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.

SDCTA
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.