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

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

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.

For the rest of the story

Edited August 10, 2012 by kennard