In its June 30 edition, The Signal published an article under the headline, “COC announces taxpayer savings on bond debt.” The article discussed how College of the Canyons successfully refinanced substantial portions of its bonds that were issued under Measures C and M several years ago.
Shortly after I retired in 2015, I prepared a white paper on school bonds to educate The Signal’s staff. It had been perceived that there may have been potential local school bond abuses. After spending 200 hours studying school bonds and writing the white paper, I learned that school bonds are quite peculiar. In comparison to financing privately held real estate, school bonds were expensive. I have since learned that public sector financing is inherently less efficient than that of the private sector.
School boards generally are composed of members who thoroughly understand education, but commonly lack the financial sophistication to properly evaluate the bond offerings that are structured by Wall Street underwriters. This resulted in the issuance of capital appreciation bonds and notes, which, like subprime mortgages, did not pay interest up front and the deferred interest charges were added to the loan balance. Of course, interest compounded and the bonds/notes ultimately became substantially more expensive to repay. A substantial number of California school districts issued these bonds. The problem eventually became so great that then-Gov. Jerry Brown and Attorney General Bill Lockyear worked with the California Legislature to shepherd reform by constraining the issuance of capital appreciation bonds and notes.
The problems were further compounded because school districts frequently did not spend money wisely. For example, one school district infamously exploited a loophole in the rules and issued 30-year bonds to purchase iPads for students. Those bonds are still being paid off even though the iPads are probably long gone.
Other school districts did not properly manage their construction costs. Because of cost overruns, they were unable to finance all of the construction that they told voters was going to be funded by the bonds. These districts either had to forgo or delay projects or find other, more expensive, ways to finance those projects.
As technology changes the face of education, many school districts are likely to find that their facilities are becoming obsolete. The institutions facing the greatest challenges are probably colleges and universities. It will be interesting to see how dealing with this obsolescence is financed.
Shortly after completing my white paper, I first started writing Signal columns in response to a local school bond measure and what was then a proliferation of financial practices that were very expensive to local taxpayers. Ten years ago, the paradigm was to vote for school bond measures because they insured that the local schools would have adequate facilities and having a good school district was good for property values. However, the portion of homeowners’ property tax bills that went to repay school districts’ bonded indebtedness grew rapidly and taxpayers began to take notice.
Over the past decade, as more attention was directed toward school bonds, voters demanded increasing accountability for how school bond proceeds are spent. Greater transparency has shown which school districts have done a good job.
COC is one that has done a good job. At one time, COC issued capital appreciation bonds, but they have since refinanced them with lower-cost conventional bonds. Furthermore, COC has structured its bonds in a manner such that they could be refinanced to take advantage of the current low-interest rate environment.
Furthermore, COC has also done an outstanding job of managing construction costs and has generally spent the taxpayers’ money prudently. They have spent their money in a manner consistent with promises made to voters and their financings have been efficient in comparison to other public financing.
In my white paper, I projected local school bond property tax increases under various scenarios. Each of those scenarios projected sharp increases later this decade. However, COC’s successful refinancing of its bonds has prevented those steep increases attributable to its bonded indebtedness from becoming reality.
Six years ago, I was vocally critical of local school bond financing. Since then COC has done an outstanding job of restructuring its bonds to take advantage of the current low-interest-rate environment, so I feel it is important to give them credit where credit is due.
Jim de Bree is a semi-retired CPA who resides in Valencia.