August 25, 2012

Poway's School Bonds By The Numbers

Will Carless's revelation in the Voice of San Diego, Where Borrowing $105 Million Will Cost 1 Billion: Poway Schools broke on August 6, 2012. Carless wasn't actually the first to write about the Poway bonds. A retired  reporter and current blogger from Michigan, Joe Thurtell, wrote about Poway's bonds back in May, 2012 (here, here and here). In a May 12th piece titled "CAB scam in Poway", Thurell had this to say about PUSD's ballot disclosure for Prop C:
The nicest thing I can write about the language used by Poway schools in San Diego is that it was shrewdly phrased. But when framed with the ‘no new taxes” promises flung out by bond supporters, the bond proposal amounts to a brazen lie.
Whether they put down “yes” or “no” on the 2008 ballot proposal, voters in the Poway school district in San Diego could not have known that the “legal interest rate” on some of the bonds they approved would amount to an eye-popping, wallet-ripping 2200 percent.
Nowhere in the ballot language was it spelled out to voters that the majority of the debt that was approved would be in the form of Capital Appreciation Bonds with interest rates so usurious that CABs were banned in one state — Michigan — when the monstrosity was exposed.
Neither promised “mandatory audits” nor “independent citizens’ oversight” captured the reality for citizens — that these pernicious instruments of debt could only fulfill the promise of “no new taxes” if property values increase by hundreds of percent.
 Nor were voters made aware that there is no escape from this hall of financial horror. A term of the bond official statement states that they may not be re-financed to better terms.

Last Monday, August 20th, the PUSD Board of Education carved some time out of their regular monthly meeting to respond to the furor over the Prop C school bonds. The district prepared a powerpoint presentation and later posted it on their website. All of the current board members (Andy Patapow, Linda Vanderveen, Marc Davis, Todd Gutshow and Penny Ranftle), former board member Jeff Mangum and Superintendent John Collins stand by the decisions to borrow $105 million that will cost almost a billion dollars to repay and won't be repaid until 2052, and cannot be refinanced.

The district's position, as I surmise it, from the powerpoint file:  The schools in the newer areas of the district that are paying Mello-Roos fees are much nicer. They wanted to get some equity in the buildings in the district, so they put all of the non-Mello-Roos properties into a School Facilities Improvement District (SFID).  (SFID= a Mello-Roos for-the-rest-of-us.) Twice the voters in the SFID  failed to approve  bond measures.   After a statewide voter measure (Prop 39)passed,  lowering the percent needed to pass a school bond measure from 67% to 55%, PUSD was finally successful in getting a bond passed in the SFID. Prop U ($198 million) was approved in November, 2002. It was supposed to provide enough funds to renovate all 24 schools within the SFID, but unprecedented and unforeseen increases in building materials made it necessary for PUSD to ask the voters in the SFID to approve another bond measure, Prop C ($179 million), in February, 2008.

Oh wait, let me change that. According to former PUSD trustee Jeff Mangum, it was the voters, not the school board that passed Prop C. Well, yes it was, but it was the school board that worded the ballot measure, and promised not to raise taxes. The ballot statement said that the estimated cost of Prop C would be $16 per $100,000 of assessed valuation (av)  bringing the total cost for Prop U plus Prop C to $55/$100,000 av. Yes, that is what the bond measure said. At the board meeting, Supt. Collins also pointed out that there was some small print in the measure that said the final maturity of the Prop C bonds might be either 25 yrs or 40 yrs after the last issuance of bonds and that the maximum interest rate could not exceed 12%. I did read that back in 2008, and as a result, I questioned PUSD trustee Todd Gutshow about it (see below). My concerns were strong enough to keep me from voting Yes on Prop C in 2008.

In their powerpoint presentation, the district also pointed out that the total cost of borrowing the $376,998,406 will come to $1.6 billion, which is  $4.2611 for every dollar borrowed.  Passing the bond measures allowed the district to capture $92,523,994 in state building funds, which is a pretty cool thing.  So, the district added the state funds and $73,556,321 in "other district capital facilities funds (creative use of mello roos funds? redevelopment money?) to the principal amount of the bonds, for an amended payment ratio of 2.9579, which is really, really not a cool way to frame this. First of all, the state funds were not "free", they were paid for by us, the taxpayers. Secondly, neither the state funds nor the other district funds were borrowed money, so to throw those figures in and then to recompute the return on borrowed money is completely misleading, in my opinion.

