Paul Kitagaki Jr. / pkitagaki@sacbee.com

Sam Provenzano's English 1A class at the Yuba College Sutter County Center watches a film on flat-screen monitors last week. The new campus will be 38 years old by the time the capital appreciation bonds used to finish it are paid off. A $4.6 million principal will cost $59 million when it's repaid.

Each $1 from bonds to cost schools $18

Published: Wednesday, Oct. 17, 2012 - 12:00 am | Page 1A
Last Modified: Wednesday, Oct. 17, 2012 - 7:06 am

Rancho Cordova taxpayers eventually will pay $9.1 million to retire just $514,000 in capital appreciation bonds issued by the Folsom Cordova Unified School District – about $18 in payments for every $1 borrowed.

The bonds paid for school upgrades and construction in Folsom Cordova's Improvement District 4, the same area that is the focus of a $68 million bond measure on the ballot this November.

None of the $9.1 million in payments will be made for 23 years, as interest accumulates. Then the entire tab will be paid over two years, bond statements show.

Two school board members who voted for the bonds in late 2009 said they didn't know about the high costs when they approved them.

Folsom Cordova Unified Superintendent Debbie Bettencourt said the district started researching how the $514,000 in capital appreciation bonds were structured after a Bee article in September detailed similar bonds elsewhere.

"Unfortunately, we are so focused on staying within the law on tax rates that we didn't look at the detail of how it was compiled," she said.

Capital appreciation bonds are a form of financing that allows school districts to delay bond payments in some cases for decades, unlike more conventional bonds where payments start almost immediately.

Districts issue capital appreciation bonds to get around several constraints: There are limits to how much a district can get from taxpayers in any given bond election. And because property values have fallen, those spending limits mean districts can't get as much from a conventional bond as they would have during the boom years.

Delaying payment on the bonds allows districts to gamble that property values will rise by the time they have to start making payments.

Critics argue that capital appreciation bonds are too risky and allow school board members to reap the political rewards of improving schools while putting off the pain of repaying the bonds.

"These things are a disaster," said Jon Coupal of the Howard Jarvis Taxpayers Association. "… It's Tony Soprano interest rates."

Bonds funded upgrades

The $514,000 in capital appreciation bonds issued by Folsom Cordova Unified represent a small portion – 2 percent – of the $25 million in bonds issued for the Rancho Cordova area in December 2009. But they represent a significant portion – 20 percent – of the $42 million in interest that will eventually be paid on those bonds.

Bettencourt said the capital appreciation bonds allowed the district to keep tax bills within the legal limit of $60 per $100,000 of property valuation. The bonds were structured so residents would pay a similar amount in taxes over a 25-year span, she said.

District officials were in a hurry to issue the bonds so they could use millions in federal stimulus funds to offset interest costs, said Bettencourt, who was the district's chief financial officer when the bonds were approved in 2009.

The capital appreciation bonds, along with other traditional bonds issued at the same time, paid for improvements at Mills and Mitchell middle schools and a partial modernization of Cordova High, including construction of a two-story science building and removal of 20-year-old portable classrooms.

Inflation eventually will lessen the real cost of the bonds, Bettencourt said, adding that all long-term debt comes with a premium.

"I think if we looked at the real cost of a home – two to three times the sales price – none of us would own a home," she said in an email.

Details left to staff

Last month, The Bee highlighted three local districts that took out bonds at a high cost, including the Yuba Community College District, which will pay $59 million to retire $4.6 million in bonds over 40 years. The practice first received scrutiny following reports that Poway Unified near San Diego ultimately will pay almost $1 billion to retire $105 million in bonds.

The Folsom Cordova Unified bond sale was managed by Stone & Youngberg LLC, the same organization that managed the Poway Unified bond sale. Stone & Youngberg officials could not be reached for comment.

"In all honesty I don't recall it being broken out," said board member Richard Shaw, referring to the presentation the board received in 2009 about the bond's costs.

The minutes of the meeting where the bonds were unanimously approved do not mention discussion of the costs associated with the capital appreciation bonds. A summary chart prepared by the board's bond advisers for a meeting earlier this month mentions the capital appreciation bonds but lumps the interest costs of those bonds with more traditional bonds approved at the same time.

Shaw said board members often leave details about bonds to school staff.

"It's a fine line to walk," Shaw said. "To what degree do you micromanage everything in your district? You have to trust your people."

Measure P on ballot

Disclosure of the cost of the capital appreciation bonds may influence the outcome of an upcoming bond measure.

That election, titled Measure P, would allow Folsom Cordova to complete the modernization of Cordova High School, a process that would be delayed by up to 10 years without more bond funding, Bettencourt said. Bond proceeds would let Cordova High add a fine arts theater and music room, as well as bring new technology to all schools.

Taxpayers have little way of knowing whether the district would opt for conventional bonds, capital appreciation bonds or a mixture of both when borrowing under Measure P.

Folsom Cordova Unified has issued $221 million in bonds since 1997; a third were capital appreciation bonds, Bettencourt said. Most carried costs that were higher than traditional bonds but well below the $18-to-$1 repayment ratio for the 2009 Rancho Cordova bond issuance.

Bettencourt said the district, after studying the terms on those 2009 bonds, would pay closer attention to bond terms and present them more clearly to board members.

"In the future the board will have a study session with the financial consultant before issuance" and bring back anything with more than a 3-1 ratio of interest to principal, she said.

The $514,000 bonds also were approved by the county Board of Supervisors. Jude Valverde, the county's chief financial officer, said supervisors routinely approve school bonds with little or no discussion but added that county staff can advise school districts if they have concerns.

Had Valverde been on the job when the Folsom Cordova bonds were approved, she said, county staff would have been asked "to have a conversation with the district."

Shaw, the school board member, said the $9 million in costs associated with the $514,000 in bonds is too high. "I almost think there ought to be a law," he said.

State legislators will consider a bill in December that would put limits on school districts that want to use capital appreciation bonds. The bill would limit school bonds to 25 years, limit interest to 8 percent, allow districts to refinance or repay bonds early, and would require that either county supervisor boards or the county superintendent of schools approve deals.

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