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School Bonds: West Contra Costa Unified Used Controversial Long-Term, High-Interest Loans

WCCUSD is among hundreds of districts throughout the state using capital appreciation bonds to finance major projects. Taxpayers will repay at least $33 million for a $2.5 million loan.

Back in 2010, the West Contra Costa school district issued bonds to borrow almost $2.5 million. By the time taxpayers retire the debt, they will have paid $31 million in interest for a total of $33.8 million, or $13.50 for every dollar borrowed. 

WCCUSD is among the California school systems that are borrowing against the future to build facilities and improve infrastructure, according to a report in the Bay Citizen, which is also the source of the figures above. 

The publication says 1,350 school districts and government agencies throughout the state are using capital appreciation bonds to finance major projects.

These capital appreciation bonds have allowed the agencies to borrow billions of dollars while delaying payments, in some cases for decades.

WCCUSD also borrowed $52 million with the controversial financing mechansim in 2009. The minimum amount to be repaid is $190.8 million. 

Another district using the bonds is the Acalanes Union High School District.

The Bay Citizen chart shows that in 2010 and 2011 the Acalanes district borrowed almost $68 million. It estimates the district will make $201 million in interest payment for a total of $269 million.

Mt. Diablo Unified School District will pay $100 million to settle a loan of $50 million from bonds issued in 2010. 

In in 2011, the Martinez Unified School District issued bonds to borrow almost $25 million. The loan will cost taxpayers $5 million in interest. 

The Moraga, Lafayette and Orinda elementary school districts are not listed on the chart.

Typically, school districts begin paying off bonds within six months and end up paying two to three times what they borrowed, the The Bay Citizen said.

The bond market is like any other capital market, whether you're borrowing money from Big Vinnie or Wall Street—the more you need the money the more you'll have to pay for it.

Bill Clark, an associate superintendent for the Contra Costa County Office of Education, said that the state imposes a debt issuance ceiling for school districts based on property values. Districts from higher income areas have little problem issuing bonds for their construction needs. However, districts from lower income areas have to resort to more creative bond issuance plans.

"The schools cost about the same money, but the low wealth district can't build using more acceptable funding methods," said Clark. "Don't the low wealth kids deserve to have effective classroom environments that contribute to their academic success?"

With capital appreciation bonds, some school districts will end up paying more than 10 times what they borrowed. In some cases, the payments don't start for 20 years. In some cases, the facilities that were built with the bonds will have been replaced by the time the money is paid off.

District officials usually decide what type of bonds to use after voters have approved the money through ballot measures, The Bay Citizen reported.

Earlier this month, state Superintendent Tom Torlakson and state treasurer Bill Lockyer urged school districts to stop issuing capital appreciation bonds until the state does a thorough investigation of the practices.