There was one page in the powerpoint presentation that had some new (to me) information. Apparently PUSD told the San Diego County Taxpayer Association (SDCTA) that they planned to use capital appreciation bonds (CAB) for Prop C. The president of SDCTA, Lani Lutar,  confirmed this in a tweet, but she added that the estimated total cost was to be under 500 million.  In a  comment on Carless's article, Lutar said that SDCTA will soon be issuing a policy brief on CABs, but that they oppose them for bond terms greater than 25 years.

It is important to note that under certain market conditions, limited use of shorter term CABs may result in a lower cost to taxpayers in comparison to other financing mechanism, so CABs should not be written off under all circumstances. Will Carless was incorrect in his response post. We regularly ask for financing and debt cost information as part of our review process. Our analysis included the total debt cost that was provided to us by Poway in 2008. SDCTA's current policy on CABs is as follows: SDCTA opposes the use of Capital Appreciation Bonds (CABs) with maturities greater than 25 years as a financing mechanism for General Obligation bonds because of the increased debt burden on taxpayers. CABs with maturities of 25 years or less should only be pursued if it can be demonstrated that its use will result in less debt service than other financing instruments. Other financing options that should be compared to the potential use of CABs include voter approved bond reauthorization or additional voter approved tax increases. Defensible assumptions for growth in assessed value shall be used for development of any proposed financing method.

Apparently Lutar's group missed the small print that said the Poway bonds might be issued for a 40 year term.

PUSD may have let SDCTA in on their expected use of  CAB bonds, but SDCTA did not share that information in their report recommending approval of the Prop C bonds. I saw nothing in the ballot statement about these CAB bonds, nor anything in the literature from the Yes On C committee.  Nor did Todd Gutshow mention it in the email conversation we had prior to the bonds passing (see below).  Why not? Why was the CAB financing such a secret?

In fact, PUSD had already issued a  CAB bond in October, 2006, several years before Prop C was even on the ballot.  The bond was issued for $3,080,766.  It was part of the series B bonds for Prop U. The payback (final accreted value) amount will be $19,050,000. That is almost a 6-to-1 payback. This bond can not be redeemed prior to maturity in 2013. But who knew?

In addition to underestimating the true cost of renovating 24 schools, PUSD grossly overestimated the growth of assessed valuation in the SFID. These are the figures that SDCTA included in their report, but the figures likely came from PUSD:

