Bonds for $105 Million to Cost School Over $1 Billion

A California school district is shouldering $1 billion in interest on a $105 million bond in a deal intended to defer most of the payments for 35 to 40 years.

The Poway Unified School District, in San Diego County, structured its 2011 sale of capital-appreciation bonds to avoid debt service until 2033, with the largest sums -- more than $300 million each -- due in 2046 and in 2051, according to data compiled by Bloomberg.

Other issuers in California may pursue similar deals to raise money for construction at a time when revenue from property taxes is stagnant, said Marilyn Cohen, founder of Envision Capital Management Inc. in Los Angeles, who has $195 million of munis under management.

“I’m sure California is the worst offender,” Cohen said in a telephone interview. “Property taxes have gone to hell in a handbasket in California.”

Last year, Los Angeles County Treasurer Mark Saladino advised school business officials there against long-term capital-appreciation bonds, saying they would result in a “significantly higher debt burden.”

Poway, a district of 33,000 students about 20 miles (35 kilometers) northeast of San Diego, issued the debt to modernize schools in July 2011. It was part of as much as $179 million in borrowing approved in a 2008 referendum that passed with 64 percent of the vote. The San Diego County Taxpayers Association now regrets that it endorsed the proposal.

“There’s too much risk involved with issuing long-term capital-appreciation bonds,” said Chris Cate, vice president of the association. “They’re not callable bonds so you can’t pay them off early. It’s too risky for taxpayers.”

Tax Promise

School officials promised at the time that the measure wouldn’t raise taxes. There was no mention of how the deal would be structured or what the interest payments would be.

The bond sale was managed by Stone & Youngberg LLC, which was acquired by Stifel Financial Corp. after the Poway deal. A Stifel spokeswoman, Linda Olszewski, wasn’t available for comment yesterday.

Sharon Raffer, a spokeswoman for the district, said she had no immediate comment on the ultimate cost of the borrowing yesterday. Penny Ranftle, the school board president last year, and Linda Vanderveen, the current president, didn’t respond to telephone calls seeking comment.


Tax-exempt capital-appreciation debt is similar to so-called zero-coupon bonds, except that the investment return on the principal is reinvested at a compound rate until maturity. The securities usually yield more than coupon bonds to compensate investors for the longer holding period before they receive any income.

California school districts are increasingly deferring debt payments because of declines in property values, which provide the tax revenue to repay bonds, and because of statutory limits on how much property tax may go toward debt service per year, Cate said. A 2000 law limits taxes for debt service to $30 per year per $100,000 in property value.

The Poway measure was reported earlier by the Voice of San Diego and blogger Joel Thurtell.

The Oceanside Unified School District, west of Poway in San Diego County, financed a $32.4 million sale in 2010 with capital-appreciation bonds. District officials used the tool because the eroding tax base left them short of revenue needed to replace roofs, upgrade power supplies and make other improvements to 20 schools, Assistant Superintendent Luis Ibarra said. The total cost to taxpayers for payments starting in 2034 and ending in 2049 will be about $300 million, according to data compiled by Bloomberg.

“The district expects that tax-base growth will allow for annual tax rates to continue within historical ranges,” Ibarra said by e-mail.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE