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The Big Borrow 

Some Humboldt school districts trading quick money now for hefty debt later

 

If the roof is rotting, the windows are rattling and the technology capabilities are prehistoric, just how badly will a school district want to upgrade?

Badly enough to take $7 million right away with a promise to pay back $71.6 million later?

Yes, that badly, McKinleyville Union School District trustees decided last year, although they left themselves options to pay the money off early, with penalties that they're still trying to calculate.

Badly enough to take $2.6 million and pay back $13.5 million later?

Yes, that's the deal the Southern Humboldt Joint Unified School District made in 2011, although its early payment options are unclear.

Badly enough to weave together conventional bonds with more aggressive ones that ultimately will cost five, seven, even 10 times the amount borrowed, just to get a little more money upfront? Yes, said the Northern Humboldt Union High School District, the Blue Lake Union Elementary School District and the predecessors to the newly combined Fortuna Elementary School District.

All are among the 20 percent of school districts statewide that have issued a risky type of bond that one state has made illegal, and that California Treasurer Bill Lockyer has called "terrible deals," according to the Los Angeles Times.

The Times published a lengthy article last week about schools' use of capital appreciation bonds, in which interest piles up for years instead of being paid out regularly. "The school boards and staffs that approved of these bonds should be voted out of office and fired," the newspaper quoted Lockyer saying. That quote and the Times' database of school districts bonds have resonated around the state, but the basic problem wasn't news to McKinleyville school board members, who got a sobering briefing on their debt last month.  

"That was a shock for me," said Sara Alto. She's gone back through all the material the board was given before it voted 4-0 in 2011 to issue the bonds, and she can't find an amortization schedule or any reference to what the full payoff would be.

"I don't remember at approval borrowing $7 million and paying back $70 million. Any normal person could see that, and see that's huge," she said Tuesday. "If I had seen that figure at that meeting, there would have been more questions from myself."

But what any normal person can see isn't always what school trustees or superintendents are told in their briefings with bond advisers, or what they remember later.

"I'm not a finance person," said Jim Stewart, who was superintendent of the Southern Humboldt Unified School District in 2011 when it issued roughly $5 million in bonds, just over half of that in capital appreciation bonds that will ultimately cost it $13.5 million if it can't get out of them early. "I didn't grasp all those particulars."

Was that a good deal for Southern Humboldt at the time?

"I'm not that sophisticated about these things to know whether it's good or bad," Stewart said.

Like other administrators in smaller school districts, Stewart, now principal of the district's Osprey Learning Center, has juggled the roles of educator and administrator. In the Blue Lake Union School District, Paula M. Wyant is both a principal and superintendant, and she was trying to look up bond records this week while substitute teaching and dashing into parent meetings.

Blue Lake, according to a website that tracks government bonds, issued just under $2 million in general obligation bonds back in 2010. Most of them -- $1,755,000 worth -- were the plain vanilla type of school bonds still favored by the majority of California school districts. They're called current interest bonds, or CIBs, and they pay interest regularly, commonly twice a year. Then when the bond matures, the investor gets back the original amount he or she invested.

Along with those current interest bonds, Blue Lake also sold a relatively modest package of capital appreciation bonds. They totaled just $244,264 and 60 cents, in 20 different clumps to be paid back between 2021 and 2040, according to the Electronic Municipal Market Access (EMMA) system, at www.emma.msrb.org.

Investors who bought those bonds won't get paid any interest at all -- but that interest builds up and builds up, so when the bond matures, they get one big chunk of change. Here's how big: Whoever bought the Blue Lake school bond maturing in 2040 paid just $4,976 in 2010, but will get $160,000 in 2040. Put that in your 401(k).

"I think that's pretty bizarre," said Sherry Dalziel, a school board member who was president of the board when voters approved those bonds.

"I don't recall being told that that was the way of it."

In the Northern Humboldt Union High School District, which last year plunked a couple of capital appreciation bonds in among a much bigger batch of more conventional bonds, school board president Mike Pigg initially didn't believe they existed.

Asked on Monday about the LA Times database, which said his district would pay $1.975 million to pay off just $195,000 in bonds, Pigg said, "That information is false."

On Tuesday, after the Journal emailed him a link to the EMMA's 126-page document that spells out his district's bond details, he backtracked, saying the numbers were accurate but relatively unimportant. They were part of a much larger bond deal, with an average interest rate of around 5 percent. Northern Humboldt is borrowing $8 million at an overall cost of $17 million. All but the final two years are current interest bonds, those plain vanilla ones. The last two years are capital improvement bonds, and looked at in isolation, they're whoppers: The investor who bought one for just over $52,000 in March 2011 will get just over $1 million in 2036 when the bond matures. The 2035 bond sold for around $143,000 and will mature at $970,000.

Couldn't Northern Humboldt have found some way to go without that last 52 grand and saved itself a cool million?

"If you want to make a big deal out of year 2035 and year 2036, go ahead," Pigg said. "The question you should ask is what McKinleyville has done. Theirs is scary."

What Pigg is describing, bond advisers say, is the fundamental divide over how to use the more aggressive bonds.

A few of them, salted into a bigger portfolio, can bridge a gap and help schools get important construction work done sooner. But rely on them heavily, and risks become much greater.

McKinleyville is among the districts relying on these bonds heavily. Of the $14 million in bonds voters approved in 2008's Measure C, $7 million were sold as current interest bonds in 2009. But the other $7 million -- actually, $6,999,907 -- went out as capital appreciation bonds in 2011, with maturities going out to 2050.

"This was the best of a bad set of options," said Tim Hooven, one of the district trustees who voted for the bond issue. "We were right in the middle of a construction program and we had contracts closing and contracts opening."

All but $2.1 million of that $14 million has been spent on repairing and updating Morris elementary, Dows Prairie elementary and McKinleyville middle school, said district superintendent Michael Davies-Hughes.

A new gymnasium is on hold until the district figures out how it wants to deal with the $71.6 million repayment schedule everyone now realizes is in its future.

A meeting to discuss options, including what it would cost to get out of the bond deals in 2017, is scheduled for 6:30 p.m. on Wednesday, Dec. 12, at the district's Azalea Conference Center, 2285 Central Ave.

Meanwhile, plenty of questions remain about school bonds elsewhere in Humboldt. Fortuna school officials weren't immediately able to say just how their two outstanding bonds break down between riskier and more conservative ones, or how they plan to structure another $5 million in bonds they hope to issue soon. Garberville schools may or may not have some options to pay their most expensive bonds off early. And with voters having just approved more school bonds in Arcata and Fortuna, it's worth asking -- just what kind of bonds are those going to be?

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Carrie Peyton Dahlberg

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Carrie Peyton Dahlberg was editor of the North Coast Journal from June 2011 to November 2013.

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