Breaking Down Poway's Billion Dollar School Bond
August 21, 2012 1:11 p.m.
Will Carless, reporter Voice of San Diego
Dan McAllister, San Diego County Treasurer Tax Collector
Related Story: Poway Residents Ask: What Can We Do Now?
CAVANAUGH: Is this KPBS Midday Edition. I'm Maureen Cavanaugh. It's Tuesday, August 21st. Our top story on Midday Edition is the meeting last night in Poway about a controversial school bond. The district told voters last year it needed approval to borrow $105 million to finish a school modernization project. The voters gave that approval, most not realizing the type of bond being used would actually cost residents almost a billion dollars over 40 years. The story pursued by voice of San Diego education reporter Will Carless has made national headlines. Will was at the meeting last night where Poway officials tried to explain the bond. And welcome, Will.
CARLESS: Always a pleasure, Maureen.
CAVANAUGH: First of all, was the meeting last night well-attended?
CARLESS: Oh, yes. It was standing room only. Aye never been to a Poway School Board meeting, so I can't compare it to previous one, but it was a full house.
CAVANAUGH: And what was the atmosphere like?
CARLESS: It was pretty calm. I guess I was expecting it to be more raucous and angry and seething. There were people who were angry, but people were being civil and polite.
CAVANAUGH: So people were being cordial and --
CARLESS: Yeah, well, I'm used to the San Diego unified meetings of late, where there's people chanting outside, and people shouting at the School Board. There was none of that. There was an atmosphere of this is a community that's going through a hard time. And the overwhelming kind of impression that one left with was the idea that this is a community that's trying to figure out what to do next and how to get out of this mess if it can.
CAVANAUGH: How did school leaders explain this bond deal?
CARLESS: Oh, gosh. Well, you're asking me to sort of summarize what they spent about two hours doing yesterday.
CAVANAUGH: Ah, okay.
CARLESS: But essentially they said, look, we were squeezed into a very tight position by an awful financial market, by a financial collapse. Essentially it boils down to we didn't have another option, we thought we did the best thing, we thought that it was going to work out okay, and we're not apologetic for it, we acknowledge it's extensive, and we did the best we could, and there were no backroom shenanigans, and you don't need to mistrust us.
CAVANAUGH: Did they bring up the point they were trying to save residents from a tax hike?
CARLESS: It was more them saying, look, we promised you we weren't going to raise your taxes. That's what you told us that you wanted, and that's what we assured that we did with this bond. And at the end of the day, of course they didn't. Taxes could very well rise as a result of the bond. But at least in the short term for the next 20 year, they have tied in the tax rate is not going to increase, and they kept their word.
CAVANAUGH: Is this billion dollars bond deal becoming a political issue in Poway?
CARLESS: I haven't heard local politicians -- I stand corrected. I did receive an e-mail from one of the council women in Poway. I can't remember her name off the top of my head. But it is. And one of the guys who's running for City Council -- I'm afraid -- his name --
CAVANAUGH: You were up late last night.
[ LAUGHTER ]
CARLESS: But one of the chaps who used to be on the School Board was there, he said there partly to say I had nothing to do with this, but also to make the political point that he stands behind the School Board and everything else. To be honest, there was a lot of talk about that last night, about people bringing this up, and making it about personal politics and stuff like that. I don't know enough about the internal political machinations in Poway to give your listeners a lot of information on that.
CAVANAUGH: Gotcha. Well, one person stood up and claimed he was a financial expert, challenged the assertion that Poway could not find cheaper bonds. Are you going to be following occupy that?
CARLESS: Certainly. That was the big claim that was made that I think really needs to be fact-checked. And that's a claim they haven't heard after researching this story for more than a month now, and talking to the School Board and the superintendent, no one's ever raised that to me. They've only said, look, this was the only way we could do it. I've spoken to a couple people this morning who said other school districts were doing deals at the time that didn't involve this. You know? And the way the School Board did this deal under what's called a negotiated bond, which I don't know too much about, but what they're saying is there were other ways to do this deal, this wasn't the only way to do. So I'm going to be challenging that assertion pretty forcefully over the next few days.
CAVANAUGH: Thank you so much.
CARLESS: Appreciate it.
CAVANAUGH: Earlier today I spoke with Dan McAllister. He's speaking out about the Poway bond deal, and offering recommendations for school bond financing. Dan, welcome to the program.
MCALLISTER: Good morning, and thank you. How are you?
CAVANAUGH: I'm quite well. Thanks a lot.
MCALLISTER: It's my pleasure.
CAVANAUGH: Remind us why this $105 million bond will wind up costing almost a billion dollars?
MCALLISTER: Well, first of all, the duration of the bond issue itself is not 20 years or 25 years. It's 40 years. So the last payment is due 39 years from now in 2051. Secondly, there were no payments due for the first 20 years of the 40 year period. Therefore is becomes in essence, a balloon payment, whereby 40 years of bond payments and interest get pushed into 20. And because the interest rate is up there as well it's going to cause this cost to rise to just under a billion dollars to finance the $105 million that the district was able to issue bonds for.
