Passing off $980M in School Debt for the Next Generation
It’s a common situation: A school district in desperate need of additions or renovations and technology upgrades borrows money from investors, to be paid back with interest. But for the Poway Unified School District in San Diego County, Calif., there is a twist: They don’t need to make any payments on the $105 million they borrowed in 2011 until 2033, so the district’s debt will continue to grow as interest on the loan amasses. In the end, taxpayers will be charged $877 million in interest alone.
This is possible due to a 2008 vote that allowed the district to borrow more money to finish a $500 million reconstruction project to modernize and expand the 24 oldest schools in the district that began in 2003, but did not permit the school board to increase taxes, leading to an expensive, controversial loan known as a capital appreciation bond. By 2051, the district must pay investors more than $981 million total, almost 10 times what they borrowed.
Most schools only pay back two to three times what they have borrowed, and begin paying down the interest quickly. However, in California, the 1978 passing of Proposition 13 capped property tax at no greater than 1 percent of the cash value of the home and restricted annual increases at 2 percent, calling for a reassessment only upon its sale or new construction. This measure reduced available funds for public schools and other local government services. Combined with other propositions raised by voters, it’s been almost impossible to raise taxes, according to published reports.
As of this writing, two propositions are on the Nov. 6 ballot to address the problem. Proposition 30 seeks a 7-year tax raise for the wealthy and a 4-year, one-quarter percent sales tax raise, both of which will go into California’s General Fund. Proposition 38 calls for a 12-year tax raise on almost all citizens, with most of the revenue going directly to the schools and the rest for debt service payments for educational facilities. If neither plan passes, the state will confront $5.9 billion in budget cuts, mostly to schools, and districts will face severe reductions in the length of the school year.
Poway Superintendent John Collins addressed community concerns in a September school board meeting, acknowledging the bond is “costly” but noting “it is imperative that we take a step back in time to reflect on the bigger picture,” as the construction program was successful and academic achievement of students continues to grow.
“Throughout the life of the bond program, our district has worked closely and relied upon leading bond industry experts and bond counsel to guide us through complicated financing structures that would help us achieve one goal: meeting the financing requirements set forth by the voters of the district,” Collins said. “At all times, we can say, we achieved that goal.”