01.30.2013 Community Colleges, Financial Advisory, K-12 No Comments

CABs: State Leaders Aim to Restrict Local School Financing Options

When the economy tanked, the need to replace leaking roofs or update electrical systems for computers and technology didn’t go away. Schools throughout California have continued to be under tremendous pressure to provide quality and safe schools for our children.

Like most things, there is no free lunch when it comes to financing the construction and renovation of our public schools. Whatever path a community takes, you either pay now or pay later for these buildings – but like your household, it’s good to have both options.

As recently as 1998, the State of California provided up to 80% of funding for new school construction. Today, its share has fallen to 50%, and there are proposals on the horizon that would further reduce its contribution. In addition, the State School Facilities Program is essentially out of money.

As a result, communities have had to rely increasingly on local bond measures. To avoid construction cost escalation and keep promises made to voters, many school districts are using Capital Appreciation Bonds(CABs) as part of their overall financing program. CABs are a type of bond where the investor does not receive interest payments periodically during the term; instead, all interest due on the bond is paid at maturity, along with the principal repayment.

Current Interest Bonds (CIBs) on the other hand require principal-and-interest payments twice a year.  CABs and CIBs are finance tools that have been widely used and by public entities including the State of California.

However, State Schools Superintendent Tom Torlakson and Treasurer Bill Lockyer recently asked school boards to put a moratorium on new bond issues that contain CABs. Legislation has been introduced (AB 182) to outlaw this type of bond and limit the financial options of our schools and community colleges.  Yet no similar measure has been introduced or discussed for other governmental entities.

We share in ACSA’s  concern that small districts and low property value districts will  a disproportionately impacted by limiting CABs. Because of the stagnant tax base and artificial limits on bond financing ($60 per $100,000 of assessed value for unified; $30 for non-unified ), CABs are used to keep bond levels within tax-rate limits while allowing educators to provide new classrooms and make health-and-safety repairs.

In some communities, particularly those especially hard-hit by the recession, it can be cost-prohibitive to issue only CIBs. Therefore, voter approved improvements must be delayed – possibly costing the loss of another generation of students to overcrowded and substandard facilities.

During the Great Recession, school construction was often the only significant economic activity in some communities. Schools were able to get competitive bids with favorable prices and low-interest rates.  This is another reason why C.A.S.H is also against AB 182. 

Singling out schools and eliminating the use of CABs will essentially lock some districts out of the bond marketplace and will not be able to deliver on the promises made to local voters.

It makes prudent financial sense to have the total repayment of a bond issue  generally not exceed a 4:1 repayment ratio.  However, restricting the use of CABs, along with proposed reductions in the maximum term of borrowings, could result in reductions of 30% or more of facilities funds available to school districts for construction at a time when the unemployment rate hovers near 10%. It’s like telling homeowners that you can only take out a 15 year mortgage when they really need is a 30 year home loan.

As an unintended consequence, the State’s financial responsibility to fund required school improvements will also increase. Let’s not bankrupt our future or tie the hands of California’s nearly 1,000 school districts by restricting its financial options.

Should you have any questions about your program or the proposed legislation CFW is available to address your concerns.  We encourage you to contact Abel Guillen at 510-596-8180.  

Comments are closed.