Texas schools pass debt on to the next generation

bond-debt-300x300Has anything relative to bond debt improved since the article below was published?

Sadly, the answer to that question is NO…

If you really care about the debt we are leaving our kids and grand kids, you should read the article below and start asking school board members some serious questions about bond debt and how it is structured.

If you look at our debt 20+ years from now, should the question be:

What are we doing for our kids?

OR

What are we doing to our kids?

After doing your own research you may come away with the satisfaction of knowing all is well, or, after learning more about Capitol Appreciation Bonds(CAB) you may be deeply troubled.

What questions should you be asking? After you read this article, I think you will know.

Watchdog.org, By November 6, 2013 –

The Leander Independent School District is awash in debt and feeling pretty good about itself.

The district’s $3.7 billion in projected debt is higher than all but Houston and Dallas, school districts with several times the number of students. Leander’s debt per student, projected at more than $114,000, is by far the highest in Texas for comparably sized districts.

In September, the Leander ISD school board approved $206 million more bond debt, a single issue that will cost district taxpayers $1.1 billion or five times more than the original cost if taken to full maturity.

The district’s current annual debt service of more than $61 million, which is about 20 percent of the annual budget, is expected to top $90 million a year within the next decade and $138 million in 35 years.

Leander, a school district of about 35,000 students northwest of Austin, and a handful of other fast growing districts in the state have amassed billions of dollars of debt through the use of capital appreciation bonds.

Capital appreciation bonds are a product of their time, of $17 trillion national debts, incalculable unfunded national, state and local liabilities and grotesquely underfunded public pensions.

Unlike the more common current interest bonds, which require that the issuer pay off the principal and interest throughout the term of the bond, interest on capital appreciation bonds compounds and accumulates until maturity. In Leander’s case that is as long as 36 years from now.

By the time the bill comes due for a new generation of a taxpayers, many of whom had no say in issuing the bonds, the elected officials who did are long out of office or dead.

California, alarmed by instances of abuse of capital appreciation bonds, toyed with outlawing them before passing a bill in early October curbing the ability of public bodies to use the bonds and shortening their maturity to 25 years from 40.

Texas state Rep. Dan Flynn and state Sen. Chuy Hinojosa originally filed bills in this last legislative session banning their use before modifying their bills along the lines of California.

Both bills died at the end of the session.

The failure of his bill has only fueled Flynn, R-Van, who as co-chair of the House Transparency in State Agency Operations, is calling for a state investigation into what he sees as the abuse of capital appreciation bonds.

“I didn’t know anything about it, but when I was shown how all these school districts were piling up all this debt, it scared me to death,” Flynn said. “And the people involved, you don’t see them worrying about. It’s because these bonds are a way of having what you want right now and having somebody else pay for it. And when you ask them about it, their attitude is, we don’t have a problem, you have a problem.”

However you characterize the attitude, Leander ISD officials have made it clear their employment of capital appreciation bonds and perhaps their entire fiduciary philosophy is misunderstood, by Flynn and others.

While there has been some circling of the wagons — the district asked that Watchdog.org speak to its communications director rather than interview school board president Pam Waggoner and CFO Ellen Skoviera — the message is one of accomplishment rather than shame.

Leander ISD, spokeswoman Veronica Sopher said, is a school district to which families clamor to come, whose parents expect an education parceled out in permanent rather than portable buildings.

Time and time again, Sopher returns to two themes in defense of capital appreciation bonds: the tension between the demands of families for the best facilities and the state-imposed limit on the property tax that may be levied for long term debt, capped at 50 cents for every $100 of assessed property valuation.

“We are a district of choice. Our community has an expectation,” Sopher said. “From the beginning voters have always supported our use of CABs. Voters have said this is what we want.”

A decade ago, capital appreciation bonds were one of the financial tools used by suburban districts to build schools ahead of exploding growth in their student populations. Leander’s student body more than doubled, from 16,753 students at the end of the 2003 school year to 34,369 by the end of the last school year.

Leander’s outstanding CAB debt was $1.85 billion, according to bond sale documents available to the public. Leander’s capital appreciation debt — even before the latest issue — was greater than combined CAB debt of the next six school districts at the top of the debt list: Wylie, Ennis, Grand Prairie, Frisco, Lewisville and Denton ISDs.

