In the environmental world, leaving things for future generations has become an overused cliché: Perhaps we didn't intend for them to have to clean up our air pollution or revamp our fossil fuel industry — but oops, it's already too late. In a financial context, though, the idea of passing debt along is more of a calculated methodology. The longer you can forestall payment, the more likely someone else will inherit it. And you can only hope that person has bigger purse strings.
That's the hope of school districts in San Mateo County, many of which have bankrolled their facility upgrades and repairs with high-interest capital appreciation bonds (CABS), in the hope of paying them off decades later, according to a new civil grand jury report. The report cites 20 such bonds outstanding in San Mateo County, some of which have a 40-year maturity date, and interest rates of up to 12 percent. They've put local school districts on the hook for more than $2 billion, or roughly four times the amount borrowed.
Yet most of that money won't be paid for decades, long after children being born now have graduated from high school, and long past the normal timeframe for upgrading facilities – meaning that by the time these loans are paid off, the improvements they funded will have already deteriorated. “This is like having a car loan that is paid at the end of the useful life of that car,” the grand jury wrote. Its report referred to the capital appreciation bonds repeatedly as “ticking time bombs.”
Spokespeople at the San Mateo County Office of Education were unavailable for comment, but the San Mateo Union High School District issued its own press release following the report, in which it vowed to correct “numerous factual errors, omissions, and misstatements.” The grand jury had made an example of San Mateo Union High School District because of its profligate reliance on the bonds, resulting in a projected debt of about $1 billion.
District spokespeople demurred, claiming they only owed $592,731,659 in debt services for $124,999,353 in CAB-financed loans. They said one series of bonds was actually issued through a federally-subsidized program called Build America Bonds – not CABs – and another had to be a capital appreciation bonds in order to take advantage of a federal stimulus program. The net result of these loan constructions was better for taxpayers, said Elizabeth McManus, the district's deputy superintendent of business services.
Yet the district can't fully refute the grand jury's larger claim that it's punted a sizable debt over to future generations – its CAB payments are due in 2042 and 2051, respectively. Now it only has two options – refinance now, or just hope that property values rise, leaving tomorrow's taxpayers with a bigger nest egg.
Neither approach would ameliorate the situation, said grand jury foreman Timothy Johnson, adding that he isn't even sure the bond terms would allow a refinance. “And interest rates are expected to go up,” he said.
But there may be a silver lining: a new state bill, Assembly Bill 182, hopes to limit bond terms to 25 years and save school districts from their own bad judgment. Right now it's coasting through the Legislature.