August 15, 2012

PUSD's Prop C: The Naysayers Were Right

Last week, Voice of San Diego investigative reporter, Will Carless, published a piece on on a creatively financed PUSD school bond: "Where Borrowing &105 Million Will Cost $1 Billion: Poway Schools".  Carless lays out the details of the last bond sale authorized under Prop C, a school bond approved by the voters in 2008. PUSD financed $105 million through a capital appreciation bond (CAB) that will be paid off in 2051. The payments do not start for 20 yrs, although interest continues to accrue. The bond payments will eventually be about $50 million/yr., which is almost half the amount being financed. Unless we have massive inflation or massive new construction in the older areas of the district, we're screwed.  And not just us. Our kids and grandkids, and great grandkids are going to end up paying almost a billion dollars for this bond.

Carless' article created a lot of buzz. The article was reprinted in the Chieftain, as was a followup article by Carless. Poway Patch ran a blurb and an editorial piece (here and here).  PUSD released a statement in response to Carless' article.  I have some things to say about the bond sale, but I am not going to rehash everything that was in Carless' article or other articles. I am going to focus on some issues and nitty gritty details that are part of what I like to call "the bigger picture".

Mello-Roos, SFID, Prop Y, Prop U and Prop C
Many years ago, a developer in California could not build a housing development if the local schools were overcrowded. Then, the  California legislature allowed developers to form Mello-Roos districts to pay for the new schools. Home purchasers in Mello Roos districts pay yearly fees to pay for the bonds that built the schools in their areas.  PUSD has 14 Community Facility Districts (CFD, aka "Mello-Roos" districts) that were formed between 1987 and 2006. (There are possibly more formed between 2006-2012).  There are no Mello-Roos districts in the City of Poway. In 2000, PUSD decided the older schools in the district needed some upgrades. PUSD formed a School Facilities Improvement District (SFID), a type of CFD, from the older developments in Poway and PQ and RB that were not in a Mello-Roos district. PUSD put a school bond, Prop Y, a $156 million bond on the ballot. Prop Y got 62.93% yes votes, but it needed 67% to pass.

In Nov, 2000, California voters passed Prop 39, which allowed school bonds to pass with 55% voter approval. These bonds were capped at an amount that could be paid for by a tax rate of $60/ $100,000 of assessed valuation.  And, uh, there had to be a citizen's oversight committee.

PUSD could not get a $156 million school bond measure passed in 2000 because it required a 2/3 majority to pass, but in 2002, a $198 million bond measure passed with 57.4% of the voters approval. PUSD promised not to exceed a tax rate of $55/ $100,000 of assessed valuation. Prop U was supposed to pay for expanding and renovating 24 schools, but in Feb, 2008, PUSD asked SFID voters for $179 million more to finish the job.  Great job by the oversight committee, eh? Prop C passed with 63.9% approval.

Prop C misinformation
Personally, I think PUSD planned 2 bonds all along. I am sure there were cost overruns, and for some reason PUSD decided to improve every school in the district during a time of high labor and high materials costs.  Prop U + Prop C allowed the district to sell  a total of $372 million in bonds. A $372 million bond would still have required a 2/3 majority to pass, but by breaking the amount into 2 smaller bonds, PUSD could get them passed with 55% approval.

Another reason I believe they planned 2 bonds all along is because PUSD claimed that they were renovating the oldest schools first, but, in fact,  they didn't. For example, Valley School was one of the schools that did not get renovated until after Prop C passed, even though it was older than some of the schools that were renovated first. Why? Perhaps because voter approval of school bonds was more iffy in the Valley school boundaries, so Valley renovations became contingent on passing a second bond.

It is just my opinion that PUSD planned 2 bonds from the get go, but it is a fact, not an opinion that PUSD and the citizen group, "Yes on C" headed by Sabrina Butler, misrepresented Prop C to the voters. The Yes on C group  repeatedly presented Prop C as an "extension" of Prop U, instead of a separate bond measure.  They also said that it would extend Prop U "for 11 yrs". People were led to believe that if they extended the first bond measure for a few years, we could finish the job. It is kind of scary to to imagine why the well educated people of Poway didn't realize that borrowing $179 million a few years after borrowing $193 million was going to be like extending the first bond for a few years.