Northside ISD, northwest of San Antonio, grew during that same decade to more than 100,000 students from just under 69,000, having issued just $2 million in capital appreciation bonds. Its overall outstanding debt of $3.3 billion is less than Leander. Its debt per student, $33,331 is less than a third of Leander’s.

Katy ISD, outside of Houston, has grown by 21,472 to 61,427 students in the last decade with less total debt service and almost no reliance on capital appreciation bonds. Mansfield ISD, southeast of Fort Worth, grew by  more than 11,000 to 31,206 students with less than a third the overall debt of Leander and just $6.5 million of it from capital appreciation bonds.

A ‘story of growth’

The Fast Growth Schools Coalition, an Austin–based lobbying group for the interests of just under 100 school districts that counts Leander among active members, is an enthusiastic supporter of capital appreciation bonds. Executive director Michelle Smith, who is also an education consultant for HillCo Partners, one of the most powerful lobbying groups in Texas, sees no excess in their use anywhere among its membership.

The need for capital appreciation bonds, Smith said, comes from the imposition of the 50-cent limit by the state, a step originally taken by the Legislature in the early 1990s to offer a measure of tax relief.

Districts like Leander can’t be compared to one another, because the circumstances in each district are different, she said

“The state has tied the local school districts’ hands,” Smith said.  “What you are seeing in actuality are last ditch efforts to build buildings that their children need.”

The 50-cent limit, Sopher said, has exerted the primary pressure on Leander to issue CABs. And yet a check of the tax rate for bond debt beginning in 2004 shows Leander nowhere near that limit.

In 2008, when Leander issued more than $270 million in capital appreciation bonds, its bond debt tax rate was a little less than 33 cents. The year before, with a tax rate of 32 cents, the district issued more than $105 million in bonds. And the year before that nearly $143 million in bonds were issued when the tax rate was 30 cents.

In the years following 2010, when Leander last issued CABs, $70 million worth, the rate jumped nearly a dime to its current 47.19 cents, still nearly three cents less than the 50-cent limit.

“CABs have allowed us to maximize our growth and live within the 50-cent test,” Sopher said. “Ours is a story of growth.”

The numbers and rhetoric didn’t square for Jim MacKay. When McKay, a regional sales manager in public safety, moved his family into the district from nearby Round Rock and his tax bill nearly doubled, he started asking questions.

“It became blatantly obvious how bad a program this is,” MacKay said. “I thought, why not just give this to the payday loan down the street. At least we’d keep the debt local. Something was wrong and no one wanted to give us answers.”

MacKay decided to run for school board in Place 3 against longtime school board president Waggoner. Most of the taxpayers he spoke to had no idea the district was accumulating debt in the billions.

“First they ignored me, then they resorted to character assassination. It was brutal and I was personally devastated,” MacKay said. “But I kept on because I thought that what we were missing was holding the board accountable and making them respond to the criticisms.”

In May, Waggoner beat the newcomer with 54.3 percent of the vote to MacKay’s 45.7 percent. The 3,153 votes, according to Watchdog’s analysis, represented 3.6 percent of all registered voters in the school district.

“I looked at my vote total as a win,” he said. “I think Leander should be a cautionary tale for the entire state of Texas.”

Sound the alarm?

That recognition may be slow in coming. Outside of Flynn and Hinojosa, it’s tough to find much if any alarm at capital appreciation bonds at the state level. The state attorney general’s public finance division, which is required to review public bond issues for the state, has never rejected a capital appreciation issue, a check of AG records shows.

The state Bond Review Board hasn’t interfered with a bond issue. State Comptroller Susan Combs, having made public debt at all levels in Texas a centerpiece issue, provided no specific data about capital appreciation bond debt in her extensive report, Your Money and Education Debt.

When asked whether or not she saw the potential for saddling taxpayers a generation or more from now with huge school debt, Combs replied generally in an e-mail response:

“Capital appreciation bonds are an example of how decisions made today can have financial ramifications into the future. If the entity defers payments, costs increase and our kids would be paying for it. Decisions made today could also constrain the entity’s future financial management ability when payments come due. Residents should be aware and ask questions of these bonds because their future generations can ultimately be on the hook for that money.”

And even that threat is blunted by the Texas Permanent School Fund Bond Guarantee Program. The fund is paid into by school districts across the state to ensure that no school district defaults on a bond issue.

The first sign outside of the district that something might be amiss came a year ago, when Fitch Ratings, one of the major bond rating services, downgraded Leander’s tax debt rating from AA to AA-.

