School districts usually pay to fix up schools and build new ones by floating bonds and repaying them over a long period, often as much as 25 years. Now the San Juan District is considering repaying its debts much faster to save on interest costs.
San Juan Unified’s school board will vote Tuesday on whether to move to a “hybrid” strategy that combines two- and three-year bonds with 15-year bonds. It is likely to pass. The board consensus at a meeting Tuesday was to move forward with the change, said board member Larry Masuoka.
There is general agreement that the district will transition to a “pay-as-you-go” model in the future that uses only two- and three-year bonds, he said.
The reduced costs associated with selling three-year bonds will allow 99 percent of the money raised to be used for construction, compared with 66 percent of the money generated by 25-year bonds, said Kent Stephens, the district’s chief financial officer, in a report to the board.
Michael Day, president of the California League of Bond Oversight Committees, a watchdog group, says San Juan Unified is a trailblazer. Using a “pay-as-you-go” model is “rare right now,” he said. “If this passes, there will be a lot of them (school officials) talking about it.”
The hybrid approach would cost the district 11 cents in interest for each dollar borrowed. Traditional 25-year financing generally costs the district 34 cents on the dollar, while issuing two- and three-year bonds costs the district a penny for each dollar borrowed.
“It’s a phenomenally good deal,” Day said. “The reduction in cost is substantial.”
San Juan Unified already has dipped its toe into the short-term bond pool. Last year, the district sold $20 million in two-year bonds to finance facilities projects authorized by Measure N, approved by voters for $350 million in 2012. The debt, including $300,000 in interest, will be paid by August 2015.
School bonds have been under scrutiny since Poway Unified School District turned to expensive capital appreciation bonds to raise $105 million, ultimately costing San Diego County taxpayers $1 billion over 40 years. Locally, Folsom Cordova used capital appreciation bonds to finance $514,000 at the cost of $9.1 million.
Capital appreciation bonds are unlike conventional bonds that require governments to pay down principal and interest almost immediately. The bonds became particularly popular after the housing market plummeted in 2007. Districts found they couldn’t raise as much from conventional bonds as they could during the boom years because borrowing limits are tied to property values. Last year, state lawmakers restricted debt service on capital appreciation bonds to four times the principal and limited their term to 25 years.
Some members of the California League of Bond Oversight Committees, the Howard Jarvis Taxpayers Association and other organizations that generally oppose bonds are recommending that, under certain circumstances, school districts move to short-term bonds, usually two- and three-year, in a pay-as-you-go model for school construction, remodels and upgrades.
“Pay-as-you-go financing, with a series of shorter-term bond issuances, may make sense for larger school districts with multiple capital needs that can be stretched over the course of several years,” said Jon Coupal, president of the HJTA.
There are drawbacks. Short-term bonds limit the amount of money the school district can spend annually for facilities improvements to $17 million to $20 million a year, Stephens said. That would slow down the pace of projects and could mean higher costs for the district as the cost of construction goes up over the years.
Masuoka led the charge to move to short-term bonds. He says that, with $20 million already banked, the district would have about $25 million a year to spend on infrastructure. If another bond measure passes in 2016, it would allow the district to generate enough money to keep abreast of its facilities needs.
Representatives of the California League of Bond Oversight Committees and the Sacramento Taxpayers Association – traditionally bond opponents – said they would be open to supporting a new bond for San Juan if the district used the pay-as-you-go method. “We could actually end up in a place where we were supporting the next bond,” Day said.
Masuoka said taxpayers would be more likely to support the bond if they knew almost all the proceeds would go to school facilities and upgrades.
The school district has passed three bond measures, Masuoka said. “If we had been doing this from Day One, we would have no debt and significantly more infrastructure built.”