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School districts around California are taking a second look at the massive amount of debt they've taken on to finance new schools. Over 200 districts have collectively borrowed billions of dollars in risky financial arrangements that defer payments, in some cases for decades.
As NPR's Richard Gonzales reports, these districts often end up paying back many times what they borrowed.
RICHARD GONZALES, BYLINE: A couple of years ago, officials at the West Contra Costa School District, just east of San Francisco, were in a bind. The district needed two and half million dollars to help secure a federally subsidized loan of $25 million to build a badly needed elementary school.
CHARLES RAMSEY: We'd be foolish not to take advantage of getting $25 million and having to spend two and a half.
GONZALES: That's Charles Ramsey, president of the school board. He says the problem was that his district didn't have the upfront money, that two and a half million dollars.
RAMSEY: The only way we could do it is was with a CAB.
GONZALES: A CAB - that's the acronym for capital appreciation bond. Unlike a typical bond where a school district would have to make immediate and regular payments, the CAB allows districts to defer payments well into the future by which time lots of interest has accrued. In this case, that two and a half million dollar bond will cost the West Contra Costa School District about $34 million to repay. Ramsey says it was a good deal because his district is getting a brand new $25 million school.
RAMSEY: You'd take that any day. Why would you leave 25 million on the table? You would never leave $25 million on the table.
BILL LOCKYER: It still doesn't make it a good deal.
GONZALES: That's California's State treasurer Bill Lockyer.
LOCKYER: It's the school district equivalent of a payday loan or a balloon payment that you might obligate yourself for. So you don't pay for maybe 20 years and then suddenly you have a spike in the interest rates that's extraordinary.
GONZALES: Lockyer's in his office poring through a database collected by the Los Angeles Times of school districts that have recently used capital appreciation bonds. In total districts have borrowed about $3 billion and will have to the payback will be more than $16 billion. Some can be refinanced, but most cannot, says Lockyer. The poster child for the issue is the Poway Unified School District in suburban San Diego.
LOCKYER: They borrowed a little over $100 million. So that's what they really got. And debt service will be almost $1 billion. So, over nine times amount of the borrowing. There are worse ones, but that's pretty bad.
GONZALES: The superintendent of the Poway School District, John Collins, wasn't available for comment, but he recently defended his district's use of capital appreciation bonds in an interview with San Diego's KPBS Investigative Newsource.
JOHN COLLINS: Poway has done nothing different than every other district in the state of California.
GONZALES: He's right. In some cases, districts are on the hook to pay back 10, 15, and even 20 times the amount they borrowed. But California Treasurer Bill Lockyer says it distresses him to hear school officials defend these bonds.
LOCKYER: It's so irresponsible that if I were on a school board, which I was 40 years ago, I would get rid of that superintendent.
GONZALES: Back in the '90s, the state of Michigan banned capital appreciation bonds altogether. But Lockyer says California needn't go that far. He supports a series of reforms such as capping the payback of debt to four times of the amount borrowed. Otherwise, says Lockyer, these bonds will be paid by the children of today's students. Richard Gonzales, NPR News, San Francisco.
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