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Peeling the onion on costly school bonds

I usually avoid rebutting rebuttals, but I want to explore the Bellevue Union School District’s capital appreciation bonds a little further in light of the superintendent’s response to an editorial (“Time to hit the pause button on costly bonds”) I wrote about three weeks ago.

You can read the editorial here and Superintendent Alicia Henderson’s rebuttal here.

In short, the editorial said capital appreciation bonds are a bad deal for taxpayers. With interest payments deferred until the bonds mature (and interest being charged on interest along the way), they cost a bundle. In Bellevue’s case, the district will pay $4 million to retire a $378,000 CAB issued in 2011. That’s more than $10 in interest for every dollar in principal.

Henderson said I was wrong, but I don’t think she backed that up. In addressing the interest costs, she combined the $378,000 CAB with $4.3 million in other Bellevue bonds sold in 2011. The interest-principal ratio on the $4.3 million loan, she said, was 1.05:1. Once the $378,000 CAB was added, she said, the ratio climbed to 2.1:1. “None of the facts suggest loan shark rates,” she said, quoting the editorial. OK, a 2-1 ratio isn’t bad on a loan. But let’s put it in context: The district increased its borrowing by about 10 percent, and its debt ratio jumped 100 percent. Sounds like an awfully steep interest rate to me.

Henderson also said the district couldn’t pass up the opportunity because the federal government is going to pay 90 percent of the interest. So the interest costs are being shared by taxpayers in Windsor and Willits and Twin Falls, Idaho and Madison, Wis. and Marietta, Ga. – well, you get the picture. That’s a great deal for Bellevue taxpayers – as long as no other school district is doing the same thing.

Bellevue, of course, isn’t alone.

If you’re interested in this subject – and if you’ve gotten this far I assume you are – you should read an outstanding piece of investigative reporting by the Orange County Register (link). The Register peeled the onion on a much larger CAB deal in the Placentia-Yorba Linda school district. Beyond the $280 million in interest to be paid on a $22 million loan, reporter Melody Petersen detailed the conflicting interests of the school district, which presumably should be looking for the least expensive deal for taxpayers, and its financial advisers, who double as campaign strategists and bond underwriters. They want to maximize returns. In this instance, I’d say they did.

Not to worry, Placentia-Yorba Linda district officials said. It’s a great deal. You see, the interest payments are heavily subsidized by the federal government. Including the taxpayers in the Bellevue Union School District.

– Jim Sweeney





6 Responses to “Peeling the onion on costly school bonds”

  1. Stephen says:

    280 million payback for a 22 million dollar loan is a “good deal”. I don’t know who is more ignorant here, the elected officials or us, fee voters who elect idiots who state, with all sincerity, that a280 million payback for a 22 million dollar loan is a good deal

  2. michael koepf says:

    INSIDE OPINION is permanently closed.

  3. James Ligon says:

    The Sonoma Valley United School District has done something similar. The school district issued bonds in 2010, borrowing millions of dollars for the local schools. Members of the school board did not read the prospectus, did not understand the terms of repayment and believed the Superintendent who told the board that the money was essentially “free.” In fact, the repayment of the school bonds is not part of the operating budget.It is repaid by our taxes, a matter of no concern to the board. The interest rate paid on one of the zero coupon bonds was/is 12%, at a time when banks were paying less than 1% on savings deposits and mortgage loans were less than 5%. The school did not concern itself with the high cost of borrowing since taxpayers would repay the “free” money provided to the district. We brought this to the attention of the school board, but got the impression that math wasn’t their thing.

  4. GAJ says:

    Any good manager knows that borrowing must be done in a prudent manner and must not be allowed to “balloon” as it could result in the failure of the company and, if a small business, the manager/owner going bankrupt and losing everything including their home.

    No such worries for our clueless bureaucrats who happily make very bad deals that someone else will have to pay the price for.

    Living within one’s means does not apply to government drones.

  5. Reality Check says:

    Jim, I’m with you on this. But I think your editorial and comments should include the length of the loan and interest rate. The numbers are probably outlandish not because the interest rate is obscene (although I don’t know that) but because the school chose to make no payments for . . . what? . . . . 20-30-40 years. That’s a lot of compounding.

    This gets muddied a bit by supposedly educated people claiming that the money is practically free from the Feds, as if they know that the Feds will be able to afford even 5 years from now.

  6. Follower says:

    …and they’ll all get re-elected.