Backloading the debt so heavily was in large part why Fitch issued its rating, Steven Murray, a senior director in Fitch’s Austin office, said. Murray was circumspect, insisting the final decision for using capital appreciation bonds is up to the board and its consultants, with final approval by the voters in Leander.

“Their (debt) burden is sizable and potentially unmanageable,” Murray said. “With the recent housing collapse and recession, you’d  hope everyone had learned their lesson. Backloading the debt is a problem.”

Leander rewarded Fitch for its analysis by excluding them from providing a rating for its most recent issue of capital appreciation bonds.

Watchdog attempted to learn the philosophy behind the long term bonds from Leander’s consultant Southwest Securities Inc., of Dallas. Leon Johnson, head of the consulting group, took a message but chose not to respond.

Southwest Securities was not as persuasive with the latest capital appreciation bond issue as it had been in the past. The school board passed the issue 4-3, but Aaron Johnson, the board’s vice president, told a local reporter he had concerns the new debt might prevent the district from future borrowing.

Johnson didn’t return Watchdog e-mails asking to discuss his vote.

Even Sopher expressed concerns, not about the propriety of a huge debt but that future growth — and the Leander School District is banking on enrollment doubling again in the next 10 to 15 years — will force school districts to challenge the 50-cent debt test.

School districts like Leander had better worry about the future of capital appreciation bonds instead. Flynn said he is asking House Speaker Joe Straus to authorize a committee to prepare an interim study he hopes will restrict both the use of the bonds and their length of maturity.

And if he doesn’t get his special committee, Flynn said he will continue to speak out against the bond abuse until his reform bill is one of the first he files in the 2015 legislative session.

Flynn is committed.

“You just don’t want all these school districts in Texas piling up all this debt. It scared me to death,” Flynn said. “People keep telling me I don’t understand the issue. Let me tell you, I understand it very well.”

~~~~~~~~~~~~~~~~

Contact Mark Lisheron at mark@watchdog.org

Click here to LEARN HOW TO STEAL OUR STUFF!

Mark Lisheron is the Austin-based reporter for Watchdog.org. He first served as a national Watchdog reporter before joining Texas Watchdog. He spent almost 30 years in newspapers, 14 of those years for the Milwaukee Journal Sentinel and a decade with the Austin American-Statesman. Mark can be reached on Twitter at @marktxwatchdog or by email at mark@watchdog.org.

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One response

  1. Senator_Blutarsky | Reply

    What we are doing TO future generations of taxpayers, is criminal and gross negligence.

    what about a slowdown in GDP, a decrease in tax revenues, major bank defaults, much higher interest rates and more weapons for the military and possibly some major wars?

    These are all likely events in the next few years. As bond and credit markets collapse, we will see interest rates at least in the high teens like in the 1970s. This will also kill the $1.5 quadrillion derivative market. Well, all of this is not a problem either. Just needs more money printing. Instead of printing trillions, we just add a few zeros and make it into quadrillions or quintillions. We might even get to googols (1 with hundred zeros). The founders of Google never thought that would happen in their lifetime. Or did they?

    Expect a systemic collapse of current economic models, based on unbacked paper currencies before the below extrapolations actually occur, however.

    What every government in hyperinflationary economies fails to understand is that adding debt to a debt problem just exacerbates the problem. Zimbabwe still hasn’t learned, despite their recent experience of hyperinflation. They now need to print money again since they still have no idea how to govern the country. This coming hyperinflationary era will benefit no one. Governments will lose control, people will lose their jobs and there will be social unrest and probably wars, including cyberwars. World trade and economic activity will collapse. Asset markets might boom for a while, reflecting to hyperinflationary price levels. But this will be short lived and follow the pattern of all hyperinflationary economies because hyperinflation always goes hand in hand with depressions.

    Credit markets will also fall fast due to severe economic conditions, high interest rates and the inability of borrowers to service their loans. Indexation of loans in line with inflation is also a possibility. It has happened before.

    “The bankers own the earth. Take it away from them, but leave them the power to create money, and with the flick of the pen they will create enough deposits to buy it back again. However, take away from them the power to create money and all the great fortunes like mine will disappear and they ought to disappear, for this would be a happier and better world to live in.
    But, if you wish to remain the slaves of bankers and pay the cost of your own slavery, let them continue to create money.”
    — Josiah Stamp Former Director of the Bank of England

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