The San Diego County Taxpayers Association is not a citizen watchdog group. Far from it. Back in 2008, I blogged about the SDCTA board of directors and their vested interests in Poway School bonds. As it turned out, I missed a few connections.  April Boling is currently on the SDCTA executive committee. In the past, she has been president and held other board positions. Boling is hardly nonpartisan. She has served as campaign treasurer for several local Republican candidates and PACs She was also campaign treasurer for Steve Vaus' successful Recall Rexford committee. Apparently she was also the "contact person" for the "Friends of Poway Unified School District", a 527 political organization advocating for school bonds in Poway in 2002 (Prop U) and in Nov 2007 (Prop C).

SDCTA supported both Prop U and Prop C. Here is how SDCTA summarized the fiscal impact of Prop C:

Fiscal Impact:
Passage of this bond proposal will generate revenue from five issuances over an 11-year period between 2008 and 2019, totaling $179 million. Poway residents would continue to pay $55 per $100,000 of assessed property for an extended period, through 2044, under this proposal. The average assessed value of a home in Poway in 2000 was $200,000. The District has experienced an average assessed value increase of 9.36 percent annually over the last four years. As of March of 2006, the average assessed value of a home in the District is $337,401; therefore a homeowner can expect to pay an additional $185 a year in property taxes.
Table 1 outlines the projected increase in assessed value during the life of the bond. 

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.
The SDCTA projections are irresponsible. Housing bubbles don't last forever. Maybe they were planning on revamping Poway Rd with 5 story buildings or something, but the outrageous growth rates from 2008 to 2012  turned out to be way off. And it throws off all the calculations for the rest of the bond payback period. Currently, assessed valuation in the PFID is closer to $20 billion than to the projected $25 billion.  That shortfall ripples through the entire payback period, making it impossible to payback the loans at the promised tax rate.

Will Carless' article pointed out that PUSD won't even start paying back the $105 million bond until 20 yrs from now. Here is the chart that shows the payments from the audit report on PUSD's website:

From 2034 to 2052, the yearly payments on this bond will be about $50 million/yr. Currently, taxpayers in the PFID are paying about $11 million per year.  That means the assessed valuation of properties in the PFID need to more than quadruple in the next 20 yrs. Either that, or the tax rate will have to quadruple.

So why did PUSD structure a bond so that we don't start paying it off until 20 yrs into the future? Because, we will be paying off other bonds until 2034. The $105 million bond was the last bond sale of Prop C, but it wasn't the first. PUSD issued $74 million Prop C bonds in 2009. They are also CAP bonds.  According to the Jan 2012 audit report, PUSD does not plan to pay back those bonds until 2018.

Look at the period between 2028-2032. The repayment amount is over $107, million, or about $21 million/yr. Assessed valuation would have to almost double in the next 16 yrs to meet those payments. That will be difficult, because of the slowed economy, because most of Poway and the PFID is "built-out" and because Prop 13 limits increases in assessed valuation to 2%/yr. for properties that are not resold. We might be in trouble, paying off the bonds well before 20 yrs from now.

From the chart, you can see that the payments for the Series A Prop C bonds don't begin until 2018. I think that is because we will still be paying off Prop U bonds until then. One series of Prop U bonds will be paid off in 2017, another in 2027, and the last Prop U series will be paid off in 2032. The last Prop U audit report on PUSD's website, dated June 30, 2007, shows Prop U bond payments through 2032.
The chart for the Prop U bonds is slightly different than the one for the Prop C bonds in that it lists the years as fiscal years. Therefore 2012- 2017 is a span of 5 yrs in the Prop U audit, whereas it would be 6 yrs in the Prop C audit. I am hoping that some of these Prop U bonds were refunded, because I don't think we will be able to manage both the Prop U and Prop C bond payments between 2018-2033.

The bottom line is that the voters approved the sale of $377 million in bonds that were to be paid back over an almost 50 year period. It doesn't seem unreasonable that $377 million would generate over a billion dollars in interest over 50 yrs. While it doesn't seem unreasonable, it does seems stupid to have agreed to finance the bonds over such a lengthy period of time.

