How a school district's bond went from $100 million to $1 billion

The Poway Unified School district borrowed just over $100 million for building renovations in 2008, but because of a form of creative financing called a capital appreciation bond, the total debt is now adding up to close to $1 billion.

Jeff Horwich: I know we're done with "the numbers," but here's one more fun one: 834 percent. That's the interest a school district near San Diego will pay to private investors who funded a recent bond referendum. The Poway Unified School district borrowed just over $100 million for building renovations.

A new piece from the Voice of San Diego news website explains how this will leave taxpayers on the hook for much, much more. Will Carless is head of investigations at the Voice of San Diego. Hello.

Will Carless: Hello.

Horwich: How in the world does a school district borrow $105 million and wind up owing almost $1 billion?

Carless: Well, it does it with a form of creative financing called a capital appreciation bond. And the basics of it is that the way to borrow money at a very expensive rate is basically not to pay anything back for the first 20 years or so, and then to pay the debt back over kind of the last 20 years of a 40-year loan.

Horwich: Why did this play out so differently than what a school district would normally do when it goes to voters with a bond referendum?

Carless: So the long and the short of it is that the school board and the district had told voters back in 2008, when they were approved to borrow this money: 'We're not going to raise your taxes in order to get this money.' Now, the problem was, they still don't have enough money coming in from the current taxes in order to borrow a whole load more money. So what that means is that they've had to borrow money, they've had to kind of leverage it against the future tax money that they're going to get, but they're not going to get that for 20 years or so.

Horwich: Did district officials have any idea how they plan to pay back this enormous sum?

Carless: The way this works is it does eventually get paid through property taxes, and the thing is that there is a certain levy on property taxes that goes towards paying off all of the school district's debt. And the hope is that the property values will rise by so much, that come 2031, when this debt has to stop being paid off, the levies that there are right now will be so much bigger and that they'll have so much more money coming in. That can happen in the next 20 years; nobody knows what will happen, but if that doesn't happen, that means that property taxes will spike in order to make up the difference.

Horwich: School districts everywhere are scrambling for creative ways to meet their funding needs. Is this a situation that we might see elsewhere?

Carless: Look, there's no doubt that this has happened in dozens if not hundreds of school districts around California. I mean, we're already finding them; we've been sort of broadening our scope and we're actually publishing a piece today that shows three other local school districts that have very similar deals to Poway's. This is a multi,-multi-billion dollar issue across the whole of the state. Tens of billions of dollars of debt out there in this type of creative financing.

Horwich: Will Carless with Voice of San Diego. Thanks a lot.

Carless: Thank you.

About the author

Jeff Horwich is the interim host of Marketplace Morning Report and a sometime-Marketplace reporter.

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