Poway, PQ and RB make up the SFID. Most of those areas are already "built out". There would be minor growth in the Poway Industrial Park, but even that was mostly built out. In fact, the census bureau found that the City of Poway lost population between 2000 and 2010. Where was the 5-8% growth from 2008 to 2015 going to come from?  Back in 2008, I asked Todd Gutschow about this and some of the other details in Prop C (my questions are in black. Mr. Gutshow's responses are in blue):
Date: Thu, 17 Jan 2008
1. What EXACTLY is planned for Valley School?  Are there 2 plans for Valley- one if Prop C passes and one if it doesn't?   Newly constructed classrooms? More portables? Newer portables?  
There are two plans for Valley. Much of the planned renovations for Valley will take place using funds from Prop U. If Prop C passes, additional work will be done. I do not know exactly what is included in either plan. As soon as I have that information, I will get it to you.  
2. How old are the portables at Valley? 
3. Are the new portables that have recently been brought over for the preschool NEW or are they old?      In other words, how old are they? 
4. Have they been moved from other campuses that were renovated?    I suppose this sounds like I am asking if Valley is getting north Poway hand-me-downs.
 It is my understanding that these portables were used at Poway High School. I do not know how old they are, but will find out.  
5. Can Prop C money be used for district buildings (lease or remodel?).That is, can it legally be used for these purposes?  
It is my understanding that Prop C money cannot be used for building, leasing, or renovating the district office or other district administrative sites. Further, there has never been any discussion of using Prop U or Prop C funds for district offices. However, I need to verify what the language of the proposition allows from a legal standpoint (which I understand is the nature of your question).  
6. According to SDCTA info, Prop C will cost the taxpayers $497 million. If I had seen that earlier, I might have blogged about how a $40 million shortfall snowballed into a $500 million tax measure.  
I am a little surprised by your statement about the cost of repaying Prop C bonds. Any long-term borrowing (like a mortgage) always results in interest payments that are significantly more than the principal borrowed. The exact amount of interest will not be known until the bonds are issued. Also, I am not sure where the $40M shortfall number comes from. I realize that there have been several shortfall numbers floating around in the newspapers and various district materials, but the shortfall for the originally planned Prop U work is about $90M to $100M.    
There are some issues I still do not understand. According to the graphs on this document, assessed valuation is expected to grow by 7-8% during the next 3 yrs. That seems to me to be an overly optimestic  projection.  
Actually, 7% – 8% is reasonable based on the increases that we have seen the pass two years. According to the County Assessor, the 2007-08 assessed value for San Diego County grew by a little over 9%. I cannot find the growth for PUSD; however, generally, PUSD is a bit higher than the County in general. Even with market values falling, there remains a significant gap between the current assessed value and market value. As homes are sold or remodeled, the assessed value is up dated. I believe this will continue even with the current real estate situation.  
7. If Prop C did pass, and assessed valuation did not grow by 7-8% - if, in fact, it grow by 2% or less for the next 3 yrs, how does that affect the taxes the taxpayers will have to pay to pay off the bonds?  
If the assessed value base does not grow according to the estimates, then the district will not issue bonds. The district will only issue bonds when the assessed value base grows sufficiently to allow the combined payment for Prop U and Prop C to remain below $55 per $100,000 of assessed value. The district is 100% committed to keeping the combined tax for Prop U and Prop C below the $55 per $100,000 rate. By managing the timing of the bond issuances, the district controls the tax rate needed to repay the bonds. The district expects that Prop C bonds will be issued over the next 10 to 12 years, but that time could be extended if the assessed value base does not increase as expected. In the mean time, the district will borrow money using a bridge financing arrangement. The proceeds of the future bond issuances will be used to pay back this bridge loan. This mechanism allows the district to perform the work now (keeping the cost lower) while keeping its commitment to the taxpayers to maintain the tax rate at or below $55 per $100,000.  
8. Could taxpayers have to pay more than $55/$100,000 av?  
Legally, the tax rate under Prop 39 cannot exceed $60 per $100,000 AV. The district would not be able to issue bonds that would require a larger tax rate.  Prop U and Prop C are separate Prop 39 ballot propositions. Thus, it would be legal to increase the tax rate to $60 per $100,000 AV for each of them. This would make it possible to have a tax rate of $120 per $100,000.  Even though the maximum rate is much higher, the district’s plan for bond issuance, as I stated above, will keep the combined tax rate for both Prop U and Prop C at or below $55 per $100,000. The district will not issue bonds that would require the combined tax rate for both Prop U and Prop C to go above $55 per $100,000.  
9. More than $60/$100,000 av?Legally is there a limit? I know the limit for a bond proposition is an $60/$100,000 of estimated assessed valuation. But if the estimates are way off, what happens?  
As I stated above, under Prop 39, bonds cannot be issued until the actual assessed value base is sufficiently large to keep the tax rate at or below legal limit.  
10. If Prop C passes, and the district borrows money now- eventually they will have to pay back the loan. The assessed valuations may not be anywhere near projections, and 11-14 yrs from now the interest on the bonds could rise substanially. So, legally, even though PUSD said it is not their intent- is it still possible that taxpayers will be paying off both Prop U and Prop C bonds simultaneously- and for way more than $60/$100,000 av?  
The first part of your statement is correct. Prop U and Prop C bonds will be paid off simultaneously at some point. Right now, almost all of the Prop U bonds have been issued and the tax rate is approximately $44 per $100,000. Thus, it would be possible to use the remaining $11 per $100,000 to issue and pay for a portion of the Prop C bonds. As the Prop U bonds are paid off and/or the assessed value base increases, additional Prop C bonds will be issued. Interest rates on bonds are fixed. They cannot rise once the bonds are issued. Thus, bond repayment amounts are fixed once the bonds are issued. This sets the amount of tax that must be collected each year to fund the bond payments. This allows the district to issue bonds only if a tax rate of $55 per $100,000  or less generates enough tax revenue to fund the new issuance plus any other outstanding bond issuances.  
11. From SDCTA:The interest rate on any bond, which is established at the time of the bond issuance, cannot exceed 12% per annum.  The total debt service of this bond proposal is estimated to be $497.4 million; $179 million principle plus $318.4 million in interest. What is the projected interest rate on the bonds  that went in to the projected $497 million payback? What is the possible payback amount if the bonds were issued at 12 % ?  
I do not know the exact model used to estimate the bond repayment. I will have to check on this for you. 

