PLEASANTON RESIDENTS learned last week that they will pay $9.3 million more in property taxes for bonds they never approved because past school officials lost their moral compasses in pursuit of more construction money.
It's an example of what happens when staff members and elected officials don't stop to ask, or don't want to know, whether their actions pass the smell test. It's what happens when they depend on advice from people with financial interests in the outcome.
The scheme was not limited to Pleasanton. Bloomberg News service reported in 2009 that about 200 California school districts approved similar deals, raising a total of $1 billion, from 2002-07. The deals -- which then-Attorney General Jerry Brown in 2009 declared unconstitutional -- were supposedly designed to take advantage of falling interest rates by refinancing outstanding school construction bonds. But, at the same time, districts borrowed more money.
The costs in Pleasanton's case are just coming to light after the district last month hired an independent consultant to analyze the deals, which were approved by administrators and trustees who have all since left.
At issue is the refinancing from 2003-05 of what was left of $155 million of bonds voters approved in 1988 and 1997 that are scheduled to be repaid by 2025.
The analysis by Lori Raineri, an independent, Sacramento-based financial consultant for public agencies, shows two effects on
First, the district refinanced existing debt. By refinancing at a time of lower interest rates and front-loading payments to further reduce interest costs, the district reduced the debt service by $9.9 million. But, because of the accelerated payment schedule, property owners began in 2005-06 a 10-year period of much higher tax payments.
Second, the district took on new debt. As part of the deal, the district borrowed an additional $6.8 million -- debt voters had not authorized. The new borrowing was wrapped into the refinancing, driving up the principal and interest costs by $9.3 million. It's this second step, borrowing more than the voters had approved, that was correctly deemed unconstitutional. District officials don't know where the money went.
Property owners, who must pay off the bonds through taxes, now face higher bills because of the deal. In the current fiscal year, they paid toward the bonds $89.10 for every $100,000 of assessed valuation. The exact future rates will depend in part on real estate values.
What's clear is that, because of the refinancing and new borrowing, tax payments will be substantially more than they would have been. The deal boosted payments for the bonds by 5 percent in 2005-6 and 33 percent this fiscal year. By 2013-14, the scheme will drive up bond payments by 72 percent. Finally, starting in 2015-16, property owners will start to pay less because of the refinancing. The accelerated payment schedule bears no resemblance to what voters were promised when they approved the original bonds.
Across the state, similar schemes were pitched to school districts by investment backing firms. Two, UBS AG and Piper Jaffray Cos., dominated the deals and collected fees up to four times the U.S. average for bond sales, Bloomberg reported. San Francisco attorney David Casnocha was the bond counsel for many of the biggest deals.
In Pleasanton's case, Piper Jaffray was the underwriter, collecting $947,000 in fees for the refinancing. Casnocho was the bond counsel, for which his firm was paid $290,000. Neither Piper Jaffray nor Casnocho responded to inquiries.
Unlike investment bankers, Raineri charges by the hour and does not profit from the deals she analyzes. Raineri said she resisted pressure from many of her school district clients to engage in similar deals. In a 2007 letter to the state Attorney General's Office, she questioned their legality and ethicality.
It shouldn't have taken an attorney general opinion to shut down this illegal scheme. Unfortunately, many in the financial industry prey upon local governments and look for any opening.
As Raineri told the school board last week, "it's part of what goes on in our society that business is aggressive in pursuing its needs. And that's why government has to be aggressive about pursuing the public good."
Daniel Borenstein is a staff columnist and editorial writer. Reach him at 925-943-8248 or firstname.lastname@example.org.