problem for Poway's school district (Published Monday, Nov 19, 2012)

    Local state Assemblyman Ben Hueso has pledged to introduce legislation shortly on school bond borrowing.

    Hueso's spokeswoman, Paola Avila, said Thursday the legislation should be introduced in a week or so.

    "We're still working on the language," Avila said.

    The letter notes that "remedial legislation is needed to prevent abuses and ensure that both school board members and the public obtain timely, accurate, complete, and clear information about the costs of CABs, and alternatives, before CABs are issued."

    You can read Lockyer and Torlakson's letter in full here.

    Will Carless is an investigative reporter at Voice of San Diego currently focused on local education. You can reach him at will.carless@voiceofsandiego.org or 619.550.5670.