A 38-year loan with no payments for 26 years that will eventually cost $12 for every $1 borrowed.
This isn't a subprime mortgage sold during the housing boom it's a bond issued last year by a Sacramento-area community college district.
Across Sacramento and the state, school districts have issued a flurry of "capital appreciation" bonds to keep construction projects going even as property tax revenue falls. It's a borrow-now/pay-later approach that relies on today's students and their children for tomorrow's payments.
Or, as Robert Wassmer, a professor of public policy at Sacramento State, observes, it's like taking a 10-year car loan and not making payments for five years.
"The total cost of the car will be much higher due to higher interest payments," he said. "You will be making very high payments in years five to 10 on an asset whose productive life is near its end."
School districts have turned to these types of bonds for a range of projects, from new buildings to general upgrades, because they are wrestling with two constraints. One is the recent decline in property tax revenue; the other is the limits on tapping those funds.
Those two factors have rendered the more common approaches to raising the money general obligation bonds insufficient to meet the construction needs.
Most voter-approved general obligation bonds require immediate collection of revenue from property taxes. There are limits to how much a district can get from taxpayers in any given bond election. For elementary districts, that limit is $30 annually per $100,000 in assessed property value. For community colleges, it's $25 per $100,000.
Because property values have fallen, those spending limits mean districts can't get as much from a general obligation bond as they would have during the boom years. Capital appreciation bonds allow districts to delay payment until a time in the future when, presumably, property values would be higher. The risk is in the higher costs, incorrect projections and the possibility of default.
In short, some districts can't take any more from today's taxpayers, but future taxpayers are fair game.
This practice received national scrutiny after Poway Unified School District near San Diego sold about $100 million in bonds at a cost of almost $1 billion over 40 years.
Here, large school districts such as Folsom Cordova Unified and Sacramento City Unified have issued capital appreciation bonds within the past five years.
Three other districts in the area stand out. They each will pay off bonds over 38 to 40 years, well above the standard 25 years. And they will collectively pay almost $10 for every $1 in bond proceeds:
The Yuba Community College District, which operates schools in Woodland and Marysville, will pay $59 million to retire $4.6 million in bonds that trustees approved last year. The district won't make bond payments until 2038 and won't finish until 2050.
The Dry Creek Joint Elementary School District in Roseville will pay $66 million toward $8.2 million in bonds from 2009. It won't start making payments until 2033 and won't finish until 2048.
The River Delta Unified School District south of Sacramento will pay $19.5 million to retire $3.3 million in bonds from 2008. It won't start making payments until 2032 and won't finish until 2048.
Jim Estes, a finance professor at California State University, San Bernardino, called the interest payments the three districts will make "staggering." He said the bonds may ultimately threaten the districts' financial stability, though ratings agencies consider the risk of default low.
"There will be nobody around that voted for this in 30 or 40 years," Estes said. "There will be nobody to hold accountable. The bonds have a longer term than the facilities they want to build."
Some board members at the districts issuing the bonds either said they couldn't recall approving them or that they were misled about terms.
Other district leaders noted the bonds are part of larger portfolios. Some expressed hope that the bonds could be refinanced as the economy improves. Some hoped inflation would lessen the pain. A few said rising property values would make retiring them easy.
Despite their cost, the bonds, they said, let voter-approved projects continue.
"We had promises made to our local communities," said Kuldeep Kaur, chief business officer for the Yuba Community College District. "Our assessed property values would not have allowed us to pay."
The good and the bad
The Yuba district, which serves a mostly rural area with high poverty, offers a good example of the advantages and pitfalls offered by capital appreciation bonds.
Many of its buildings needed renovation, and the district couldn't serve all students who wanted to attend. So the district put a $190 million bond measure on the 2006 ballot, needing 55 percent approval. It hit 57 percent.
A year later, the district issued bonds for $95 million. Some were capital appreciation bonds, with the district promising to pay $3 toward interest for every $1 in principal.
Property values then fell fast, limiting the district's ability to borrow more.
Last year, the district issued another $30 million in bonds with traditional payments before approaching statutory limits. But it needed $4.6 million more to finish projects, including a new Sutter County campus.
So the district's eight-member board approved $4.6 million in capital appreciation bonds that put off payments for 26 years at a cost of $12 per $1 borrowed. The payments will be $7 million in 2038, followed by annual payments of about roughly $17 million in 2048, 2049, 2050.
Two board members this week said district staff did not, at the time, fully explain the structure of the bonds to them. They called the bonds a raw deal.
