Grand Jury: Bonds issued by 13 San Mateo County school districts are 'ticking time bombs'

By Bonnie Eslinger, Staff Writer, Mercury News.com -

Capital appreciation bonds used by 13 San Mateo County school districts are expensive "ticking time bombs" that will drain future taxpayers, according to a civil grand jury report released Thursday.

Those bonds enable districts to pay for capital improvement projects now, and don't have to be repaid for decades. As a result, they'll accrue substantial interest that eventually will cost the districts several times more tax dollars than the original sums, the grand jury warned.

For example, $35 million in bonds issued by the San Mateo Unified High School District in 2011 will end up costing more than $280,651,356 when they mature in 2050, according to the report.

"These blow up," Grand Jury Foreman Timothy Johnson said Thursday.

The grand jury report notes that use of capital appreciation bonds, known as CABs, increased considerably after the 2008-2009 housing market crash. As property tax revenue fell during that period, school districts turned to such bonds to pay for their capital projects.

Districts tried to justify the risky financial move by noting that when property values rebound, they'll generate more tax revenue to repay the assumed debts, according to the report.

Although voters approved bond measures, they were "ill informed" that the school districts would select capital appreciation bonds, Johnson said.

In January, State Treasurer Bill Lockyer and State Superintendent of Public Instruction Tom Torlakson called for a statewide moratorium on capital appreciation bonds until the Legislature and governor can reform the way they're issued.

"In many cases, CAB deals have forced taxpayers to pay more than 10 times the principal to retire the bonds," Lockyer and Torlakson wrote in a joint statement on Jan. 17.

"We are convinced that remedial legislation is needed to prevent abuses and ensure that both school board members and the public obtain timely, accurate, complete and clear information about the costs of CABs, and alternatives, before CABs are issued."

In San Mateo County, 13 school districts have borrowed a total of $553.4 million through 20 capital appreciation bonds, according to the grand jury report. The compounded interest projected for the debts total $1,580,234,305, so the sum to eventually be repaid will exceed $2 billion, according to the report.

Of the 20 capital appreciation bonds issued, the report highlights three as particularly imprudent because the debt service is four times the amount borrowed: a $22.7 million bond issued by the Hillsborough School District in 2011 that will multiply to more than $172.2 million by 2045; a $6.5 million bond issued by the Laguna Salada Union Elementary School District -- now the Pacifica School District -- that will multiply to more than $37.4 million by 2030; and the $35 million bond issued by the San Mateo Unified High School District in 2011.

According to the grand jury, the other school districts with capital appreciation bonds are Burlingame, Hillsborough, La Honda-Pescadero, Menlo Park, Millbrae, Redwood City, San Carlos, San Mateo County Community College, Sequoia Union High and Woodside. The report also states the "Jefferson" school district has a capital appreciation bond, but does not clarify whether it's the high school or elementary school district; Johnson said he was unable to provide that information late Thursday.

In response to the report, the Redwood City School District issued a press release that contends the grand jury incorrectly stated the total it owes on a $44 million bond issued in 1997. The district says it owes $91.3 million, not $135.3 million. It also says almost half of the bond has been repaid and the rest will be doled out over the next nine years.

In a written statement, Superintendent Jan Christensen said the district followed "prudent loan parameters so that the community can invest in safe, modern and attractive neighborhood schools without incurring significant financial risk."

The San Carlos School District issued three capital appreciation bonds -- in 1997, 2005 and 2006 -- that totaled more than $38.2 million and will end up costing more than $106.9 million, according to the report.

Robert Porter, the district's chief operating officer who wasn't around when the bonds were issued, said having the option to pay back at a later date gives school districts more flexibility.

"I think there are a couple of districts that have abused these debt instruments and unfortunately all districts are paying the price," he said.