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The poster child for irresponsible school bond borrowing says it can cut down on its billion in debt, but the deal raises a lot of questions.
A year ago, Poway’s debt seemed inescapable. But now, with the help of San Francisco financial adviser Dale Scott, Poway Unified wants to chart a path out of its mammoth debt problem. The catch? Poway will have to jack up property taxes on some residents – an option it rejected back in 2011.
The deal currently before the board is complicated, but we’re going to take a crack at explaining it. We’ll take a look at the legal red flags and some other curiosities about Poway’s new deal in a separate post.
First, a quick recap: Poway shot to fame in 2012 with its 2011 sale of about $126 million in bonds. Because of the wacky way Poway put together its deal, using something called Capital Appreciation Bonds, the district stuck taxpayers with repayments over 40 years totaling almost $1 billion.
Here’s how Poway’s new plan would work:
• Remember that bonds are basically assets – pieces of paper held by investors. Those investors bought the bonds back in 2011 for a certain price, on the agreement that they will receive a certain amount of money (far more than they paid) on a set date in the future.
• Because Poway’s bonds are “un-callable” (can’t be refinanced) those investors aren’t compelled to sell them back to Poway. Poway is basically locked into its mortgage.
• Just because the owners of the bonds don’t have to sell to Poway, however, doesn’t mean they can’t. Scott wants to go out and find as many of the investors who own Poway’s bonds as possible and strike a deal with them to sell their bonds back to the district.
• Scott said his firm and the district can figure out a fair current market value of the bonds, and see if they can get that price from the sellers.
• As long as the bondholders agree to sell at a price that saves the district money over the long term, Scott says the deal is entirely legal (this is a highly contentious point, and we’ll have more on this later). The district still has to come up with the money to buy the bonds from the investors, though. Poway Unified obviously doesn’t have hundreds of millions of dollars sitting around, so it has to borrow more money to do this.
Poway does that by issuing new bonds (borrowing more money), presumably, and – this is key – at a lower interest rate than it did in 2011. It then uses that cash to buy the bonds from any willing sellers. Because it’s paying less in interest for the new bonds, taxpayers ultimately save money, Scott said.
There are several tricky things about Scott’s plan. But here’s a big one: It will result in an immediate property tax rate increase for some Powegians.
The 2011 CAB deal was structured so that future taxpayers shouldered the whole burden for paying off the loans (this is the main moral argument against CABs – that they unfairly shift the burden for today’s improvements onto tomorrow’s taxpayers). By contrast, because the new deal involves incurring more immediate debt, taxes have to go up right now to pay for that new borrowing.
If the district agrees to go forward with the deal, taxes would go up for residents within Poway Unified’s School Facilities Improvement District. That’s residents who are not subject to Mello-Roos fees and mainly covers older areas of Poway. (There’s a map of the SFID on Page 5 of this presentation.)
Overall, Scott says the deal ultimately could save Poway Unified as much as $260 million in interest over the next 40 years.
He points to a similar deal his firm orchestrated for Stockton Unified School District, which, like Poway, got itself into a big Capital Appreciation Bond mess. By buying up some of Stockton’s CABs and refinancing them, Scott said his firm saved taxpayers more than $70 million in the long run.
The district hasn’t taken any action yet on Scott’s plan. Right now, the school board is just holding public meetings with Scott to explain the theory to the board and the public.