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School Bonds: Mt. Diablo District Used Controversial Long-Term, High-Interest Loans

Mt. Diablo is among hundreds of districts throughout the state using capital appreciation bonds to finance major projects. Taxpayers will pay at least $100 million on a $50 million loan.

Back in 2010, Mt. Diablo Unified School District issued bonds to borrow $50 million. By the time taxpayers have retired the debt, they will have paid at least $100 million, or $1 in interest for every dollar borrowed. 

Mt. Diablo is among the California school systems that are borrowing against the future to build facilities and improve infrastructure, according to a report in the Bay Citizen, which is also the source of the figures above. 

The publication says 1,350 school districts and government agencies throughout the state are using capital appreciation bonds to finance major projects.

Throughout the state, these capital appreciation bonds have allowed the agencies to borrow billions of dollars while delaying payments, in some cases for decades.

In addition to the $50 million loan, Mt. Diablo also has a $940,000 capital appreciation bond that will cost taxpayers at least $846,000 in interest payments.

Steve Lawrence, the superintendent for the Mt. Diablo district, said the 2:1 ratio of payback on the capital appreciation bonds is better than most school districts. It's also better than the 4:1 payback ratio proposed in pending legislation before the state Legislature.

Mt. Diablo will begin paying down the bonds in 2016 and pay a higher interest rate through 2022. After that, current interest rates will be charged until the bonds are paid off.

The money is being used for solar energy, technology infrastructure and heating and air conditioning systems.

Another district using the bonds is the Acalanes Union High School District.

The Bay Citizen chart shows that in 2010 and 2011 the Acalanes district borrowed almost $68 million. It estimates the district will make $201 million in interest payment for a total of $269 million.

The Martinez Unified School District borrowed almost $25 million in 2011. It will pay $5 million in interest for a total of $30 million.

In 2010, the Walnut Creek School District borrowed almost $2 million. It will pay $1.6 million in interest for a total of $3.6 million.

Typically, school districts begin paying off bonds within six months and end up paying two to three times what they borrowed, the The Bay Citizen said.

With capital appreciation bonds, some school districts will end up paying more than 10 times what they borrowed. In some cases, the payments don't start for 20 years. In some cases, the facilities that were built with the bonds will have been replaced by the time the money is paid off.

Bill Clark, an associate superintendent for the Contra Costa County Office of Education, said that the state imposes a debt issuance ceiling for school districts based on property values. Districts from higher income areas have little problem issuing bonds for their construction needs. However, districts from lower income areas have to resort to more creative bond issuance plans.

"The schools cost about the same money, but the low wealth district can't build using more acceptable funding methods," said Clark. "Don't the low wealth kids deserve to have effective classroom environments that contribute to their academic success?"

District officials usually decide what type of bonds to use after voters have approved the money through ballot measures, The Bay Citizen reported.

Earlier this month, state Superintendent Tom Torlakson and state treasurer Bill Lockyer urged school districts to stop issuing capital appreciation bonds until the state does a thorough investigation of the practices.

Jack Enright February 01, 2013 at 12:07 AM
This "relevation" really shouldn't be a surprise to any informed person. Borrowed money is paid back with interest. Deferring initial payments significantly increases that interest. I think that many people vote "yes" on bond issues without understanding the potential long-term cost and that the useful life of whatever was purchased or constructed is long obsolete or needs replacement before the bond(s) are retired.
Casey February 01, 2013 at 05:21 AM
I am horrified by this fiscal irresponsbility. There's got to be a better way. I'd rather have the schools go without and build savings and investments (like anyone else). That would really teach our kids something and not saddle them with debt in their future. We think we're doing something good for the "low wealth kids" when in fact we are just postponing their discomfort, to put it mildly.

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