Who would think it's smart to sign onto a loan that requires repayment of $15 for every $1 borrowed? Only the most desperate and financially illiterate, right? Wrong. Fairfax Elementary School District in Bakersfield last year sold a little more than $1 million in bonds and will have to repay $15.6 million in principal and interest by 2048.
Fairfax was one of about 200 California school districts -- including others in Kern -- that have borrowed billions of dollars through new bond arrangements known as capital appreciation bonds, or CABs, that postpone payment for decades and carry astronomical interest expenses, a Los Angeles Times analysis has found. It's yet another reason that voters must pay attention to the business conducted by even the most seemingly innocuous elected bodies, like candidates for school board and community college districts. State Treasurer Bill Lockyer has blasted these long-term bonds as "terrible deals," saying the "school boards and staff that approved of these bonds should be voted out of office and fired."
Conventional school bonds usually require $2 to $3 in repayment for every dollar borrowed -- roughly equivalent to an average home mortgage. However, with decreased school funding in recent years, some districts have resorted to arrangements with repayments at double that cost or more. The high cost is due to longer repayment schedules of 30 to 40 years. Because repayment is often postponed for a decade or more, school districts are able to skirt local property tax caps. According to the L.A. Times, experts frown on bonds that cost more than four times the amount borrowed or mature over more than 25 years.
Since 2007, seven Kern County school districts have issued bonds with maturity periods in excess of 30 years and costs that exceed four times the principal. In addition to Fairfax Elementary, they include Arvin Union, Delano Union, Kernville Union, Richland, Southern Kern and Vineland school districts. Of these districts, Richland, near Shafter, faces the biggest long-term payout of $52.5 million for $6.8 million borrowed in 2009 over 40 years. Southern Kern Unified in Rosamond will pay the second-highest amount: $45.8 million to borrow $4.7 million over 40 years.
It's fair to say school officials have been in a difficult spot in recent years. They've rationalized these bonds as short-term fixes to unprecedented budget problems. But whatever spin they put on it, these loans are deliberate ways to get around local tax laws, not to mention undeniably rotten deals for local taxpayers.