The Grade Blog

Sunday, Jul 21 2013 05:00 PM

Lakeside schools considering expensive bond to avoid default

  1. 1 of 1

    By Alex Horvath / The Californian

    Donald Suburu School in the Lakeside Union School District.

    click to expand click to collapse
BY COURTENAY EDELHART Californian staff writer cedelhart@bakersfield.com

The Lakeside Union School District in southwest Bakersfield is desperate to retire $10 million in debt coming due and may issue a bond so controversial that the legislature is considering restrictions on its use.

It's called a capital appreciation bond, or CAB. And it's expensive.

Related Info

HOW TO GO

Lakeside Union School District will hold a special meeting to discuss bond repayment options 5:30 p.m. Aug. 6 at 14535 Old River Road.

The Lakeside school board will hold a special meeting Aug. 6 to consider strategies for dealing with the crisis. Depending on which financing options they choose and how they're structured, the new debt could cause property taxes to go up for property owners in the district.

"We're going to have to issue something," said board member Tamara Jones. "We have no choice. We don't have the money."

CABs are long-term, extremely high-interest bonds that have led to exorbitant debt obligations across the state, typically $6 for every dollar borrowed but often much more.

Rim of the World Unified School District in Lake Arrowhead, for instance, issued $283,612 in bonds in 2010 and will have to pay $6.65 million in principal and interest by the final maturity date of 2039. That's $23.45 for every $1 borrowed.

Payments on conventional bonds generally start immediately, but with CABs, payments are delayed for years. In the meantime, interest continues to accrue.

Among other things, Assembly Bill 182 would limit the maturity of capital appreciation bonds to 25 years and limit repayment ratios to $4 for every $1 borrowed.

About 20 percent of school districts in California have used CABs since 2007, according to the California State Treasurer's Office. About 70 percent of those bonds have 30- to 40-year maturities.

Because they are so expensive, State Treasurer Bill Lockyer and State Superintendent of Public Instruction Tom Torlakson have called for a moratorium on CABs while AB 182 works its way to the governor's desk, where it's expected to be signed.

But the moratorium is voluntary, and even if the bill becomes law, Lakeside could apply for a one-time waiver to issue a CAB above the new debt service cap. The proposed law contains an exemption for bond anticipation notes, and that's precisely the type of debt bearing down on Lakeside next year.

Bond anticipation notes are short-term notes local governments and school districts sell to investors to fulfill immediate cash needs until an anticipated source of revenue comes in. That revenue is then used to pay off the securities at maturity.

Lakeside is a tiny southwest Bakersfield district with about 1,300 students at two schools. Lakeside School is grades K-8 and Suburu School is K-5.

The district took out a $7.5 million bond anticipation note in 2009, and needs $10.1 million to pay it off when it comes due in June 2014.

The problem is that the money Lakeside was anticipating was increased property taxes. Between the housing market crash and falling milk prices that reduced the value of area dairies, assessed valuations in Lakeside have plummeted in recent years.

Because of the district's financial position and future revenue prospects, it's likely not eligible to borrow in a more traditional way, so a CAB may be its only option.

The state is urging districts that don't honor the moratorium to at least follow the provisions of the proposed regulations as if they were law, or come as close to the debt service caps as possible.

"If it comes down to defaulting or authorizing a CAB, then a CAB is the lesser of two evils," said Bill Ainsworth, a spokesman for state treasurer Lockyer.

In 2008, Lakeside voters approved Measure I to pay for infrastructure and equipment. At the time, both enrollment and the tax base were growing.

Of the $22.5 million authorized, $18.8 million remains to be issued, but Lakeside won't be able to issue any new bonds if it defaults on previous ones.

The previous issues included a mix of CABs and other kinds of debt, including $3.4 million in CABs that will cost $8.9 million by the time they mature in 2033.

CAB investors don't allow borrowers to pay off their debt prematurely, so there's no way for the district to get free earlier. AB 182 would require CABS of more than 10 years to be callable or subject to redemption.

Superintendent Gary Mullen was hired in July of 2011, after the outstanding bond anticipation note and CABs were issued.

Two of the district's five board members didn't take office until afterward, either.

Mullen said he and the current board are trying to find a responsible and efficient way out.

"As soon as I came in, once I found out about this bond anticipation note, I contacted KCSOS (Kern County Superintendent of Schools), the Kern County Taxpayers Association and other public agencies looking for suggestions for things we could do," he said. "We're trying to be open and transparent."

Mullen's predecessor was Nick Kouklis, who is now chief executive officer of Self-Insured Schools of Kern.

"CABs were one of a few available vehicles that were commonly used in those days," he said. "They didn't get the scrutiny then that they do today."

A lot of schools began turning to CABs after the passage in 2000 of Proposition 39, which lowered the percentage of voters needed to pass bond issues from two-thirds to 55 percent, but also set caps on tax rates for repaying the bonds.

"CABs were a way to circumvent Prop. 39, but what schools didn't realize at the time was that it was basically predatory lending," said Mike Turnipseed, executive director of the Kern County Taxpayers Association. "If you buy a $100,000 house, why would you get a $600,000 mortgage?"

At the same time, Turnipseed praised Lakeside for its transparency and willingness to listen to outside voices. The district is making a sincere effort to make the best of a bad situation, he said.

"You can't ask for more," Turnipseed said.

Lakeside has hired a new consultant to help it sort out its options. One of several choices is paying $63.5 million to borrow $10.7 million, a debt ratio of nearly six to one.

Lakeside wants any new debt it issues to generate no more than $30 in increased property taxes per $100,000 in assessed property value, said Lori Raineri of Sacramento-based Government Financial Strategies Inc.

"The district wants to spend as little as possible of the taxpayers' money, so we're trying to come up with a cautious and conservative plan," she said.

Have something to share? Comment on this story
Today's Daily Deal
from
Bakersfield.com
$10
Daily Deal Image
McMurphy's Irish Sports Bar
Two $10 vouchers for $10 from McMurphy's Irish Sports Bar ($20 value)
  • Value
    $20
  • Savings
    $10
  • Bought
    0
Buy Now