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.
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