Ira Sharenow February 02, 2013 at 08:03 PM
This is a good web site as it has the actual legal documents. http://emma.msrb.org/default.aspx
Giorgio C. February 02, 2013 at 08:04 PM
I think the current local approach places the district of having to support some non critical needs for some cities for purpose of voter buy in.
Becky O'Malley February 04, 2013 at 08:14 AM
Does anyone know (1) if the El Cerrito High Theater was paid for by capital appreciation bond money and (2) how much it cost and (3) who developed it, contractor, architect etc.?
Giorgio C. February 04, 2013 at 02:37 PM
El Cerrito, Hercules, Richmond, and Pinole have been told that if they did not support the current bond debt limit waiver, that current school construction in their respective cities would suffer delays. This is documented in three resolution documents and in the Hercules meeting minutes. Is this the same argument that we shall hear for the next waiver request? That current projects will slow to a crawl unless we support a new waiver request? I support building schools, but it is beginning to appear that we have been pulled into a cycle of perpetual bond indebtedness.
Tim February 04, 2013 at 09:29 PM
I don't have that info right at my fingertips, but I can say that as the CAB issue was coming to the forefront after the Poway district's debacle, I looked to see whether WCCUSD had lots of CABs, and the answer to that is that there have been very few of these issuances, and the amounts are relatively small. If memory serves, it was under $15 million total for all four bond measures. If no one brings the specifics forward sooner, I will see whether I can answer these questions.
David Mills (Editor) February 08, 2013 at 05:57 PM
West Contra Costa Unified School District officials have sent us the following response to this bond story. They also want everyone to know the school board is holding a special meeting next Wednesday at 7 p.m. at Lavonya Dejean Middle School in Richmond to discuss the district's history of bond issues from 1998 to the present. "Premium bonds are a common feature of school district general obligation bonds whether such premiums are used to lower borrowing costs (i.e. because investor demand is higher for premium bonds) or in order to maximize the amount of bond authorization used for projects. I don’t know that the District has ever issued general obligation bonds for which it didn’t receive at least the face amount of the bonds. Taxpayers are protected, here, though, since any amount received by the District in excess of the principal amount of the bonds is paid into a costs of the debt service fund."
Charles Cowens February 08, 2013 at 08:24 PM
Who is the quote from?
Charles Cowens February 08, 2013 at 08:46 PM
Tim, there is a list, at the end of this Friday Memo (Harter->BOE) from 8/2012, of WCCUSD bond issuances: http://www.scribd.com/embeds/109445870/content?start_page=1&view_mode=scroll&access_key=key-24963un64gz4rbl0o3wx It's from an attempt on my part before the election to describe the WCCUSD bond program in a blog article: http://met3000.cowens.net/posts/wccusd-bond-overview/
Tim February 08, 2013 at 09:07 PM
Thanks, Charley!
David Mills (Editor) February 08, 2013 at 09:24 PM
Charles: The quote is a statement from the school board. It was supplied to us by school board member Charles Ramsey.
Valerie Snider February 08, 2013 at 11:45 PM
The statement by Ramsey has nothing to do with CABs. Maybe he didn't understand what the Patch article is about.
Giorgio C. February 09, 2013 at 04:02 AM
One of my concerns as I stated at this weeks board meeting is the composition of the CBOC because of the two union reps, #18 and #19 on the roster below. I believe that these two positions are a direct violation of the Education Code. Current roster http://www.wccusd-bond-oversight.com/uploads/CBOC%20Members%20By%20Categories/2012/UPDATED%206-21-12%20CBOC%20Membership%20by%20Categories.pdf EDUCATION CODE SECTION 15278-15282 15282. (b) No employee or official of the district shall be appointed to the citizens' oversight committee. No vendor, contractor, or consultant of the district shall be appointed to the citizens' oversight committee. It should be noted that one of the 7 legally required positions was vacant for almost one year. It might be worth doing an analysis of all votes to see if the results have been influenced by the addition of any not-so-citizen-like positions.
Monimom February 09, 2013 at 06:33 AM
@Valerie Maybe Mr. Ramsey is speaking about premium because this CAB mentioned in the article sold at a premium? Ira above provided the link to Emma where it shows about $800k in bond premium was used to pay bond counsel and other costs to other advisors who helped sell the CAB. Attorney General Kamala Harris warned another school district, Poway Unified, in March 2011 informing them the use of premium to pay cost of issuance is illegal and harms taxpayers since this practice causes districts to raise more bond money than was voter approved. (just google to find this letter) So in addition to taxpayers having to pay this CAB off, do we have to pay an amount that exceeds voter approval?
Ira Sharenow February 09, 2013 at 08:17 AM
I was very surprised to read: “Attorney General Kamala Harris warned another school district, Poway Unified, in March 2011 informing them the use of premium to pay cost of issuance is illegal and harms taxpayers since this practice causes districts to raise more bond money than was voter approved.” In 2008 Albany voters approved a bond issuance of $10 million face for a new swimming pool and classrooms. Page 11 of the official bond document states that the face was $10 million and the premium was $437,194.15. The original issue premium was $437,194.15. One problem in California may be that there are good laws but there is not enough money to enforce the laws. http://emma.msrb.org/EA288297-EA5908-EA628309.pdf http://californiawatch.org/dailyreport/officials-warn-schools-about-mishandling-bond-money-10710 http://www.bondbuyer.com/issues/120_48/california_school_issuance_costs-1024244-1.html
David Mills (Editor) February 09, 2013 at 03:07 PM
