It seems all the negative publicity surrounding capital appreciation bonds, or CABs, may have had a big impact on California’s municipal bond market.
California school districts conducted 62 bond sales in 2013, down from an average of 97.5 deals a year between 2007 and 2012, according to The Bond Buyer, a trade publication that covers municipal bonds.
That’s a 36.4 percent drop.
And the total amount of money borrowed via CABs in 2013 dropped markedly too, down 43.5 percent from the previous five-year average.
From The Bond Buyer:
CABs pay a compounded interest rate and principal upon maturity, instead of through regular payments over time. They allow school districts to finance construction projects and defer debt-service payments in the short-term, avoiding property tax increases. But the districts incur higher costs in the long run.
The use of CABs among school districts got a flurry of bad publicity a few years ago when media attention brought to light situations where CABs had been issued with repayment schedules that had greater than a 10-to-1 ratio of interest payments to principal.
One example was the Poway Unified School District in San Diego County, which sold $105 million of bonds that require nearly $1 billion in debt service at their 40-year maturity, without an option to call the bond.
Critics say such structures saddle taxpayers and school districts with massive debt burdens and interest payments.
“Critics say,” indeed.
Capital appreciation bonds have traditionally led to huge repayment amounts. In several cases in California, districts are now on the hook for more than 15 times what they borrowed, according to this analysis by the Los Angeles Times.
The state of Michigan considered the bonds so nasty that state lawmakers banned the loans in the 1990s.
In the wake of our stories and other coverage, notably by Michigan blogger Joel Thurtell, California didn’t go quite that far.
Lawmakers eventually passed a bill last year that limits school bond to a 4-1 payback ratio and forbids districts from borrowing over 40 years, as they had been.
It’s too early yet to see what impact that bill will have on the number of school districts borrowing money this way. The law only went into effect on Jan. 1 of this year.
California State Treasurer Bill Lockyer wanted lawmakers to go further. In a series of heated interviews in 2012, he decried Poway’s bond deal and said the staff who put it together should be fired.
They weren’t.
Indeed, Poway Superintendent John Collins, who has vehemently defended the deal and who organized a secretive $130,000 report that exonerated his district’s actions, just got a pay raise.
He was already the highest-paid superintendent in the county and one of the highest paid in the state.