San Diego County's Poway Unified School District, which teaches 34,000 kids in 37 schools, has sparked controversy with the revelation that the district used an aggressive form of municipal debt offering to raise $105 million for school renovations. The problem: the deferred interest bonds are costly to pay off and will cost taxpayers $1 billion over the next 40 years.
The school district, which provides K-12 education for kids from 15 county towns, gained permission from voters to borrow money to finish a school modernization program started in 2002. But the district promised voters it wouldn't raise taxes. To accomplish that school district floated the debt by issuing capital appreciation bonds, a form of zero-coupon bond that pays no interest for 20 years (so Poway wouldn't have to break its "no tax increase pledge" to current taxpayers).
The problem is that the issuer pays a steep premium for these bonds. Starting in 2034 the district will have to make big payments, that will rise to $50 million annually, just to pay off the debt. The capital appreciation bonds presume that property values will soar in the area over time and provide a steady increase in property taxes. That's a risky proposition, to say the least.
Local taxpayers aren't happy because Poway officials neglected to mention the financing technique they planned to use when they asked for permission to borrow additional dollars.
This isn't the first time that school districts have sparked controversy by using capital appreciation bonds to raise debt after making "no tax increase" pledges to taxpayers. In 1994, Michigan banned the practice after districts racked up $2 billion in debt obligations with the bonds.
The problem is that the issuer pays a steep premium for these bonds. Starting in 2034 the district will have to make big payments, that will rise to $50 million annually, just to pay off the debt. The capital appreciation bonds presume that property values will soar in the area over time and provide a steady increase in property taxes. That's a risky proposition, to say the least.
Local taxpayers aren't happy because Poway officials neglected to mention the financing technique they planned to use when they asked for permission to borrow additional dollars.
This isn't the first time that school districts have sparked controversy by using capital appreciation bonds to raise debt after making "no tax increase" pledges to taxpayers. In 1994, Michigan banned the practice after districts racked up $2 billion in debt obligations with the bonds.
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