California school districts are back to issuing once notorious capital appreciation bonds after a short-lived decline. Districts also are changing the way they use more traditional bonds, which could foreshadow more trouble for schools’ finances.
Recent bond moves suggest districts might be responding to low growth and more unpredictable growth forecasting. If that’s the case, it could get harder for districts to get new bond money, especially if interest rates ever rise above their low current rates.
Capital appreciation bonds were widely criticized for their high payback ratios — as much as $15 for every $1 borrowed in the San Ysidro School District — and for pushing off debt for 30 or 40 years. In response, Gov. Jerry Brown signed into law stringent new limits on the bonds in October 2013.
In a 2015 interview, San Diego County Treasurer-Tax Collector Dan McAllister supported the new rules, calling their passage “arguably one of the finest moments for the Legislature.”
He said, however, that capital appreciation bonds aren’t inherently bad.
“It’s the terms that make all the difference in the world,” McAllister said at the time.
Those laws capped payback ratios at $4 for every $1 borrowed, limited maturity to 25 years down the road and required new bonds include an option for refinancing. Districts seemed to react to the laws, and in 2014 the number of new capital appreciation bonds was down by half.
But by 2015, districts had warmed up to the bonds again, issuing 51 new ones — about on par with 2012 and 2013. That included six K-12 and community college districts in San Diego County. The online publication The Bond Buyer first reported on the resurgence of the bonds earlier this year.
McAllister said in a recent interview with inewsource the new regulations mean taxpayers “will not be subjected to the outlandish terms” that existed a few years ago..
“I think the public can be assured that good things are happening,” he said. “If people use (capital appreciation bonds), they use them in accordance with the new law, not the old system.”
The San Diego Unified School District is one of the local districts that issued a capital appreciation bond in 2015. The district borrowed $100 million, and it will pay it off between 2032 and 2039.
The district will end up paying just over $2 for every $1 borrowed, well below the legal limit and the ratios seen a few years ago.
Jenny Salkeld, San Diego Unified’s chief financial officer, said the regulations were nothing new for the district. She said McAllister even held up the district as a model of how to do capital appreciation bonds well.
“If anything … when (the new rules) became effective it just memorialized what were were already doing,” Salkeld said.
Besides the capital appreciation bond, San Diego Unified issued six other more traditional bonds in 2015 for a total of more than $829 million. That’s more bonds and more money than it did in 2011 through 2014 combined.
Salkeld said that increase is in part because of a unique strategy the district is taking to line up new bonds with the life cycle of new technology it’s buying. She and McAllister also pointed to some favorable conditions for new bonds.
“The climate for issuing bonds is good because the interest rates are low. Therefore, the payback will be less for taxpayers,” McAllister said. “It has been a good two years or so for people to issue bonds.”
School districts throughout the state are taking advantage of the low rates. In 2015, California school districts and community colleges issued 358 non-capital appreciation bonds. That’s up 80 percent from 2011.
And these new bonds are different. Bond data analyzed by inewsource shows districts are stretching out debt from more traditional bonds much longer than in recent years.
A non-capital appreciation bond issued in 2011 will be paid off in less than 15 years. A similar bond issued this year will be paid off in more than 21 years. That doesn’t necessarily mean the interest paid will be higher, but it means taxpayers decades removed from the bond issuance will still be paying that money back.
A bond issued by San Diego Unified last year won’t be paid off until 2045.
Robert Berry, a deputy director with the California Debt and Investment Advisory Commission, said he hadn’t studied the issue in depth, but multiple factors are likely responsible for the longer maturity periods.
One of those factors could be districts are using lower “tax revenue growth projections” when they’re issuing bonds, Berry said.
Growth means there’s more tax money available for new bonds. Around 2010 to 2013, districts responded to low growth by pushing bond debt off for decades, using capital appreciation bonds.
Now that that’s less of an option, they might be stretching what growth there is by breaking debt up into smaller annual payments over a longer period of time.
The question, then, is whether there’s any evidence of slower tax revenue growth among school districts. Data from San Diego Unified’s own disclosure documents says maybe.
In bond documents filed last year, the district showed the total value of property in the district grew 6.1 percent in fiscal 2016, a slightly lower growth rate than the previous fiscal year.
That’s still outstanding growth compared to the dreary Great Recession years, but paltry compared to historic growth. In the last pre-recession fiscal year of 2008, the total value of property grew 9.3 percent. The last time it grew less than 8 percent was in fiscal 1998.
Salkeld said the district is making a conservative estimate of 5 percent annual growth in the foreseeable future.
The total value of property in a district can grow two ways: The buildings in the area get more expensive, or more buildings are built. As far as price growth, the average cost of a home in San Diego Unified is doing well, up 8.2 percent as of August 2015 compared to 2014.
The number of new buildings, however, is down sharply. In 2014, the last full year for which data is available, the number of permits for new home units was down 50 percent from 2013. The total value of new residential building permits in the district for 2014 was down 43 percent from 2013.
While those numbers are not conclusive, they do indicate potential trouble in the district’s property tax base. In the long term, that could mean districts like San Diego Unified will push debt out further and further, not with the now-limited capital appreciation bonds, but with more traditional bond measures.
McAllister, for his part, said San Diego County might be getting so expensive it’s pricing out some parts of the population. There’s still robust growth in parts of the North County, including San Marcos, as well as in the Otay Ranch area of South County.
McAllister doesn’t expect either underlying condition — an increasingly expensive San Diego home market and low interest rates — to change any time soon.
“I think you’re likely to see interest rates stay down for a while, so probably you’ll see more bonds issued,” he said. “And the needs go on, school districts have to fix schools, paint schools, fix them up, make them earthquake proof, build new ones.”
Districts need money for upkeep, even if lower growth makes that money harder to find.
We'll let you know when big things happen.