WCCSD board member Charles Ramsey has sent us this reply. It's the district's response to some of the comments on this article. Because of its length, it's divided into two parts. "It's interesting to me that the District's 2010 Series D financing has come up both in the recent Chronicle article and in the e-mails below. As you remember, this is not a stand-alone CAB financing or a financing with a high interest rate or a notably high repayment ratio, like so many of the CAB transactions that have recently come under scrutiny. Instead, these CABs were a small but necessary part of a much larger financing that delivered extraordinarily low interests costs to District taxpayers. My recollection is that the 2010 Series D Bonds were the first bonds sold by the District since the program began in 1998 that achieved at a net interest rate below 4.00%. What's missing from the critics' analysis is the real driver of this financing - the authority to issue up to $25 million in Qualified School Construction Bonds that the District won by lottery in the fall of 2009. These heavily subsidized bonds represented an unexpected opportunity to keep the 2005 Measure J Bond Program moving forward in a taxpayer friendly way at a time that the program was significantly constrained and the federal government was making it a priority to encourage local agencies to move forward with shovel-ready projects despite the economic slowdown....
David Mills (Editor) February 09, 2013 at 03:07 PM
This is the second part of the WCCSD response... "Since 2010, the District has built two bond programs on a more sustainable basis, we've included language in 2012 Measure E that we hope will provide for more flexible use of bond proceeds, and we've started to collect additional tax rate stabilization funds that will provide us more alternatives in the future. But at the time we issued the 2010 bonds, including a small premium CAB component in the financing was the cleanest way to solve the two major issues with the QSCB program (the timing of subsidy receipts and the limited use of QSCB proceeds) that seemed to us to stand in the way of our participation in the program. In the end, the financing produced good results. The District secured $25 million in federal subsidies that are going straight to our taxpayers, an effective borrowing rate of 3.50%, and a repayment ratio (at 2.2 to 1) that is significantly lower than for the program as a whole. I have no doubt that the District and its taxpayers were well served by going after the QSCB opportunity. There is no doubt that the District has a large and complicated bond program. Particularly since the economic collapse of 2008, the program has faced some significant challenges. Clearly, some challenges remain. And while I'm sure that the District's critics will find other areas to criticize in the months and years ahead, the 2010 Series D financing does not strike me as a good target from a taxpayer interest perspective."
Giorgio C. February 09, 2013 at 03:45 PM
Some journalists are adding their own spin to this topic. Regarding this particular 2010 CAB, I am rereading the following NPR article that I posted above. Article http://www.npr.org/2012/12/07/166745290/school-district-owes-1-billion-on-100-million-loan The journalist implies that Lockyer did not see this particular transaction as a "good deal." I'm not even sure Lockyer knew about this specific WCCUSD CAB purchase. The journalist further ignores the $25 million gained in an elementary school when writing about the "whopping 34 million owed." The 2.5 million will cost 9 million to repay, not 34 million, because we received $25 million in deliverables, correct? I expected less sensationalism from an NPR journalist. When I reread this more critically-objectively, the $2.5 million CAB seems like a reasonable decision. Or am I missing something....yet again?
Mike February 09, 2013 at 05:48 PM
We did not receive $25 million in deliverables. The $25 million was another loan we received that that will also have to be repaid with interest. I don't think that subtracting this amount from the $34 million makes any sense at all. Perhaps we could allow the issuer to foreclose on the $25 million dollar elementary school when this CAB blows up in 20 years in lieu of repayment, but I don't think it is in the community's best interest for the district to go bankrupt and have to liquidate assets. That's not to say that some parties wouldn't benefit from getting district real estate at fire sale prices. Whoever sold the bond to the district knows how risky it is and unless they defrauded the investors, there still must be some upside if the district can't handle the balloon payments when they become due.
Giorgio C. February 09, 2013 at 06:34 PM
Thanks, Mike. Mr. Ramsey's choice of words in the article is throwing me for a loop. He's an intelligent man, so I am trying to give him the benefit of the doubt. I would do better if I simply read the contractual document, financial statement, etc. The picture you are describing is so bad that I was sure there was a misunderstanding, that the reporter was exaggerating-sensationalizing this. So it is as bad as it looks?
Alicia M. February 10, 2013 at 04:00 PM
@Ira...under Education Code 15146, %100 of any bond premium should be deposited in the debt service fund to offset the above market interest rates taxpayers will have to pay to bond investors. In looking at the Albany's Sources and Uses Schedule in the Official Bond Statement, only about $3k of the $430k in bond premium was deposited in the debt service fund. The rest of the premium was used to pay costs of issuance.
Giorgio C. February 10, 2013 at 05:32 PM
Under the same Ed Code "(d) The governing board shall ensure that all necessary information and reports regarding the sale or planned sale of bonds by the school district it governs are submitted to the California Debt and Investment Advisory Commission in compliance with Section 8855 of the Government Code." Isn't this step supposed to ensure compliance with relevant laws?
Ira Sharenow February 10, 2013 at 11:44 PM
Alicia, there are always going to be issuance fees and they are going to come out of the bond proceeds, so how does one determine if the bond premium was used for the fees? Often the ballot language simply lists the face value, not the maximum proceeds. I think it would be more straightforward to require that the ballot language state the maximum amount that can be borrowed. If the language says $10 million, then it can be sold with a face of $9.5 M and a premium of $500 K, but the total is still just $10 M.
