Wednesday, June 25, 2014

Grand jury to Contra Costa County school districts: Stop using Capital Appreciation Bonds

By Theresa Harrington Contra Costa Times
POSTED: 06/25/2014 07:04:22 AM

To help save taxpayers money, the Contra Costa County grand jury¿ recommends school districts avoid the use of Capital Appreciation Bonds, or CABs, to finance their construction projects.

The civil grand jury report released this month found that CABs are often substantially more expensive than Current Interest Bonds because they add interest to the principal each year and delay repayment until the end of the loan term, which is often more than 20 years. Repayment costs can be several times more than the original amount issued.

Seven school districts in Contra Costa County have issued CABs in the past. The Acalanes, Byron, John Swett, Mt. Diablo, Pittsburg, Walnut Creek and West Contra Costa districts issued CABs ranging from $19,583 to $100 million. with required taxpayer repayments ranging from $140,000 to $259.4 million.

"School districts in Contra Costa County should seriously consider avoiding CABs in any future bond sale," the report states. "In addition, school districts should consider including 'callable' provisions in all future bond sales."

Callable bonds can be repaid at a lower interest rate than the original rate, which can significantly reduce interest costs, according to the report. However, a district must negotiate this before the bonds are issued.

The report cites a $2.5 million West Contra Costa district CAB issued in 2010 as an example of high repayment costs, noting it will cost taxpayers $33.8 million to repay by Aug. 1, 2034.

The West Contra Costa school board on Wednesday expects to consider a plan to refinance $100 million in previously issued bonds in part by using convertible CABs to help keep the tax rate charged property owners below $60 per $100,000 in assessed value.

Board President Charles Ramsey said the district is considering a callable CAB that could be converted to a Current Interest Bond in two years. He also noted the grand jury report failed to mention AB182, signed into law last year, which limits CABs to 25 years and 8 percent interest. In addition, the law requires all CABs to have a call option no later than 10 years after it is issued and limits the total debt ratio to no more than 4 to 1 on all bond sales.

Ramsey said the West Contra Costa district's current plans would fall within those parameters, with the CAB under consideration estimated to have a debt ratio of less than 3.25 to 1.

"We're talking a two-year convertible CAB. We're not talking a 40-year non-callable CAB," he said. "You can't even do those anymore. You can only do a 25-year convertible CAB, so this complies with the legislation. This allows us to look at all scenarios to make sure we're doing what's in the best interests of the taxpayers."

Theresa Harrington covers education. Contact her at 925-945-4764 or tharrrington@bayareanewsgroup.com. Follow her at Twitter.com/tunedtotheresa.

CAPITAL APPRECIATION BONDS ISSUED:
District Date Issued Amount Due Date Amount Due Callable
Acalanes 2010 $30 million 2025-2039 $123.9 million Yes
Acalanes 2011 $38 million 2028-2046 $228 million Yes
Byron 2007 $1.4 million 2026-2032 $4.3 million No
John Swett 2009 $266,175 2030-2034 $3 million No
John Swett 2011 $19,583 8/1/2028 $140,000 Yes
Mt. Diablo 2010-2011 $50.5 million 2016-2035 $154.7 million Yes
Mt. Diablo 2011 $943,582 2015-2018 $1.8 million Yes
Pittsburg 2011-2012 $19.6 million 2020-2046 $34.8 million Yes
Walnut Creek 2010 $2 million 2014-2023 $3.6 million No
West Contra Costa 2004 $30 million 2006-2034 $3.6 million No
West Contra Costa 2005 $100 million 2007-2034 $259.4 million No
West Contra Costa 2009 $52 million 2016-2033 $190.8 million No
West Contra Costa 2010 $2.5 million 2034 $33.8 million No
SOURCE: Contra Costa County grand jury Report

The complete report is available by visiting www.cc-courts.org. Click on Jury Services/grand jury and select civil grand jury, then grand jury reports.

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