(October 5) The Fontana Unified School District has committed to using an extremely expensive method of financing several ongoing and upcoming construction projects that will entail interest payments roughly eight times the principal of the loan it will take out.
Next week, the district will sell $108 million in capital appreciation bonds the school board recently voted to issue. To pay off that bonded indebtedness in full, the district will make payments of close to $840 million over the next 40 years.
Normally, public agency bonds are structured to provide interest payments on the face value of the bond over a 20-year, 25-year or 30-year period, at which time the bonds reach their date of maturity, and the issuer repays the principal, which is equal to the original amount of the investment. Typical interest payments on bonds run from 3.5 percent per year to six percent per year, such that a bondholder normally receives a total of 180 percent to 220 percent of the investment back over the life of the bonds.
The $108 million in improvement bonds most recently authorized for issuance by the Fontana Unified School District’s board, however, are not typical bonds but rather capital appreciation bonds, ones that carry a longer term of financing – 40 years – and are structured to provide a far greater overall return to their buyers. That rate of return will be 707 percent.
There has been considerable focus on capital appreciation bonds lately, with articles and reports in the New York Times and by the public interest group CalWatch, which have pointed out the exorbitant long term cost of that form of financing.
Fontana Unified issued the capital appreciation bonds to cover the principal and interest on a short-term “bridge” loan the district took out in 2009 to undertake several construction projects, including Jurupa Hills High School and Citrus High School.
San Bernardino County Treasurer/Tax Collector Larry Walker said the bonding arrangement the district entered into will push repayment on the loans well into the 21st Century, encumbering future district officials and taxpayers with debt they will have had no part in creating. Walker said the district’s reliance on capital appreciation bonds “represents a generational transfer of debt created by a financing mistake, and is clearly not in the interest of the taxpayers.”
District officials asserted that their financial affairs have declined to such a state that there was no realistic alternative to relying on the controversial instruments.