How bonds get so expensive

When a school district has a big project to finance, that usually means turning to bonds. And in most cases those are what’s called current interest bonds. They’re a generally safe and straightforward way to raise cash.

Districts get money they need up front, every year they pay back some of the principal plus interest, like a homeowner would on a mortgage. Depending on the size of the bond, it could take from a few years to a couple of decades to pay back all the money advanced to the district. The money for those payments comes from property taxes levied in the school district’s area.

When they calculate costs of improvements, districts have to keep in mind that there’s a limit to what they can tax residents’ property to pay for bonds. The limit is $30 per $100,000 of assessed value for an elementary school district, $60 for a unified school district and $25 for a community college district.

That tax revenue is like a credit card the districts can use to issue new bonds. The higher the property assessments, the higher the credit limit. And vice versa.

Click here to read our series on capital appreciation bonds, Ticking Time Bonds

That’s what happened in 2008.

Property values started flatlining and falling, and lower assessments, meant less money to pay back bonds.

The answer for some districts? Capital appreciation bonds. They were an option because instead of making payments right away, the district gets to delay bonds for years, even decades.

The idea behind these CAB bonds is when payments finally come due, housing prices will have grown so there’ll be enough money to meet the debt. And population growth will mean the debt will be spread around. After all, if there are twice as many houses when the debt is due then every individual house has to pay half as much.

The problem with putting off payments for years is that the bonds are growing. Relatively small bonds can balloon after 30 or 40 years so that their final payout is many times larger than the original bond.

For example, San Ysidro School District issued a bond in 2011 for $15.6 million that it doesn’t have to start paying for 30 years. When it’s finished paying in 2050 it will have cost a total of $228.9 million.

Another 2011 capital appreciation bond issued by Santee School District for $3.5 million comes with a final payout of $58.6 million. Santee has to start paying back that bond in 2026 but it won’t stop until 2051.

Investigative Assistant Madison Hopkins contributed to this report.

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About Leonardo Castañeda:

Leonardo Castañeda
Leonardo Castañeda is a reporter and economic analyst for inewsource. To contact him with tips, suggestions or corrections, please email leocastaneda [at] inewsource [dot] org.