The Citizen's Oversight Committee
I'm not sure exactly what they are overseeing. The Prop C oversight committee members are Andrew Berg, Ramon Ruelas, Chrissa Corday, Bill Bonner, Lee Dulgeroff, Kathy Frost, Jerry Ricks, Roger Moyers, and John Strula II. They had meetings. Here are the minutes of their last meeting. It appears the committee and the district spent their time congratulating each other on what a successful job they have done. There is not a single word from anyone on the committee as to how this impossible financing becomes possible.

What Really Sucks
Prop U and Prop C paid for some new schools, some new buildings and modernizing of some portables. I know that Valley School got some old portables from Poway High. The district also spent money on technology equipment. There is no way in hell that those portables, refurbished or not will last until 2051. Technology is pretty much outdated the minute it is bought. Certainly, computers and other tech stuff won't last until 2051. So what will happen when the portables rot and the computers are dinosaurs? The fact that the tax rate on the current bonds may double or quadruple in future years is not going to endear the voters to another bond to replace aging portable classrooms.

The Contractor
Echo Pacific Construction did most of the contract work for Prop C. The district used a lease/leaseback agreement to avoid public bidding. New projects that came along, like astroturfing the sports fields were considered amendments to existing contracts. Echo Pacific Construction figures into an ongoing investigation of bidding issues at several other school districts. They know how to play the game to get the contracts. I am not insinuating that anything illegal was done in the PUSD contracts. I am just saying that they are involved in an investigation. And that they have close ties with several influential people in the community.

The Politics
There was opposition to Prop C.  A few libertarians (from outside of Poway) organized the  ballot statement in opposition to Prop C. The issues were pretty much related to the government-is-too-big theme. A local, grassroots group,  South Poway Residents Association (SPRA) studied the issue, polled their members and voted against endorsing Prop C.  They issued a press release with their reasons for opposing Prop C. I think one of the biggest issues is that they worried that their taxes would double in order to pay for the 2 separate propositions. Unfortunately, SPRA was belittled for their position and they were told that they didn't care about "the kids".

I blogged about Prop C here, here and here in 2008.  I received a phone call from a woman who was on the "Yes on C" committee and who happened to be a lawyer. She accused me of putting up illegal signs in Rancho Penasquitos and she also threatened to sue me over my blog. I put up no signs regarding Prop C anywhere. I should have reported her to the county bar association. I have no idea how she even got my phone number. Imagine what might have happened if we had had a sane and reasonable discussion of how we would pay back these bonds?

The point is, people did bring up issues. There were other voices that demeaned and disallowed our concerns. The Poway City Council members all endorsed Prop C, according to news accounts. When there was an empty seat on the council, Merrilee Boyack proposed that it be filled by Sabrina Butler, whose main credential was that she was the leader of the  "Yes on C" group. Now Merrilee Boyack is apparently very upset about the bond issue and is posting on facebook about it and sent out  "scathing emails". Where was Boyack when Prop C was proposed back in 2008? It is all too obvious that those who are currently making the most noise about the Prop C CAB bonds are people who support Steve Vaus for council, and see the opportunity to hang this mess around the neck of Jeff Mangum, a former school board member who is also running for council. Neither Boyack nor Vaus complained about the bonds back in 2008 or paid any heed to the voices that expressed concerns. I would not be surprised if Boyack and Vaus and Vaus supporters show up at the next school board meeting for a little kabuki theatre. It worked so well before. Remember the Rexford firetruck story? Color me jaded, but I have doubts about the genuineness of those who are just now complaining about the school bonds.

In retrospect, there are probably many lessons to learn from the whole bond mess. Maybe if the political process in Poway was more inclusive, we would be able to make better decisions. But I don't see that happening anytime soon.


Anonymous said...

NOTE TO CHRIS CRUSE: Thanks for your mention of SPRA and our South Poway watchdog group's Jan 2008 PROP C survey results in your latest blog. You list great PROP C background details --- as always.

I recall that we had no idea how SPRA’s PROP C survey was going to turn out. We had hashed out many other issues in our SPRA meetings regarding the City of Poway and Redevelopment, etc. -- but never PUSD or school bonds. When we sent out info for our SPRA group to review prior to responding to the survey, we tried to keep it very balanced "PRO" & "CON" with a variety of links, articles, editorials, etc. in addition to statements from Todd Gutschow on the "YES" side and John Ramirez on the "NO" side.