So, as it turns out, PUSD did issue bonds that will cost the taxpayers more than $55/ $100,000 of av. We are currently paying $55/$100,000 right now and we haven't even paid off all of the Prop U bonds yet.  Just how much will it cost you? I haven't seen an all-in-one debt chart that includes both Prop U and Prop C debt service.  I had to improvise a bit, and I may need to revise later if I find more bonds that need to be paid. My figures are pretty consistent with the projection that Supt Collins used.

Debt Service Payments
2012    about    $11 million.
2021    almost   $22 million
2027    approx. $33 million.
2031    over      $45 million
2051    almost   $55 million

Assuming that the assessed value of your home and the other homes in the SFID, have the same relative value in the future as they do today, you would pay about twice what you are paying now in 2021, three times as much in 2027, 4 times as much in 2031 and 5 times as much in 2051. The owner of a house assessed for $300,000 currently pays  $165. that would creep up each year. By 2021 it would be $330, by 2027 it would be $495, by 2031 it would be $660 and by 2051 it would be $825.

My assumption is unlikely. In fact, it is absurd. All of our assessed valuations won't stay the same, relative to each other as they are today. Houses that sell will be reassessed upward. Properties that are not sold can be reassessed 2% (from Prop 13) yearly unless the purchase price exceeds the resale price- then they can be reassessed downwards. Periods of inflation would also drive up the assessed value and it would make the school tax payments less onerous because the dollars would be worth less. We bought our house in Poway 36 years ago. It was a new house and it cost $36,450. There were periods of inflation and there were a few recessions since then, although none so steep or so severely affecting housing prices as the period we just went through. Nevertheless, I think it is likely that the total assessed valuation in the SFID will increase and that inflation will make that $55 million payment not seem as huge as it seems today.  

The people who will be hit quite severely with the increased school tax payments will be new homeowners and businesses who purchase property in the district in a future time of rising prices. They will pay higher property taxes because of Prop 13 and they will pay a larger proportionate share of the school tax because the Prop 13 assessed valuation is based on the purchase price of their homes. It will be a double whammy. 

I am grateful that Todd Gutshow even responded to my request for information back in 2008. Todd and I plan to get together soon and talk about how things have turned out. One of the things I am concerned about is what is going to happen when the portables at Valley school crap out. And what the district intends to do to make sure the building stay in tip top shape for as long as it takes to pay for them. 

I also wanted to know why the district moved forward to buy a new headquarters with some money they had in another fund AFTER they issued a CAB bond in 2006 for $3 million.  We have to pay back $19 million, in 2031 for that bond. That is more than 6 times the amount borrowed. And it is not re-financeable. It seems like we had already dug ourselves in a hole in 2006, and we just kept digging. Why was the school board so optimistic that Prop C would not raise the tax rate on the bonds?

I will keep you posted.


Kimberley said...

A very prescient conversation with Todd. A lot to ponder. Regarding the $92 million matching, 2 additional issues come to mind: 1. how much state funding would PUSD have received without Prop. C, series B; and 2. Is this state school construction bond money that also has it's own interest payments that all CA taxpayers pay? Regarding the $73 million "other district capital facilities funds", I also wondered where that money came from. Stonebridge Estates in Scripps Ranch has very high mello roos fees. They were promised their own schools, but that never materialized and I heard the money was then used for the schools those children were districted to go to (Creekside? Meadowbrook and Mt. Carmel). Because the district reneged on the promised schools, the district provided buses out there. If that is the $73 million, those bonds pay interest.

Kimberley said...

Correction: Stonebridge goes to Morning Creek ES, not Creekside.

PowayBlog said...

Good point, Kimberley, someone is paying the interest on state bonds and Mello-Roos bonds.

