By Patrice Apodaca
4:03 PM PST, December 15, 2012
A media frenzy has erupted over a controversial type of debt financing often used by California school districts, including Newport-Mesa, to pay for construction projects.
So-called capital appreciation bonds, or CABs, have become the debt worry du jour, thanks to dire warnings by some politicians and policy wonks, and to a flurry of recent press reports.
The concern is so great that California Treasurer Bill Lockyer recently said that school boards and staffs that approved CABs "should be voted out of office and fired."
The main reason CABs are considered so risky is that unlike current-interest bonds, they require no repayment for many years, sometimes decades. All the while, interest accumulates, and the pushed-down-the-road amount owed swells to many times the original sum.
But does Newport-Mesa's issuance of CABs qualify as foolhardy?
Debt financing can be an extremely arcane subject, and it's tough to wade through some of the sticky details. But to find an answer to the above question, it's important to consider the history, as well as those confounding details, of the district's use of debt. After that, you be the judge.
In 2000, voters approved Measure A to help finance $110 million in repairs and upgrades needed at aging Newport-Mesa schools.
Five years later, the $282-million Measure F was passed to pay for new construction.
So far, Measure F has financed a new stadium at Estancia High School, a pool at Costa Mesa High School, the tear-down and replacement of buildings at Newport Harbor High School, and science classrooms at all elementary schools. It is also covering projects underway to build theaters and separate middle-school enclaves at Mesa and Corona del Mar High School, and stadium renovations at Harbor.
Keep in mind that this comes at a time when the state well has run dry. The last state school bond was approved in 2006, and nearly all the $10.4 billion raised has been spent. State Supt. Tom Torlakson said recently that he'd like a new bond on the ballot in 2014.
But even if approved, any amount raised would likely be a small fraction of what's considered needed for renovation and new construction. Districts would still be on the hook for the vast majority of building projects.
Back to Measure F: When it was put to voters in 2005, the district promised that it wouldn't result in increased property taxes. School officials pledged that the same tax rate as that under Measure A — about $19 per $100,000 in value — would hold.
That might have been a safe promise if property values had continued to rise. But a few years after Measure F passed, the recession hit and property values fell, taking tax receipts down with them.
The district could have decided to postpone pending Measure F projects indefinitely. It decided to proceed, and issued about $95 million in bonds, the CABs in question.
According to Paul Reed, Newport-Mesa's deputy superintendent and chief business official, the majority of the CABs are callable. A callable bond is one that the issuer can buy back at a set price, which is typically done when interest rates fall. The callable bonds, Reed said, will be refinanced at some point when market conditions are favorable.
Reed objects to news reports suggesting Newport-Mesa's use of CABs is highly risky because they ignore the fact that the majority of bonds issued by the district don't fall into that category.
The Los Angeles Times, for example, published a chart in which it gave a "ratio warning" on $83 million of Newport-Mesa debt because the total amount owed over the 35 years to maturity would be more than $547 million, or a relatively high 6.6 times the principal.
But that warning is in reference to one piece of the district's total debt, Reed said. Taken together, the cumulative ratio for Newport-Mesa's debt is a more reasonable three to four times principal, he said.
Also, he noted, the danger warning doesn't take into account the strong likelihood that sometime in the future many of the bonds will be refinanced at more favorable terms. Some of the Measure A bonds have already been refinanced, and as that debt is retired over time it will free money for Measure F. There's no balloon payment looming out there, Reed said; that $19 rate will carry both measures to maturity, whenever that might be.
Reed acknowledged there are some districts that have relied more heavily on CABs, and "I will not begin to defend, nor will I criticize" their actions. But he doesn't believe Newport-Mesa should be lumped in among those that have taken a riskier path.
"We're really not in the same category," he said.
Confusing financial instruments aside, the ruckus over CABs gives us yet another look at a disease that permeates our entire culture.
Indeed, the real problem is arguably the district's original promise that Measure F wouldn't result in a tax increase. Instead of being lured in by an irresponsible pledge, voters could have made an informed decision on the measure, knowing that the school construction projects they wanted might cost them.
The public could have been trusted with the truth: One way or the other, more stuff requires more money. Forgetting that simple axiom almost always leads to trouble.
PATRICE APODACA is a Newport-Mesa public school parent and former Los Angeles Times staff writer. She is also a regular contributor to Orange Coast magazine. She lives in Newport Beach.