As you may recall, SPRA members responded to the survey with an overwhelming 89% "NO" vote on PROP C. We also asked members to add (optional) comments when they submitted their “YES”, “NO” or “UNDECIDED” vote. Thus, we received many interesting and perceptive member comments -- several of which were added to the SPRA press release [linked in your blog post]..... And, of course, SPRA ended up accused of being “naysayers” and “not caring about the kids”, etc. etc.

In retrospect, these were very wise and most appropriate comments. Our SPRA members' common sense and street smarts turned out to be right on the mark. I also recall that several SPRA members were not impressed with the way the prior PROP U funds had been bungled, misused, cost overruns, lack of serious oversight (even with an oversight committee) etc. --- and were inclined to vote "NO" on the PROP C bond based on these factors.

Also, when we dug into the YES ON PROP C endorsement from SDCTA, it became apparent that their endorsement was not based on unbiased analysis (and the best interests of taxpayers) --- but most likely on the personal interests of prominent SDCTA members and private connections of several on their board.

As you stated in your post, it's not that there was zero opposition to PROP C. [Your 3-part POWAY BLOG post in January of 2008 had lots of great PROP C background details and gave voters all they needed to know to conclude that “NO” was the only way to vote.] It's just that those on the NO ON PROP C side were drowned out and massively outgunned by the huge money machine behind the "YES" ON PROP C campaign. No doubt the zillions of $$$ ECHO PACIFIC CONSTRUCTION contributed to the "YES" campaign paid for the huge and very slick "YES" mailers everyone received multiple times in their mailbox. It was impossible to fight this massive “YES” onslaught with a simple SPRA press release -- plus a few other loosely connected and barely coordinated "NO" voices (and blog posts).

Thus.... not enough folks paid attention to our "NO" voices. Sadly, we could have saved the PUSD taxpayers almost a billion $$$.

--- Karen (former officer with SPRA)

Debbie said...

Ok, spent yesterday catching up on what happened with Prop C. Think I get it a little. What's next? Also, I have been looking for a map of the households who will be responsible for paying back the bond. Where can I find that? Might be something to pass out Monday night.

Anonymous said...

As usual, Chris did an excellent job of informing the public of the truth about Prop C. Unfortunately, it is too late for Poway. The greed and misinformation has been going on for years. It just now comes to light.

Anonymous said...


I recall, as you correctly reported, that in order to pass a bond issue a 2/3 Yay vote of the voters was required. When that didn't happen, the "rules were changed" to a simple majority. That was the key event that spawned the beginnings of this mess. Had the 2/3 rule remained, none of this would have happened.

Who is to blame for this?

The majority of uneducated and lazy voters.

Who should pay for this?

The majority of uneducated and lazy voters.

It's fine with me to point out the names of those that were misinformed or didn't inform the voters. I fine with me to point out who is yelping now.

But it remains valid, the majority of uneducated and lazy voters is to blame.

- Babs

Pete Saxon said...

Can anyone say "housing crisis?" This is a typical financial instrument created by investment bankers to assist unqualified borrowers in obtaining loans.

Anonymous said...

It is becoming clearer that the stench that comes from the Poway school board also runs directly through the City Council!

Clariece Tally said...

Chris - The problem with your argument to lump the recall into this bond mess is a real stretch and really not very intelligent.

First there was intentional misrepresentation by the 2007/2008 school board of which Mangum was the Board President.

The fact that some of the same people who stepped up for the recall are also calling baloney on this bond issue is that when we see unethical and/or illegal behavior we speak out.

I personally did not vote for the bond measure. I'm cheap that way. Those who did support the bond measure were deceived. When a ballot measure states "general obligation bond" and there is no further disclosure about how you intend to finance that bond (and I believe did in fact how they were going to do it) is deceitful.

Trying to point a finger at the SDCTA is also wrong. They were given the same information as the voters. As far as lumping city council in on this - they had no say on the bond issue. Some may have supported it for the same reasons 62% of the voters did and that's they were kept in the dark.

Mangum, Vandervene and Patapow were all present and accounted for when this mess was created. Under no circumstances should any of them ever hold the public trust again.

But your vast conspiracy theories is overused and tiresome with regard to Vaus, me, Boyack and several others. Your research on the bond was outstanding and now you can legimately shake your finger and say "I told you so!"