One of the board members, Jim Kennedy, served as Yuba County's treasurer-tax collector for three decades, often administering complex bonds. The board never would have approved the bonds, he said, if college staff had given an honest account of the bond terms.
"These were done without the knowledge of the board of trustees," he said. "They were done at the last minute. There weren't a whole lot of specifics. It's frustrating."
Xavier Tafoya, a retired small-business manager who chaired the board at the time, said he is happy about buildings constructed with bond proceeds. But, referring to when the first bond payments come due: "I'll probably be dead by then. That's a hell of a note to leave your grandchildren. It's just insane."
Former Yuba College Chancellor Nicki Harrington, who retired last year, had a different recollection. She, along with the financial adviser hired by the district, said the board was clearly apprised of the cost of the bonds.
"There were pictures, documents, overheads everything was laid out," she said. "We were all very transparent and very open."
As to the terms of the bonds, Harrington said, "People were pretty confident that by that time (when the bonds matured), we would be able to catch up financially."
Current Yuba College Chancellor Douglas Houston, declined to comment on the actions of his predecessors, but said the district is looking for a way to refinance the bonds.
It will be tough. The terms say the capital appreciation bonds "are not subject to redemption prior to maturity" between 2038 and 2050.
"I'm concerned about the burden that will be placed on our taxpayers," he said. "I'm looking for solutions."
At Dry Creek Joint Elementary, which operates schools in Roseville and Antelope, taxpayers will spend $66 million to retire $8.2 million in capital appreciation bonds. Dry Creek won't finish paying off the bonds until 2048 and won't start making payments for more than 20 years.
The district's bonding capacity although not the bonds' structure was approved by a thin margin, needing 55 percent voter approval and receiving 56.6 percent.
The $8.2 million helped relieve overcrowding through construction of Creekview Ranch Middle School in 2009. The school has a life expectancy in excess of 50 years, so a decade after the bonds are retired, the school will near the end of its life span.
Why choose such an expensive bond? The short answer from district officials: The $8.2 million was accompanied by more traditional bonds that cost far less; the district had bumped into borrowing limits; and projects couldn't otherwise go ahead.
Superintendent Mark Geyer expects the district's tax base to grow before payments from $3 million to $7 million annually start in 2033 (with a two-year break in 2046 and 2047).
"We're using the $8.2 million as a kind of bridge financing to get to some point in the future where we're going to have the (taxing) capacity," he said.
The board president, Scott Otsuka, said the decision was sound.
"We're a high-performing school district in a fairly affluent area, and the citizens demand a high-quality project," Otsuka said.
At River Delta Unified School District, five capital appreciation bonds have been issued in the past seven years for renovation and updates of schools. Most are for terms of 25 years or less. But the district's most expensive capital appreciation bond pushes payments to April 2048.
By then, the $3.3 million in proceeds will have cost the district $16.2 million in interest.
Superintendent Rick Hennes joined the district after that bond deal went to market in 2008. "We had some dire facility needs that had to be addressed," Hennes said.
Construction costs were falling then, district Chief Business Officer Sonnya Kale said, adding a sense of urgency. Property owners in an area covering 2,350 parcels will pay for the bond.
Alicia Fernandez, president of River Delta's board of trustees, said she did not recall the details of the $3.3 million bond issue. But she saw the use of the bond as necessary.
"There is no money coming from the state," she said "If it's costly, it's unfortunate. But I'd rather have all of our children go to facilities they can be proud of. Not ones that are falling down."
Several bond experts equated capital appreciation bonds with "balloon payment" home mortgage loans, which were popular during the housing boom and let buyers put off big payments until the end of the mortgage.
Wassmer, the public policy professor, noted that many local residents who took out balloon payment mortgages later regretted it.
"The homeowner gets underwater and ends up with an asset worth less than what they owe on it," he said. "These school districts will face the same concern 20 to 30 years from now when they are still paying on buildings that are now obsolete and need to be rebuilt with another bond issue."
Much like lenders sometimes didn't adequately explain the risks of balloon payment mortgages, some districts don't adequately explain the risks of capital appreciation bonds to their governing boards, said Estes, the CSU San Bernardino professor.
"Nobody reads all the stuff in these," he said. "When they are told about them later, they say they wouldn't have voted for it."
These bonds are more common today, but not universal.
Some districts face the same choice as Dry Creek, River Delta and Yuba Community College use capital appreciation bonds or forgo construction projects but say no thanks.
"Almost any type of bond is OK, provided there is a dedicated source of funds to repay the bond when it becomes due," said Rob Ball, associate superintendent of business support services at Twin Rivers Unified, which has shied away from capital appreciation bonds. "But that dedicated source must be certain."