California School District Will Spend $1 Billion to Borrow $100 Million

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Published August 08, 2012

| FOXBusiness

It’s being called a loan not even a subprime lender would make.

A school district north of San Diego, Poway Unified, borrowed $105 million over 40 years by selling a bond so unusual that the State of Michigan outlawed it years ago. Taxpayers in the area will end up with a nearly $1 billion bill at the end of this deal.

The Poway school district is not the only one — three other California school districts in San Diego are set to gouge taxpayers in similar fashion. The San Diego Unified School district borrowed $164 million up front, but will owe a whopping $1.3 billion at the end of its long-term bond. Oceanside Unified sold a $30 million bond, but will owe nearly ten times as much decades later, $280 million total. And Escondido Union School District likewise borrowed $27 million and will owe $247 million total. (Will Carless and Joel Thurtell at the Voice of San Diego, a local blogger, has been tracking these bond developments.) 

The bonds are a "kick the can" move to avoid dinging taxpayers now with higher property taxes.
Oh, and the bonds are not callable -- they can’t be paid off early or refinanced.

School administrators appear to have looked around at the sluggish economy and property tax revenues and figured, ‘Heck, why not defer now and pay nothing at all for decades? We’ll be dead by then.’”

The problem is, the school districts are sitting on unused cookie jar reserves, $34.5 million for Poway. The school district has set aside the $34.5 million for things like “economic uncertainties” or “unassigned/unappropriated.” 

A Poway official declined comment.

And the Poway district has already borrowed tens of millions of dollars at nosebleed 12.6% interest rates. The new $105 million bond will go toward things like green recyclable building materials, the school district’s financial disclosures show (for more see below).

This kind of bait and switch spending problem is rampant throughout California. This is why the Securities and Exchange Commission just last week announced plans to force better disclosures from states and cities in the $3.7 trillion municipal-bond market.

Much more will be needed than that if taxpayer wallets are to be protected.

In the $105 million bond deal, taxpayers in the Poway school district were promised that there would be no tax increases for 40 years. The district was already on the radar screen because the tax revenue it was getting was being eaten up by old loans at those whopping 12.6% interest rates.

But now, the school district doesn’t have to pay interest or principal on the bond for 20 years — leaving a $982 million bill for taxpayers at the back end.

The underwriters for the nearly $1 billion Poway bond deal, Stone & Youngberg, a unit of Stifel Nicolaus, and financial advisor Dolinka Group of Irvine, Calif., will get a sweet $1.4 million in total fees, says FOX News analyst James Farrell.

Citigroup (C), Goldman Sachs (GS), Bank of America/Merrill Lynch (BAC), among others, will split a cool $2.1 million on San Diego’s $164 million bond where taxpayers will eventually pay a billion dollars, Farrell notes.  

Meanwhile, San Diego County school superintendents, presidents and administrators make a lot of money. More than a dozen average $227,000 in compensation as of 2010, latest data available. The superintendent of the San Diego County Office of Education earned more than $286,000 in base pay that fiscal year.

Poway, home to more than 34,000 students, is also a school district where school administrator and teacher compensation chew up 85% of its annual budget. And its expenses chronically exceed revenues, by nearly $40 million from 2009 to 2011.

In two decades’ time, taxpayers in the Poway district will have to start paying about $50 million a year towards the loan — one-fifth of its current $250 million budget. However, right now, the district only receives about $11 million a year from homeowners towards paying off its bonds.

One estimate says the total assessed value of property within the taxed area would have to quadruple just to cover the eventual $1 billion bill for this one bond alone.

Notes Farrell: “The current school administration has not only spent ‘other people’s money,’ but made the fallout ‘other people’s problems.’”

Farrell adds: “Even Popeye’s Wimpy offered to pay on Tuesday if you gave him a hamburger today. This is Wimpy offering to force his heirs pay you later so he can eat his hamburger now — I doubt that $1 billion burger will be on McDonald’s $1 value menu.”

Taxpayers were sold on the idea that the Poway bond would be paid for without a tax increase, so they voted 'yes' to them in 2008. Instead of property tax increases, they were told current property tax rates set to expire years from now would be extended.

But the problem was that Poway school administrators had historically set aside a tiny 3% of its budget (or about $6.5 million a year) for ongoing maintenance, school disclosures show. Even though an earlier 2004-05 report showed 13 school properties needed $26 million in repairs and upgrades (what is the $34.5 million in cookie jar reserves for then?)

So now a whopping $1 billion in future bond costs will go towards new classroom and library computers, state-of-the-art wireless data systems with increased bandwidth, new voice and video alarm systems, green “recyclable building materials,” and landscaping, among other things.

Also, new storm water drainage systems to comply with the Federal Clean Water Act, as well as new “energy generation systems and facilities,” as well as “permanent, covered, outside eating areas.”

Keep in mind this: The state of California relies heavily on personal income taxes for its budget; and local governments rely heavily on property taxes.

But the number of upper bracket taxpayers, with $500,000 or more in annual incomes, dropped by a third from 2007 to 2009, leaving fewer to tax, the California Taxpayers Association notes based on data from the state’s Franchise Tax Board..

As of the 2009 tax year, California listed just 98,610 California tax returns with adjusted gross income of $500,000 or more, down 32.5% from the 146,221 in 2007.

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