Legislation Unveiled to Curb Exotic Financing at School Districts
The new measure, expected for weeks, will tighten the rules on school bond borrowing.
Two state legislators will announce new legislation Friday afternoon aimed at curbing the use of controversial capital appreciation bonds at California school districts.
The measure is being introduced in response to criticism over school bond deals that push the cost of borrowing money onto future generations of residents. Capital appreciation bonds allow districts to put off loan repayment for as long as 20 years, during which time interest accumulates on the debt. In some cases, districts end up paying back many times what they borrowed.
Capital appreciation bonds became politically toxic after a Voice of San Diego story last year outlined a deal at the Poway Unified School District, where taxpayers will end up paying back almost $1 billion on a loan of $105 million. Other stories followed across the state and the country, including a large piece in the Los Angeles Times that outlined similar deals at 200 California districts.
There are three key points to the legislation, which can be read in full here:
• It limits districts to loans where the ratio of debt to principal is no more than 4-to-1. Some districts in California have put together deals that cost taxpayers $18 or more for every dollar borrowed. Such deals would be outlawed under the new law.
• It requires any district issuing capital appreciation bonds to present an analysis comparing the cost of the deal to more conventional financing.
• It requires districts to include a “buy back” provision in their bond deals, so they can refinance the loans if necessary. (One of the most controversial aspects of Poway’s deal was that the district is unable to refinance the loan.)
San Diego County Treasurer Dan McAllister, who started the push toward legislation last year, said he’s extremely happy with the way the bill turned out.
“We couldn’t be happier because this hits at the very heart of the issue, which has enabled many of these districts to stray way off conventional wisdom with these loans,” McAllister said. “The 4-to-1 ratio is especially important.”
The bill will be introduced by Assemblymembers Ben Hueso and Joan Buchanan. It must now be approved by the state Legislature and signed by the governor.
“We feel very confident we have the right approach to solving this problem,” Hueso said. “So far I’ve had no negative calls from fellow legislators. I’ve had calls from lawmakers wanting to co-author the bill, but nothing negative.”
The bill follows a statewide moratorium on capital appreciation bonds issued last week by California Treasurer Bill Lockyer and State Superintendent of Schools Tom Torlakson.
Hueso and McAllister will announce the legislation at a press conference at 2:30 Friday afternoon at the County Administration Building.
Will Carless is an investigative reporter at Voice of San Diego currently focused on local education. You can reach him at email@example.com or 619.550.5670.
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