PD Editorial: Steep cost for free advice on school bonds

Whether you blame borrowers or lenders, or both, the lessons of the housing bust include the consequences of irresponsible loans.

In the early 2000s, as housing prices across the country climbed, buyers pushed interest payments into the future, gambling on rising equity and declining interest rates to bail them out. For millions of people, it was a trap.

Perhaps this costly lesson was lost on about 575 California school districts and community college districts that turned to deferred-interest loans when debt limits and declining property values prevented them from borrowing with conventional bonds in recent years.

In the worst instances, taxpayers are on the hook for $10 or more in interest for every dollar borrowed by their local school district using deferred-interest securities known as capital-appreciation bonds. With compounded interest payments deferred up to 40 years, many if not most of the voters who authorized the debt will be gone, leaving future generations, perhaps even their own grandchildren, to shoulder the payments.

Legislation to curb the use of CABs, as they're known in financial circles, passed the state Assembly this month on a 73-0 vote. The state Senate should follow suit.

Even then, school bonds need more scrutiny, especially the relationships between school districts and firms that provide financial advice, manage campaigns and then arrange the structure and sales if voters authorize a bond issue.

With these firms making their money on the bond sales and associated fees, the potential conflict-of-interest is obvious. Identifying the specifics can be harder because it's often impossible for anyone other than an expert to understand the complex securities that go into the mix of a school bond issue. Yet the use of these full-service advisory firms is common.

One such arrangement resulted in lawsuits filed by the Willits Unified School District and its financial adviser, Caldwell Flores Winters, Inc.

The Emeryville-based company accused the district of failing to pay $278,000 in fees associated with an $18.7 million bond sale in 2010. A cross-complaint filed by the district accuses Caldwell Flores of structuring the bonds to maximize its fees without regard for the district's ability to pay the debt.

The state Department of Education recently placed the Willits district on a financial watch list, and school officials say they may need to borrow more money to make a July 2014 payment on a $4.97 million bond anticipation note that was one part of the 2010 sale.

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