Charles T. Ramsey February 12, 2013 at 02:16 AM
In accordance with State law, the District has always deposited the premium it has received in the debt service fund. No bond counsel would give an opinion on a transaction that was not in compliance with this section of the Education Code. One point that Ms. Minyen is missing is that there is a difference between “original issue premium” (the theoretical difference between the aggregate proceeds produced if all bonds are sold to investors at the stated re-offering price (which is to say – never) and the par value of the bonds sold) and “purchase premium” (the price that the underwriter agrees to pay to the issuer on the day of purchase (which is both fixed and known as of the pricing date)). I’m not aware of any bond counsel who has come to the conclusion that the cited Education Code section refers to original issue premium, though David C. would be able to speak to that topic better than me. And to Mr. Cosentino’s point – yes, school districts are required to submit information relating to each bond issue to CDIAC and, while they’re not required to sign-off on each transaction, I think it’s safe to say that they’re familiar with this practice. Dave Olson
Ira Sharenow February 12, 2013 at 04:20 AM
Mr. Ramsey, thanks for posting a note in order to clarify some issues. I hope that you will write a regular column. I suggested this to you when you were trying to get a bond measure passed, but then I did not see a regular column even though on June 18, 2012 you wrote: “Sounds good. I like the suggestion.” That was in response to: “I would like to suggest that the board president and the superintendent each write monthly columns in the local Patch papers and perhaps answer a few questions each month as well.” A lot of people seem to think that WCCUSD lacks transparency. For example I have been trying to obtain information on the following, but have been unable to obtain the information. Can you provide the information? With respect to El Cerrito HS, by community of residence, how many students are there? For each of the elementary schools in El Cerrito and Kensington, what percentage of the elementary school graduates graduate from ECHS? How much crime is committed in El Cerrito by students and where do those students live? What sorts of crimes are being committed?
Giorgio C. February 12, 2013 at 01:54 PM
Mr. Ramsey, Ira's concerns are not unique. I've had similar such concerns. Yesterday, I attended the School Site Council of my daughter's future elementary school, but I was unable to acquire an agenda until the morning of the meeting. The law states it should have been posted 72 hours prior. I asked the principal if they had seen the following WCCUSD School Site Council guide document. http://www.wccusd.net/cms/lib03/CA01001466/Centricity/Domain/85/SSC_presentation.pdf They had not. A minor detail, but the SSC is a powerful tool for engaging the community, so agendas, minutes, and bylaws should be proudly displayed. January 20th: I request from the board president and a trustee, a copy of the district org chart. Our superintendent months ago said this would be placed on the website. No reply. I repeatedly asked district staff, board members and Superintendent for clarification about something possibly amiss on the 2010 debt limit waiver document. No reply to my emails. And the 2 month Herculean effort I had to exert via emails and meetings regarding the incomplete SARC docs (ed code violation) and I now learn that this same missing information was supposed to be available to the SSC and auditors? Lastly, when Hercules attempted to secede, they cited lack of response to public records requests in their justification. Mr. Ramsey, let's work together to make the necessary improvements, ok? It's good for buy-in, yes? Thanks.
Giorgio C. February 12, 2013 at 03:10 PM
I will add that it appears the district staff are having difficulty generating data, such as that concerning teacher qualification and turnover and possibly that relevant to Ira's queries. The other example is with the CBOC, that the Assoc. Sup. said he has been trying for 3 years to put a software system in place for tracking the progress of school construction projects. Three years? A citizen on the committee designed an Excel spreadsheet that is ready to go today (Thank you, T.W.). This is inefficient. We pay money with our bond measures and parcel taxes and it still isn't enough to meet these needs? Maybe it is not the money. Maybe there are some staff who are not able to perform some of their duties, that they possibly do not possess the requisite skill set, that they are not qualified? Or they need some training. How would we know? This is why I wanted to see job descriptions and org charts. On two consecutive audits, job descriptions were noted as being outdated or obsolete. Then how can we tell the difference between an understaffed office versus an unqualified district office? Such documentation also protects competent staff from unwarranted criticism. The information necessary for the purpose of making such an assessment appears incomplete. How can the school board make this very critical assessment? With a complete and interrupted paper trail, we will know how to address these problems. Otherwise, we are just guessing.
Charles Cowens February 13, 2013 at 07:08 AM
You mean it's a resolution they voted on?
Charles Cowens February 13, 2013 at 07:20 AM
@Giorgio As long as the Local One rep works for Local One and not the district it's not a direct violation. The test with the Building Trades rep is whether that person works for a vendor, contractor, or consultant for WCCUSD. Even then the District would probably trot out a weaselly lawyer who would argue that an employee of a vendor, contractor, or consultant is not a vendor, contractor, or consultant.
Ira Sharenow February 13, 2013 at 07:29 AM
Does anyone have campaign finance information on the most recent ballot measures?
Charles Cowens February 14, 2013 at 12:16 AM
@David The point I'm trying to make is that it's a statement from one school board member, not the school district or the school board. The media love Mr. Ramsey, because he is knowledgeable, opinionated, and, most importantly, extremely available. But, an over-reliance on one source for everything WCCUSD leads to a distorted view of the district.

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