It's time to teach California school districts a basic lesson about managing finances: Don't borrow money if you don't know how you're going to pay it back.

Yet that's what districts up and down the state are doing. They're issuing bonds for school construction and then making no regular installment payments. The mounting interest means that decades from now, taxpayers will face whopping balloon payments.

Assemblywoman Joan Buchanan, D-Alamo, has introduced legislation sponsored by state Treasurer Bill Lockyer to curb the use of so-called "capital appreciation bonds," known as CABs. It's a good start, but needs to go further.

CABs present two problems:

California Assemblywoman Joan Buchanan is photographed on Friday, March 18, 2011, in Walnut Creek, Calif. (Jose Carlos Fajardo/Staff)
California Assemblywoman Joan Buchanan is photographed on Friday, March 18, 2011, in Walnut Creek, Calif. (Jose Carlos Fajardo/Staff)

  • First, they're costly. To provide perspective, a homeowner who takes out a standard 30-year mortgage will pay back roughly twice as much over the life of the loan in principal and interest payments. But if you don't make any payments until the end, the debt mounts rapidly.

    That's what happens when school districts use CABs instead of conventional bonds with regular payments. West Contra Costa borrowed $2.5 million and will owe 13.5 times as much 26 years later. Gilroy's total debt service after 23 years will reach 13 times the original $2.35 million borrowed.

    They're two of the worst Bay Area cases. Other districts that have issued especially costly CABs include Acalanes, John Swett, Campbell, Pittsburg, Fremont, Dublin, Cupertino, New Haven, San Leandro, Burlingame and Sunnyvale, according to the California State Treasurer's Office.


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    Assembly Bill 182 would limit the debt ratio to no more than 4-to-1, and would require that the bonds contain provisions allowing districts to buy them back after no more than 10 years if they can find a better deal.

  • Second, districts don't know how they'll pay off bondholders decades from now. Indeed, that's true for most school construction bonds, but especially CABs. AB 182 doesn't address this problem.

    The deals presume payments will come from property tax revenues -- and that those taxes will steadily rise. Many school bond deals assume 4 percent or more annual property tax growth for decades into the future.

    But when property values fall, the districts scramble to refinance their debts, thereby pushing payments farther into the future, or stick property owners with higher tax rates than they were promised. Unfortunately, the tax-rate limits suggested to voters when they approve school construction bond programs aren't binding.

    The solution: Make them binding. Put bond-buyers on notice that there won't be more money in the kitty to pay off the debt, and send a message to school officials that they must keep their promises.

    The bond market will probably react by charging slightly higher interest and, more significantly, requiring that school districts use more realistic forecasts. School officials, in turn, will have to finance construction more responsibly, with less long-term speculation.

    Such fiscal checks will benefit all parties. Most significantly, property owners can sleep at night knowing their tax bills won't skyrocket and that their money is going toward school construction rather than unacceptably high interest payments.