Assembly Bill 182, authored by Assemblymember Joan Buchanan (D-Alamo) with Assemblymember Luis Alejo (D-Salinas) as a principle co-author, passed the Assembly Floor today with a vote of 75-0. This bill establishes strict parameters for school districts and community college districts when issuing capital appreciation bonds, or CABs.
“AB 182 is vitally important to the longterm fiscal health of our school and community college districts,” stated Alejo in a press release today. “These risky capital appreciation bonds have caused major debt for school districts on the central coast.”
That includes the Gilroy Unified School District. Five years ago, GUSD needed immediate cash and trustees approved borrowing $2.4 million through CABs to get it. Now GUSD will pay $28.2 million for that privilege, due and payable by 2032.
GUSD is one of the hundreds of districts across the state that weathered chronic underfunding from the state by borrowing millions through CABs, and although a relatively small percentage of GUSD's bond portfolio includes CABs – 4.7 percent – the tax-deferred interest continues to grow and the payoff will equal nearly 12 times the loan amount.
School districts receive money from CABs quickly, but the downside is that they have deferred, compounding, tax-free interest and a longer payback period.
The authors of AB 142 introduced this bill "due to concerns about the use of capital appreciation bonds," according to the press release.
These bonds can result in a large amount debt and an unfair tax burden to future taxpayers. According to the California State Assembly floor analysis, “capital appreciation bonds work by extending the term of a bond. The longer the term, the more expensive it gets. Since investors do not reap benefits immediately, they are willing to purchase capital appreciation bonds anticipating larger returns. Even though payments are not made immediately, interest is accrued and compounded until maturity, at which time, the investor receives a single payment for both interest and principal. The total debt service (principal and interest) to principal ratio is typically around two to one for current interest bonds, but can be 10 to 20 times the principal for capital appreciation bonds.”
“At least 20 schools in Monterey, Santa Cruz and San Benito Counties have borrowed over $150 million dollars,” said Alejo in the press release. “Hartnell Community College acquired a bond in 2009 for $35 million. With interest, by the time they pay off that bond, they will have paid $400 million. That’s 11 times the amount. I was outraged to learn about this fiscally irresponsible decision. That money could have and should have been used for education purposes. If this bill had been in effect, Hartnell would not have been able to agree to such horrible terms.”
AB 182 will be sent to the California State Senate Committee on Rules for consideration.
Luis Alejo represents the 30th District in the California State Assembly, which consists of the Salinas Valley, Monterey County, San Benito County, South Santa Clara County and the city of Watsonville in Santa Cruz County.