The California State Assembly unanimously passed a bill Monday restricting the use of high-debt-accumulating bonds in school districts and community colleges.
Introduced by Assemblymember Joan Buchanan, D-Alamo, Assembly Bill 182 attempts to reduce the future debt burden by limiting the length of capital appreciation bonds to 25 years and restricting money owed to a maximum of four times the borrowed amount. The bill would also let districts refinance these bonds at a lower interest rate and require increased disclosure to the school districts’ governing boards.
“They shove debt on the next generation of taxpayers who won’t benefit directly from the facilities the bonds finance, which means (the next generation will) have less ability to finance what their kids need,” said Tom Dresslar, spokesperson for California State Treasurer Bill Lockyer, who has been a strong advocate for the bill.
Capital appreciation bonds have been used by public schools throughout the nation to fund large-scale projects like school construction. Unlike traditional bonds, however, for which the funds are repaid in gradual, short-term increments, capital appreciation bonds are paid back in one total amount at a set date, often decades after the bond is issued.
However, during the period between the bond’s issue date and its maturity date, interest is continuously compounded, which often results in high levels of accumulated interest. In some cases, debt payments have accrued to even 10 times the original amount borrowed, according to Dresslar.
Several groups, such as the California Association of School Business Officials and the Association of California School Administrators, believe that capital appreciation bonds should be limited but that AB 182 should be revised.
“If passed in its current form,” said Molly McGee Hewitt, executive director of CASBO, “we are concerned that many school districts will have to delay their facilities’ construction programs, resulting in substandard facilities for students, teachers and staff that are in the greatest need of them — particularly in districts that serve a high percentage of economically disadvantaged families.”
The Berkeley Unified School District is not using any capital-appreciation bonds at the moment, though the use of such bonds is “likely to happen in the future,” according to Mark Coplan, BUSD public information officer.
Karen Hemphill, president of the BUSD Board of Education, mentioned that the board has weighed the pros and cons of capital-appreciation bonds and would consider them only in the context of saving taxpayers money.
“Fiscal responsibility has been the hallmark (of the district),” Hemphill said. “We have a lot of checks and balances and accountability.”
The state Senate will vote on AB 182 in the following months. If passed and signed by the governor, the bill will be implemented beginning Jan. 1 of next year.