IIRC, the developer offered to build the schools in Stonebridge, but the district said they did not want them to do it.

There were some Poway redevelopment funds in that other pot. It will be the subject of an upcoming blog post.

If the district had come to the voters and said, "We need to renovate and build some new buildings. We can get a share of the state bond proceeds. But we are going to have to pass 2 bond measures. It will cost you less than $100/$100,000 av, and it will all be paid for in 25-30 yrs.", would the voters have agreed to it? I'm not excusing the district 's lack of forthrightness, but with 2 previous failed bond measures, maybe they just thought the ends justified the means and this was the only way to get the job done.

Kimberley said...

Both failed bond measures got over 60%. That's great for a conservative community. I'm a believer in pounding the pavement and doing the hard work of making the case for why it should be done this way (your hypothetical). The community very much supports this school system and if it is informed about the facts regarding our schools (and financing) and embraced in the process, will respond positively. This is why 2 bond measures did pass. I do, however, wonder if some of the cost overruns could have been avoided, but that is just speculation at this point.

Anonymous said...


Only about $20 million in state matching funds were received because of voter approved bonds.

Instead, PUSD received $70 million in State Matching funds in connection with a 2004 Certificate of Participation (a debt obligation of the School's General Fund that is not secured by tax levies). The additional $22 million in state matching funds was received in combination with Prop. U and Series A of Prop. C.

NO state matching funds were received in connection with the Series B - Billion bond sold in August 2011 because the State had already run out of grant money. For those of you who may not know...state matching funds are also known as Proposition 55 funds. Prop. 55 was passed in 2004, which is funded by state bonds that are paid by all California taxpayers.

powayBlog said...

Kimberley, how does the district pay back the COP bonds? With general fund money that could be used for salaries? Or with some other funds? Or did they refinance the COP bonds with Prop U or Prop C bonds? are the COP bonds the bridge financing that had to be paid back?

Laura said...

I am 33, family of 4 and we are thinking of buying in Poway/PQ/RB. We rent in PQ. I heard something was going on and dug up this great post. Thank you sooo much for the details. I read every word and while I am new to all this jargon I think I basically understand what is going on. but I'll need to reread this and the post before it a few more times so that it really sinks in. Would anyone including Chris dare/care to weigh in on buying in PUSD vs. SFID areas? Of course we love the area and schools though me may home school. PUSD area and North County is our first choice including Scripps Ranch all the way up North on the 15 Corridor to RB, plus tacking on San Marcos. 2nd choice (for now) is parts of East County including La Mesa, San Carlos, Fletcher Hills, Del Cerro, Allied Gardens, Tierra Santa, Serra Mesa. Some people suggested Kearney Mesa and Clairmont areas. I am from CA but have only lived in SD for a few months so I've been working my tail off researching areas. I'll post this on City-Data too and link to this fantastic post! Thank you again!

PowayBlog said...

Laura, all of PUSD properties are now in either a Mello-Roos district or the SFID. Every Mello-Roos district (there are more than a dozen) pays a different tax rate. In general, condos pay about $1500/unit, houses pay about $2000-$3500/ unit, but it varies. Most of the Mello-Roos districts will still be paying bonds until 2040-2045.

The tax rate in the SFID is currently $55/$100,000av. That rate could double around 2021, triple by 2027, quadruple by 2031 and quintuple by 2051, when the bonds will finally be paid off. But that assumes that the assessed valuation in the SFID does not grow at all, which means we would be in a housing slump and no inflation for 40 yrs. That is not likely, but IF it did happen, the tax rate could go as high as $275/$100,000 av. The tax could go as high as $2200 for an $800,000 house, which is less than comparable houses in the Mello-Roos district today.

So, tax-wise, the SFID is cheaper, in fact, much cheaper today than a Mell-Roos district and probably much cheaper for the next 20-30 yrs, and likely cheaper even under the worst possible conditions 40 yrs in the future. However, the SFID has 2 disadvantages to a Mello-Roos. THe district improved the schools in the SFID, but the schools are completely new in the Mello-Roos areas. Also the SFID bonds will not be paid off until 2051. Likely, new bonds will be needed for school improvements before that is paid off.
You can look up more information here:

Laura said...

Thank you Chris! That is very helpful! :)