David Radcliff said...

My letter to the editor for the Chieftain.

I am told I am good in math. I am. I have an MBA with a concentration in finance. I teach in higher education on this topic, amongst other topics (critical thinking). I am recognized by colleagues and students of my expertise.

What the h-e-double-hockey-sticks were the PUSD board members thinking on the bond measure? Current and past board members: Mangum, Vanderveen, Patapow, Gutschow, Ranfle; step away from your positions and your election and re-election aspirations. Proud Powegians, like me, my family and neighbors reject you. Shame on you! I look forward to the PUSD board meeting on Aug. 20. See you then.

David Radcliff, Poway

Do we known if there is any way to undo this debacle? Is all the money spent? Is there any recourse for reversal or defunding due to non-disclosure stuff? I'm an Angry Bird!

Anonymous said...

San Diego County Taxpayers Association and Lani Lutar are whores for developers.

They endorsed this fiasco because the SDCTA is run by construction companies who profit from the rape of taxpayers.

Anonymous said...

"First there was intentional misrepresentation by the 2007/2008 school board of which Mangum was the Board President."

How so, Clariece? How did Mangum intentionally misrepresent prop C? I've read through Prop C, and it's pretty clear to me. Mangum was on the board during the first bond series issued under Proposition C—the $73.9 million in 2009—with a payment ratio of 3.5, but he had nothing to do with 2011's controversial $105 bond. So why do you go out of your way to place so much of the blame on Mangum?

Clariece Tally said...

To Anonymous (fyi -if you're going to call me out at least be honest enough to use your name. Own your statements.) Sorry for the essay but there isn't a short answer:

I'm not putting ALL the blame on Mangum. The Trustees are equally responsible for this mess.

Financing doesn't happen in a bubble. The terms and conditions take several months of discussion and review. So for Mangum to say it happened after he left is not correct.

From October 2010 minutes of the PUSD Board meeting:

"D-401 Approval of Resolution No. 21-2011 entitled “Authorizing Issuance of Not to Exceed $105,001,064.25 Principal Amount of General Obligation Bonds of School Facilities Improvement District No. 2007-1 of the Poway Unified School District, 2008 Election, Series B, Making Determinations, and Taking Related Actions”

It was moved by Mr. Mangum, seconded by Mrs. Vanderveen, that Resolution No. 21-2011, providing for the issuance of general obligation bonds on behalf of the School Facilities Improvement District No. 2007-1, be approved. Motion carried unanimously, 5-0."

Mangum, Vandervene and Patapow are each running in November. Mangum for City Council and Vandervene and Patapow for reelection to the Board.

Here's the deal. I don't think these are bad people. I believe they experienced a huge lapse in critical thinking skills when it came to details on the financing. I believe they got so comfortable with pushing these bonds through they made a billion dollar boo boo. To intentionally remove the call feature from the deal was irresponsible and a breach of their fiduciary duty to the taxpayers.

I was prepared to support Mangum over Cunningham (because let's face it Jim likes to spend money too). But the reality is $80k for a train boiler pales in comparison to setting sail with a one billion dollar juggernaut. The more research I do, the more I realize I simply cannot trust him with our city budget. I certainly can't trust Vandervene or Patapow going forward.

It would be irresponsible and negligent for voters to allow the three to hold public office at this time.

PowayBlog said...

Magnum was also on the board when PUSD issued their first CAB bond under Prop U. Yes, that is not a typo. Part of Prop U series B was a CAB bond for $3,080,766 issued in 2006. It is not redeemable prior to maturity in 2031. The final accreted value is going to be $19,050,000. That's 6-to-1.

clariece said...

To PowayBlog - according to the District's Powerpoint presentation it said that:

PUSD says Prop U Series B was for $119M with a pay of $239M. Ratio of 2.0111.

Can you confirm your numbers?

Anonymous said...

First of all, I never use my Google account on public sites like this, as it links to my blog and I don't want strangers viewing pictures of my kids. I was in no way trying to avoid "owning my statement."

Mangum's October 2010 vote allowed PUSD to go out in search of a bond. He did NOT vote on the specific 2011 bond with the no call feature, as that was after he left the school board.