CAVANAUGH: How should the district have set up the bond financing to make sure the cost to taxpayers wouldn't be that high?
MCALLISTER: Well, there are some guidelines that we talked about, and I should tell you too, by way of background, that I went before the CBOs, the chief business officers of the -- to tender my thoughts on issues that they should be watchful of, as they move forward to do bond issuances. On the face, capital appreciation bonds are not illegal. They are not banned here. Michigan by the way is the only state that has banned them because of issues there, apparently. But they have a place in most debt portfolio, or many portfolios that work. Many time, if it's under 25 year, and the interest rates are lower, and the payback ratios are not 4-1. In this case, it's nine or 9.5-1. It's substantial.
CAVANAUGH: People may be reluctant to vote for school bonds in their own district when is they hear this story. What are some things voters can look for to make sure the bonds they're voting for make financial sense?
MCALLISTER: That's a great question. And I think voters have a duty, a buyer beware duty. They should be scrutinizing the ballot initiates that they're being ask to the vote on. However, we're saying that districts really have the dot, the responsibility to dot, is and that means disclosure, openness, and transparency. So they must reduce down to simple terms the nature of the bond being voted on so that the voters can make an educated decision. It's not enough anymore to go to the voters and say do you approve of $105 million worth of bonds being issued to support our schools? And that seems to be what a lot of entities have done in the past. We're encouraging people to be more overt. Being more assertive and transparent. If they don't have a structure in place when they go to the voters, they should get one. They should have one.
CAVANAUGH: So are you saying that in the case of this Poway bond, the proper disclosures were not made?
MCALLISTER: I think technically and legally, the disclosures were made. It appears on the surface. However, others will have to decide whether all the legal requirements were met. I'm not in a position to pass that judgment, and I won't try. But I think for all 42 public school district, remember Poway is just one of 42 in the county of San Diego. We offer up suggestions on how to make things work better. Under 25 years, in duration, payment Raich years not greater than 4-1. And also we want to have prepayment clauses in these documents so that if the economic conditions change, the district at hand would be able to refinance out of those bonds. In the case that you're discussing, that we're talking about, Poway, apparently there is no out clause. So they are stuck with what they got a year ago. And they can't get out of it. Other districts by the way have included, like San Diego unified, we understand, has an out clause in their bond issue with caps so that they are in effect able to refinance them and move forward in a different direction if they need to. Flexibility should be the optimal concern here.
CAVANAUGH: I'm speaking with San Diego County treasurer and tax collector Dan McAllister of the one reason put forward for getting this bond approval was the fact that tax measures, asking the voters in Poway to actually increase their taxes in order to finish this modernization project would not have been popular and would not have passed. But if this were are set up as a tax rather than a bond, wouldn't it be much more straightforward than the bond in terms of the amount that needed to be paid?
MCALLISTER: Possibly. I think that it depends -- there are so many different kinds of ballot measures and issues. If it's a direct tax, you're right, it might be pretty straightforward. Do you agree to increase -- in a hypothetical way, agree to increase sales tax by 1% or half a percent? Or a TOT tax? However, in these situations many times the details are the not revealed to anyone except those who are insider forms who read the volumes of disclosure documents that are out there, and it's too voluminous to put on a simple ballot statement.
CAVANAUGH: Based on the billion dollar repayment, how much will people be paying in taxes over the next 40 years?
MCALLISTER: The California taxpayers association tried to put forward a bill which we could not get any response to or for, to wring in these wild projections that many districts utilize to project out 10, 20, 30, 40 years the assessed valuation of the properties in their jurisdiction. Will I think we've learned just in the last few years that you can't predict real estate values at all in the long run! We don't know all the circumstances surrounding the economy and what might happen.
CAVANAUGH: So we don't really know how much people in the district will be paying?
MCALLISTER: Well, absolutely we should know how much is attached to a specific bond issue. However, we are told by council that that which was represented was only advisory. If they say --
CAVANAUGH: I see.
MCALLISTER: $55 per $100,000 of value, that is advisory, not locked in. So it means that it could be raised to accommodate the debt payments if the school district is not able to make them in 20 or 30 years.
CAVANAUGH: I see. All of the things that you've been telling us, Dan, the advice that you're giving to other School Boards in San Diego County, the kind legislation that you've been talking about, do you think the fallout from this credibly expensive school bond will change the way schools think about funding projects?
MCALLISTER: Well, I would hope so. I would hope that there will be a new day in terms of everyone involved understanding that they have a fiduciary responsibility to be as frank and open with the voters and the taxpayers as possible. And while on the surface it may seem as though total transparency exists, and you might argue that it did in terms of the amount or the duration, meaning the length of time, but all the particulars were missing. And I don't know that that's in the best interests of taxpayers.
CAVANAUGH: Dan, thank you so much for speaking with us.
MCALLISTER: My pleasure indeed.