A school district's capacity to borrow is tied directly to its property values. As property values rise, a district's bonding capacity rises. But what happens when property values fall?

Collapsing property values have put a severe crimp in school districts' ability to borrow to build new classrooms and upgrade old ones.

As Bee reporters Loretta Kalb and Phillip Reese documented in their report published on Sunday, some school districts used loopholes in the law to take out riskier loans on the hope that the economy and property values will rise.

Locally, the Yuba City Community College District, the Dry Creek Joint Elementary School District and the River Delta Unified School District stand out.

They issued what are called "capital appreciation bonds" to be paid back over a 38- to 40-year period, well beyond the 25-year standard for most school bonds. Under the deals, no payments are due for many of these bonds for the first 20 years, an arrangement that pushes interest rates to stratospheric heights.

In the case of the Yuba City college district, taxpayers must repay a staggering $12 for every $1 borrowed. In Dry Creek, taxpayers are on the hook for $8 for every $1 borrowed. In the River Delta district, they must pay close to $6 for every $1 borrowed.

It gets worse. Under the terms of these capital appreciation bond deals, districts can neither refinance nor pay their debts off early.

School boards are under tremendous pressure to spend money they don't have to build new facilities and upgrade old ones. Voters who approved school bonds expect the improvements they were promised.

But with falling property values, districts have reached the upper limit of their ability to borrow. School boards must exercise discipline and say "no." They simply cannot afford to borrow their way out of a funding crisis, particularly when the borrowing is at usurious rates.

School districts in California have issued close to $20 billion worth of capital appreciation bonds since 2000. And 27 percent of the total, or $5.4 billion, had maturity dates that exceeded the 25-year standard.

State Treasurer Bill Lockyer has endorsed a proposal to limit school bonds to 25-year terms, to give school districts authority to refinance these types of debt or pay them off early, and to require that the deals be reviewed and approved either by county boards of supervisors or county superintendents of schools.

The measure will be taken up by the Legislature next session. In the meantime, school districts should voluntarily abide by these common-sense limits to protect themselves and the communities they serve.

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