You say you were going to support Mangum over Cunningham (who as an incumbent is almost guaranteed to win), which to me means you're a Vaus supporter. From the beginning of this story you've tried to make it seem like Mangum is in large part responsible for this (like with your attack of him on Fox News) because it helps Vaus' campaign.

Chris, I never once said Mangum wasn't a part of any of the CAB bonds. I'm simply trying to clarify the extent of his involvement since there are so many attempting to pin this controversy on him.


Anonymous said...

Furthermore, Clariece, you still have not clarified for me how Mangum and the others INTENTIONALLY misrepresented prop C.


clariece said...

Adam - I'm not going to argue with you. I haven’t endorsed anyone nor will I. I remain a fiscally conservative republican who is tired of being beat to death with bad financing by my elected officials. Clear enough for you?

The Board has been using CABs for several years. They are expensive and are never recommended for terms exceeding 10 years. If you read Chris' blog you will see specifically how these bonds were abused and why the ENTIRE Board is responsible. I do have to wonder though if you aren’t the same Adam that filed the bogus financial complaint against candidates after the recall.

I have intentionally stayed away from candidate endorsement because frankly my focus has been on the debacle of bad funding. There are many people besides myself who are angry with the entire Board for this mess.

You can try and portray me as a Vaus supporter because I am a conservative republican or you can understand that right now I want to find out who knew what, when and where. That’s my focus. And until we have full disclosure I don’t believe anyone who has served on the Board for the last 15 years should be considered as a viable candidate for any office.

That’s not an endorsement of anyone, that’s stating I think it’s unwise to elect someone into office when there are real legitimate questions public finance and taxpayer money.

Can you explain to me how the board, including Mangum were fiscally responsible stewards (what trustees are mandated to be) when they chose the CABs over other financing options?

Why is the 2011 bond not the first CAB issued which is unredeemable?

Why is it acceptable to authorize a bond financing which will cost over SIX times the loan amount and no ability to refinance?

The reason you’re focused on the Prop C portion of my argument is because it’s the weakest component. Without testimony you know intent is difficult to prove.

But what you can’t deflect or answer is why the entire Board, including Mangum, felt it was ok to bury us so deep in debt that we will be unable to get any future funding for other necessary repairs - such as roads, storm drains, fire stations, you name. We're screwed for any future financing for decades. Your guy was party to it, as were the rest of the board. No need to just hook it on one.

PowayBlog said...

Clariece, the total Prop U series B WAS for $119,300,766 as the district said. In Nov, 2006 the district issued $46,570,000 "current interest series B serial bonds" maturing from 2007 until 2024 and $3,080,766 Capital Appreciation Series B Serial Bonds maturing Aug, 2031. Only the CAB bonds were not refinanceable. You can find out more info here:
Put Poway Unified in the search box or CUSIP 738850.

Anonymous said...

Yes, we can reverse this. We can put this on the ballot as an initiative or elect representatives that will reverse it. We can default as taxpayers now, or default in the future. We shouldn't leave this for our kids to solve, we need to clean up our school board and city council now.

While we are at it, we should reverse all spending on school renovations...haven't they all been renovated already? Then we can stop building new schools. We already have low enrollment at many of the PUSD schools now.

Then we can go after the underfunded teacher pensions and default on them because we cant afford the increased taxes to pay for them either.

Anonymous said...

I am definitely NOT the same Adam that filed the bogus financial complaint against candidates after the recall.

So Clariece, you distribute Vaus' signs for him because you're NOT supporting him? Interesting. Anyway, I certainly can't answer all your questions and don't see the need to argue anymore. I'll continue to do my research and share my opinion. But if you're not a Vaus supporter trying hard to make Mangum look bad, then I'm a monkey's uncle (insert primate jokes directed at me here).

clariece said...

Chris - I have a question: I was looking at the minutes and it appears PUSD voted on this bond twice. Once in October 2010 and then in May 2011. Both times the language is nearly identical in the minutes. Do you know why? What about back up docs? You're one of the few who has a clear grasp of the figures and who said what when.

PowayBlog said...

Clariece, I am not sure why there were 2 resolutions. I don't have copy of the resolutions. There was a court case to determine the validity of these bonds, maybe it had something to do with that.
Check out p 5

clariece said...

What court case?

PowayBlog said...

Case Number:   37-2010-00106255-CU-MC-CTL    Case Location: San Diego